CAT Financial prices $1.3 billion, proves new issue market open; spreads widen

By Andrea Heisinger and Paul Deckelman

New York, Sept. 23 - The investment-grade bond market showed it was open for business Tuesday, with Caterpillar Financial Services Corp. pricing the first sizable issue in weeks.

The tone remained mostly stagnant as investors and issuers await formation of the government's financial sector bailout plan.

Details of an issue priced Monday from National Rural Utilities Cooperative Financial Corp. emerged, further proving to syndicate desks that the market for new deals is not closed.

Market indicators mixed

In the investment-grade secondary market Tuesday, advancing issues trailed decliners by a ratio of better-than seven to six. Overall market activity, reflected in dollar volumes, fell 7% from Monday's pace.

Spreads in general were seen wider, in line with generally lower Treasury yields; for instance, the yield on the benchmark 10-year issue dipped by 4 basis points to 3.80%

Cat Financial does two tranches

The unit of Caterpillar that handles lease financing priced $1.3 billion in two tranches Tuesday, to the surprise of some.

The $750 million of 6.2% five-year notes priced at 99.893 to yield 6.225% with a spread of Treasuries plus 320 bps.

The $550 million of 7.05% 10-year notes priced at 99.673 to yield 7.096% with a spread of Treasuries plus 325 bps.

Barclays Capital Inc., Citigroup Global Markets Inc., and Merrill Lynch were bookrunners.

It was surprising to see a deal of this size come into the market before a bailout plan is finalized, a source said.

"No one thought the first real issue out of the gate would be large and multi-tranche," a source said.

At the end of last week, as hope of a market recovery surfaced, sources said the first couple of issues would be smaller and used to dip a toe in the market's waters.

Caterpillar's issue did provide the data points companies were waiting for.

The company shelled out around 100 bps in new issue premiums to get the deal done, a market source estimated.

"They paid the price to get it done, so I don't know how encouraging this will be to other companies," he said.

National Rural prices floaters

Financial products company National Rural Utilities gave terms for its $100 million issue of floating-rate notes due 2010 on Tuesday.

The medium-term notes were priced Monday at par to yield three-month Libor plus 100 basis points.

Agent was Mesirow Financial Inc.

Primary awaits bailout bill

Those on the syndicate desks are keeping busy updating both issuers and nervous investors on the state of the investment-grade market. Everyone is awaiting both a new issue with which they can gauge how the market is really doing, and a fleshed-out Congressional plan to bail out the financial sector.

The $700 billion plan may be held up further by members of Congress who think the plan needs more scrutiny, and despite the urging of both the Treasury Department and Federal Reserve, more time.

One source said the hope among issuers is a plan by the end of the week, as it's unlikely anyone will come into the market until that happens.

"We had a fairly decent start to the day, but then the stock market was down," a source said. "It didn't really matter because no one's going to touch the market right now."

As the worst of the turmoil in the market began to die down and people began to look forward, there were predictions that it would take a couple of issuers pricing to bring others into the market.

On Monday, a source confirmed this, saying in talks with potential issuers they were looking for data points before venturing in.

Everyone continued the headline-watching vigil as news trickled out of the Senate hearings on the proposal. The House hearing is Wednesday.

Some of the comments from the hearings were the catalyst for the stock market sinking, as doubts began to creep in about whether a plan could be hashed out by the end of the week, and what exactly it would contain.

Both Treasury secretary Henry Paulson and Federal Reserve chairman Ben Bernanke urged Congress to pass the bill quickly.

Members of Congress have voiced concerns both over the rush to get a bill passed and some of the items contained in the proposal, like caps on salaries for Wall Street executives and whether bankruptcy judges can lower interest rates on mortgages.

Bernanke said the economy would be threatened further if the bill is not passed swiftly, and could lead to a recession.

Other disagreements were directed at Paulson, saying the proposal gave him too much power and was not detailed enough.

The one thing that is clear is the plan will allow the government to buy up distressed mortgages from companies both domestic and abroad, and sell them later, hopefully at a profit.

All of this news led to concern in the market over the bill's outcome, and its timing.

"I don't think anyone was very encouraged by what came out today," a source said, referring to news from the Senate hearings.

The market's sour tone, as well as more Congressional hearings Wednesday will likely mean another slow day for new issues.

Even the Caterpillar issue likely won't provide enough encouragement.

"I'm not sure what it means for the market," a source said. "They paid a bigger new issue concession than we've seen, and financials are down."

"The market's still not very good, so I'm not sure if anyone else will come in."

