Sumitomo unit prices hybrids; coming week uncertain with bank earnings, Fannie, Freddie news

By Andrea Heisinger and Paul Deckelman

Omaha, July 11 - Continued negative news from Freddie Mac and Fannie Mae hammered the markets Friday, but didn't stop Japan's Sumitomo Mitsui Financial Group Preferred Capital from pricing an issue.

Rumors of the demise of the mortgage lenders and possible buyout from the Federal government marred the end of the week after a two-day rally.

"It will definitely be interesting to see what develops over the weekend," one source said.

In the investment-grade secondary market Friday, advancing issues trailed decliners by a more than four-to-three ratio, while overall market activity, reflected in dollar volumes, plunged by half from Thursday's pace.

Spreads in general showed were seen tightening, in line with sharply higher Treasury yields; for instance, the yield on the benchmark 10-year note rose 15 basis points to 3.95%.

Sumitomo joins financial fund-raising

Sumitomo priced $1.35 billion of perpetual hybrid preferred notes at par.

The notes have an initial fixed rate of 9.5% until 2018, then a floating rate of six-month Libor plus 589 basis points.

They are non-callable for 10 years and priced under Rule 144A.

Bookrunners were Goldman Sachs & Co., Daiwa Securities, Merrill Lynch, Pierce, Fenner & Smith Inc. and Morgan Stanley & Co., Inc.

The company being in the market showed the universal need for financials to raise capital, a source close to the issue said.

"Being overseas, they were not as affected by the [Fannie and Freddie] fallout," he said. "Today was an interesting day to get things done - raising capital debt amid broader concerns."

"Our trade definitely had investors' attention."

Week tops $14 billion

The issue came at the end of a week with more than $14 billion in issuance.

Many of these came on Wednesday and Thursday after companies waiting to price issues decided to brave the market.

Those included names like Alcoa Inc., SABMiller plc, Lloyds TSB Group, ANZ International Finance and KfW.

Some of the smaller issuers for the week included H.J. Heinz Co., which priced both an issue of five-year notes and a Rule 144A sale of preferreds, Magellan Midstream Partners LP, Tyco Electronics Group SA and Northern Natural Gas.

The issue from Sumitomo also rated as interesting to one source who said that financial names are under a lot of financial pressure, and perhaps aren't issuing as much.

The coming week will see more of a reduction in financial names entering the market, he said.

"Financials are entering blackout and that combined with spreads not being very attractive means that not many non-financials will be issuing," he said.

A weekend of uncertainty

Market conditions ended somewhat weakly Friday, and with some uncertainty over what would happen between then and Monday.

"It will be interesting to see what develops over the weekend," a source said. "Bear Stearns [buyout from J.P. Morgan] happened on the weekend and it will be interesting to see whether the Fed makes any sort of announcement before Monday."

There haven't been any upcoming issues announced for the week ahead, but one source said they had a couple of things that were a possibility.

Issuance is day to day, and it's hard to tell what will come out before bank earnings announcements, he said.

"We're not going to see a lot ahead of that," he said. "I think if Monday's a good day, we should see people jumping in if the market looks stable enough. Things didn't end too badly."

Fannie, Freddie, stocks draw attention

A trader said that the huge distraction caused by the wild gyrations of the stock market and the problems of government-sponsored enterprises Fannie Mae and Freddie Mac essentially sucked all of the air out of the room, leaving little enthusiasm for trading corporates.

"There was really nothing in my stuff at all," with everyone focusing on Fannie and Freddie.

Among newly priced issues, he saw very limited spread movements, despite the sharp rise in Treasury yields that would imply narrower spreads.

For instance, Alcoa Inc.'s new $1.5 billion issue, which priced Thursday as a two-part deal, hovered not too far from the spreads at which it had been issued. While the aluminum producer's $750 million of new 6% notes due 2013 did tighten a little to 295 bps bid, 290 bps offered, versus their 300 bps spread at pricing, the $750 million of new 6.75% notes due 2018, which had also priced at 300 bps over comparable Treasuries, were seen at 300 bps bid, 295 bps offered in Friday's dealings.

He likewise saw the new $1.25 billion SABMiller plc deal from Thursday trading only a beep or two in from its initial spreads. The brewing giant's $550 million of new 5.70% notes due 2014, which came at 265 bps over, were trading Friday at 264 bps bid, 260 bps offered, while its $700 million of 6.50% notes due 2018 were seen at 269 bps bid, 265 bps offered, versus a 270 bps spread at pricing.

He did not see any new activity in the new H.J. Heinz Co. 5.35% notes due 2013. The Pittsburgh-based food processing company priced $500 million of the bonds at 225 bps over on Wednesday and they were last seen trading on Thursday at 224 bps bid, 221 bps offered.

He also did not see any fresh dealings in Tyco Electronics Group SA's new $300 million of 5.95% notes due 2014, which priced on Wednesday at a spread of 287.5 bps over.

Lehman widens again

Among the established issues, Lehman Brothers Holdings Inc. continued to take its lumps, in line with decline in the brokerage company's shares, as investors worried about its liquidity and wondered whether it might even follow in the ill-fated footsteps of Bear Stearns.

Several of its issues were among the most actively traded bonds of the day, all down a point or more on a dollar-price basis. For instance, a market source saw Lehman's 5.625% notes due 2013 fall to around the 94 mark, down a point, although its spread actually tightened - due to the rising Treasury yields more than anything else - to 398 bps bid from 417 bps on Thursday. Another Lehman loser was the 6.875% notes due 2018, seen down more than 3 points on the day at 93.5.

A trader said that in the credit-default swaps market, Lehman was "again the poster child" as debt-protection costs for the brokerage companies generally widened out by 10 bps to 25 bps on the day, with Lehman's CDS cost out the full 25 bps - on top of Thursday's 50 bps widening - to 310 bps.

He also saw the CDS spreads for Fannie Mae and Freddie Mac senior debt tighten to 50 bps bid, 58 bps offered from 74 bps bid, 79 bps offered on Thursday and their subordinated debt CDS costs also tighten, by 10 bps to 220 bps bid, 240 bps offered, after news reports indicating that the federal government might step in to keep the two big mortgage entities from going under if their situation continued to worsen.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.