Toyota prices to cap week's $24 billion issuance; negativity could scale back coming week's volume

By Andrea Heisinger and Paul Deckelman

Omaha, Feb. 29 - The steady stream of new investment-grade issues came to a virtual halt Friday, with Toyota Motor Credit Corp. about the only company pricing an offering.

The company priced $300 million one-year floating-rate notes at par to yield Federal funds rate plus 43 basis points.

Banc of America Securities LLC was agent.

The issue capped a week of more than $24 billion in issuance, dwarfing last week's more than $2.75 billion.

"It's been a very busy week," a market source said. "There were a lot of new issues to digest."

Those over the $1 billion mark included Hewlett-Packard Co., Honeywell International Inc., McDonald's Corp., ING Bank NV, KfW, Computer Sciences Corp., Citigroup Inc., Fifth Third Bancorp, Biogen Idec Inc., General Electric Capital Corp. and Allstate Life Global Funding Trust.

Smaller issuers included SunTrust Capital IX, PECO Energy Co., Whirlpool Corp., Pacific Gas & Electric Co., UST, Inc., Clorox Co., Avon Products, Inc., Colonial BancGroup, Inc., Hartford Financial Services Group and Archer Daniels Midland Co.

The issue from Biogen Idec hit a few snags in the midst of pricing as negative headlines about one of the company's drugs surfaced and forced pricing wider.

The $1 billion issue priced Thursday after coming into the market Tuesday.

Financials under pressure

In the investment-grade secondary market Friday, advancing issues led decliners by a seven-to-four ratio, while overall market activity, reflected in dollar volumes, fell by 13% from Thursday's levels.

With the news of further credit-related problems for financial companies, including the huge write offs and loss taken by insurer American International Group and the continued scrutiny for a possible ratings downgrade of bond insurer Ambac Financial Group Inc., prices in the sector fell, including those for new deals Fifth Third Bancorp and Citigroup. However, Hartford's new bonds seemed to hold their own.

In the credit-default swaps market, debt-protection costs widened out for most companies and positively ballooned out for Ambac and rival MBIA Inc.

Sprint Corp.'s bonds, which had nosedived on Thursday as the company posed huge quarterly losses and revealed that it had mostly drawn down its credit line, continued to retreat on Friday, trading like distressed junk bonds despite their nominally split-rated status.

Optimism fades

At the end of the day Thursday sources were predicting a busy week ahead for new deals as the market enjoyed a micro-rally of a few days.

By Friday morning, that had changed.

"It's as bad if not worse than yesterday," a source said after the market's close Friday.

"We had another round of financial risk repricing and things went massively wider."

Negative headlines from AIG and Dell came out overnight, affecting the market at its open, he said.

In the past issuers said investors and companies were becoming somewhat immune to the high prices being paid to get issues into the market.

This may still be true, but will likely scale down the high volume expected for next week.

"Ultimately it comes down to how bad an issuer needs money," a source said. "I don't know how many who were thinking of issuing next week are that strapped for cash that they have to get into the market."

There has become something of an execution risk in getting things into the market, a source said.

They cited this week's issues from Avon and Hartford as examples.

"Investors exercised control over the pricing process, which we're not really used to seeing," he said.

The coming week will still have some volume, but how much from the previously jammed forward calendars will actually come into the market remains to be seen.

"I think we'll definitely see a good amount of issuers but don't think it will be as busy as this week," a source said.

New issues seen mostly lower

In the secondary, a trader in financial issues said that in his sector, "everything was wider."

"It was really weak."

He saw the new Fifth Third 8.25% bonds due 2038, which priced on Tuesday at 362.5 basis points over Treasuries, get as wide as 395 bps bid, 385 bps offered.

He saw Citigroup's new 6.875% bonds due 2038 at 255 bps bid, 245 bps offered, out from Wednesday's 235 bps pricing level.

Hartford's 6.30% notes due 2018 traded at 262 bps bid, 250 bps, actually "slightly inside" the 262.5 bps spread at Thursday's pricing.

He saw existing financial bonds meantime, also weakening across the board.

CDS swap spreads widen

A trader said that it was "a bad day" in the credit-default swaps market, with banking names in general "all out by 8 to 20 [bps]."

The banks, he said "were hit pretty hard" on the continuing bad news facing the financials, including a UBS estimate that writedowns from the ongoing credit-crunch could total as much as $600 billion worldwide, half of that attributable to domestic banks and brokerage concerns.

He saw credit-protection costs for Citigroup some 22 bps out, with Wachovia 20 bps wider and JP Morgan, Bank of America and Wells Fargo all 8 bps to 10 bps wider. Meanwhile, thrift Washington Mutual's debt-protection costs widened by 35 bps.

Among the brokers, CDS spreads widened by anywhere from 7 bps for Morgan Stanley to double that for Bear Stearns.

With Moody's Investors Service still reviewing Ambac for a possible downgrade, and with MBIA warning that further writedowns will likely be necessary because of continued deterioration in the credit markets in January, the monlines' debt-protection costs ballooned.

The trader saw the cost of protecting MBIA's AAA rated bonds out 105 bps to 530 bps bid, 550 bps offered, while Ambac's was out 100 bps to 525 bps to 525 bps bid, 545 bps offered.

He saw the CDS costs on Ambac's AA rated bonds having increased to 740 bps bid, 770 bps offered, while MBIA's rose to 760 ps bid, 790 bps offered.

Another trader saw MBIA's 14% surplus notes due 2033 - which had been trading as high as 101.5 bid earlier in the week - retreating 2 points to close at 98 bid, par offered.

Sprint slide continues

Trading in Sprint Capital bonds was seen as very active, with the bonds - lowered to junk bond status by Fitch Ratings on Thursday - trading at distressed levels and being quoted around in dollar-price terms despite still having nominally investment-grade ratings from Moody's and Standard & Poor's.

Its 8.75% bonds due 2032 were seen off a point in very active trading at 79 bid, while its 6.875% bonds due 2028 were almost 2 points lower, ending just above 70.

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