Caterpillar tighter

A trader saw the new Caterpillar Financial Services' 6.20% notes due 2013 at a bid spread over comparable Treasuries of 319 bps, and an offered spread of 314 bps, versus the 320 bps at which the heavy equipment maker had sold $750 million of the bonds.

He did not see any immediate aftermarket dealings in the other part of the deal, the $500 million of 7.05% notes due 2018, which priced at 325 bps over.

He also did not see any dealings whatsoever in the recently priced Laclede Gas Co. deal; the $80 million of 6.35% notes due 2038 came to market last Thursday.

However, he did see Halliburton Co.'s recently priced 5.90% notes due 2018, $400 million of which had priced at 230 bps over on Sept. 9, trading well inside that at 205 bps on Thursday. The new bonds "are doing well, a lot better" than when they priced. He noted the 25 bps tightening.

But the trader had no spots on the other half of that deal - Halliburton's $800 million of 6.70% bonds due 2038, which also priced on Sept. 9 at 250 bps over.

Apart from that limited activity in the new and recent deals, the trader said that most of the market's focus was on the financials like Morgan Stanley and Goldman Sachs Group Inc.

Financials falter on bailout plan worries

Market angst over the recently unveiled government plan to help curb the current credit crunch by setting up a mechanism to buy at least hundreds of billions of dollars of problem loans to get them off bank balance sheets helped throw the financial names for a loop; Morgan Stanley's bonds and Goldman's were being generally quoted on a dollar-price basis.

On Tuesday, lawmakers from both parties were expressing emotions ranging from skepticism to downright opposition to that plan announced last week by Treasury Secretary Henry Paulson that would have the government spend at least $700 billion - and maybe more - to buy up bad debt on the books of banks and other financials in order to get that toxic paper out of the way and let the markets work their way out of the more-than year-long credit downturn without having to worry about surprise new disclosures of big writedowns and heavy losses.

The skeptics questioned just how this would occur, demanding details from administration officials; some wondered whether the measure would have any lasting impact at all, while critics demanded that the program include assistance for homeowners hurt by the credit crunch as well as the bankers, and balked at the notion that executives whose companies ended up on the rocks might still float away with fat golden parachutes.

Not surprisingly, financial names got hammered on the uncertainty.

A market source saw Morgan Stanley's 3.875% notes due 2009 as the most active issue of the day, with over $200 million of those bonds changing hands. The bonds were being quoted on a dollar-price basis at 94, down 2¼ points on the day, while on a spread-to-worst basis, they were at 2,429 over Treasuries - or an 825 bps widening from levels a day earlier.

It was the same story for Morgan Stanley's 4% notes due 2010. These traded down 5¼ points to about the 86.75 bid area, while its spread widened by 517 bps to 1,368 bps - putting the bonds well within the category traditionally classified as "distressed," despite the company's A1/A+/AA- ratings. Over $100 million of those bonds traded.

Another market source saw the 3 7/8s down 4 points on the day to 92.5 bid, although that was still up from low levels around 80.

Its 4s, the source said, dropped as low as 78.5 before ending at 85.5

Another actively traded Morgan Stanley issue was the 6¾% notes due 2011, which were seen ending down some 6½ points at 77.5, after having bounced off lows of about 76.

Goldman up to 10 points lower

Goldman Sachs's 5.70% notes due 2012 were among the more actively traded issues on the day, with over $40 million changing hands. Those bonds were seen by one source having dropped some 10 points to the 82.75 level, or a spread of 850 bps, although another source pegged the bonds down 8 points on the day to 84.75.

The Goldman bonds were not helped by the late-breaking news that legendary Wall Street sage Warren Buffett will invest some $5 billion in Goldman through his Berkshire Hathaway, Inc. That news came too late in the session to have an impact, although observers said it would likely play a key role on Wednesday.

Financial CDS costs widen out

With the financials' bonds sliding, the costs of protecting their debt was meantime widening out notably. A trader watching the credit-default swaps market said that bank paper CDS costs were anywhere from 5 bps to 130 bps wider, with Wachovia Corp.'s debt-protection costs out the full 130 bps to 580 bps bid, 620 bps offered. Washington Mutual Inc.'s costs were 17 percentage points wider, to 54% to 58% upfront, plus 500 bps annually.

Among the investment bank CDS, Goldman's rose by 75 bps to 360 bps bid, 380 bps offered; Morgan Stanley was out 70 bps to 490 bps bid, 520 bps offered, while Merrill Lynch's CDS cost of 280 bps bid, 300 bps offered was a relatively conservative 20 bps wider.

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