Merck sells mega-deal, Telefonica Emisiones, Gulf Power sell bonds; deals firm in secondary

By Andrea Heisinger

New York, June 22 - A large investment-grade bond offering from pharmaceutical giant Merck & Co. led the way in Monday's primary market and was accompanied by deals from Spain's Telefonica Emisiones, S.A.U. and Gulf Power Co.

These new deals, two of them sizable, led the way on an otherwise quiet day, perhaps swayed by unease in the equities markets.

"It wasn't very exciting," a market source said of the day. "You had Merck, and that was the highlight."

Merck's bonds were seen little changed once they hit the secondary soon after pricing. Other recent deals, including one from General Dynamics Corp., were much improved from Friday's level.

The secondary remained focused on the industrial new issues, with little action on the financial side where no new deals hit the primary market.

Spreads were largely wider late Monday as Treasury yields came in, a source said. The 10-year note was 9 basis points tighter than the previous day to yield 3.68% as was the five-year note with a 2.7% yield.

Merck prices mega-deal

Drug maker Merck sold an upsized $4.25 billion of notes in four tranches Monday afternoon. The sale was announced in the morning with an initial size of $3.5 billion and was increased prior to the launch, a source said.

All of the notes priced at the tight end of talk.

The $1.25 billion of 1.875% two-year notes priced to yield 75 bps over Treasuries.

The $1 billion of 4% six-year notes priced at 137.5 bps over Treasuries. This was at the tightest end of guidance, which was in the 150 bps area.

A $1.25 billion tranche of 5% 10-year notes priced at Treasuries plus 140 bps, which was better than talk in the 150 bps area.

A final tranche was $750 million 5.85% 30-year notes priced at 145 bps over Treasuries. This was also well below talk of 155 to 160 bps.

All of the notes had a margin of plus or minus 12.5 bps on price guidance.

Proceeds from the deal are going to help finance a portion of the cash consideration for the Schering-Plough Corp. merger. This cash consideration totals $18.4 billion.

The company, based in Whitehouse Station, N.J., tapped Banc of America Securities LLC, Citigroup Global Markets Inc., J.P. Morgan Securities Inc. and RBS Securities Inc. to run the books.

The sale lasted much of the day, but a source away from it said "I heard the Merck deal went great."

Spain's Telefonica prices two tranches

Telefonica Emisiones priced $2.25 billion in two tranches of senior notes by late afternoon, a source close to the deal said. It was priced by 4:30 p.m. ET, he said.

The $1.25 billion of notes due January 2015 priced to yield Treasuries plus 225 bps, while the $1 billion of 10-year notes sold at 220 bps over Treasuries.

A term sheet was not available at press time.

The telecommunications company, based in Madrid, is using proceeds for deposit on a permanent basis with guarantor Telefonica SA, which will use the funds for general corporate purposes.

Citigroup, Deutsche Bank Securities Inc., Goldman Sachs & Co. and Morgan Stanley & Co. Inc. were the bookrunners.

Merck leads Monday

An otherwise quiet and shaky day was boosted by the arrival of the four-tranche sale from Merck. It's the latest in the long line of pharmaceutical names to price large deals, usually to help fund a merger or acquisition.

This was no different, although it was smaller than some of the previous deals.

The market's tone was not promising as the day began, a source said. "It opened a tad softer," he said. That changed as the morning progressed, with the Merck sale formally announced in an SEC filing by 11 a.m. ET.

By late morning, the market had improved enough to be "neutral," the source said. This allowed not only the Merck deal to get the green light, but also Telefonica.

"We felt comfortable going ahead with it," a source close to the Telefonica sale said.

Tuesday will likely see some offerings spill over from Monday's successes, the source said.

"There should be a couple of things at least," a market source said. "There's some momentum from [Merck] and the other deals."

Gulf Power offers $125 million

Gulf Power priced $125 million one-year senior floating-rate notes at par to yield three-month Libor plus 10 bps, according to an FWP filing with the SEC.

Morgan Stanley was the bookrunner.

Proceeds will be used to repay a portion of short-term debt and for general corporate purposes, including the company's continuous construction program.

The electric subsidiary of the Southern Co. is based in Pensacola, Fla.

Merck bonds unchanged

Once three of the four tranches of Merck's new deal were freed for trading, they were little changed from their pricing levels, a trader said.

The 4% bond due 2015 was slightly better than its 137.5 bps over Treasuries price, sitting at 135 bps bid soon after selling.

The 5% due 2019 was also slightly tighter at 137 bps bid, 127 bps offered from its price of 140 bps over Treasuries.

The 5.85% due 2039 was unchanged from its Treasuries plus 145 bps price.

There was no trading level on the tranche due 2011, the trader said.

Telefonica bond worsens

A new bond due 2019 from Spain's Telefonica Emisiones was quoted at 222 bps bid, with no offer, a secondary source said. It priced at Treasuries plus 220 bps.

No level was available for the notes due 2015.

General Dynamics tightens sharply

The 1.8% bond due 2011 from defense contractor General Dynamics was markedly improved from its price and trading levels from Friday, a trader said.

The bond sold at 80 bps over Treasuries and was at 63 bps bid, 60 bps offered late Monday. They were trading at 78 bps bid on Friday.

Magellan Midstream loses gains

A 6.55% bond due 2019 from Magellan Midstream Partners, LP lost some of the gains it made after selling Friday, but the issue remained nicely tighter than its price, a secondary source said. The bond sold at 280 bps over Treasuries and was quoted late Monday at 266 bps bid, 260 bps offered. This was a slight widening to unchanged from the 265 bps bid, 263 bps offered levels post-pricing Friday.

Tobacco names top trading

Bonds from two makers of tobacco products topped trading Monday afternoon, a trader said.

A 9.7% note due 2018 from Altria Group Inc. was seen the most popular with investors. The issuer consistently has bonds trading at high volume.

Coming up behind Altria was a recent 8.125% bond due 2019 from cigarette maker Lorillard Inc. The bond was priced within the previous week and remains significantly tighter than its pricing level.

Westar Energy, ArcelorMittal top movers

Two of the bonds making the biggest jumps by late Monday were from Kansas' Westar Energy Inc. and steel maker ArcelorMittal.

The chief executive officer of Westar Energy recently talked about alternative-energy efforts, including wind power. The company's 5.15% bond due 2017 was more than 25 bps better than a week ago.

ArcelorMittal's 5.375% bond due 2013 went the other direction and landed more than 62 bps wider than the previous week.

Bank, broker CDS widen

The credit default swaps for bank and brokerage names were each 3 to 10 bps wider, a trader said late Monday. There were no individual levels available.

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