American Honda Finance, Stanley Works, UGI price; investors, issuers cautious; Goldman better on Buffet deal

By Andrea Heisinger and Paul Deckelman

New York, Sept. 24 - Issuers continued to test the investment-grade bond market waters Wednesday, including American Honda Finance Corp., Stanley Works Co., and UGI Utilities, Inc.

Market sources were cautiously hopeful that new issues would continue to consistently price, both to encourage other companies and provide data points.

In the investment-grade secondary market Wednesday, advancing issues trailed decliners by a narrow margin. Overall market activity, reflected in dollar volumes, rose 23% from Tuesday's pace.

Spreads in general were seen little changed, in line with generally steady Treasury yields; for instance, the yield on the benchmark 10-year issue rose by 1 basis point to 3.81%.

Goldman Sachs Group Inc. bonds were seen having tightened on the news that legendary investor Warren Buffett will buy a $5 billion stake in the investment bank - and could buy another $5 billion of shares through the exercise of warrants. Goldman also raised $5 billion via a stock offering.

Stanley prices five-year deal

Tool maker Stanley Works priced $250 million of 6.15% five-year unsecured notes Wednesday at 99.804 to yield 6.196% with a spread of Treasuries plus 325 basis points.

Bookrunners were Banc of America Securities LLC and Citigroup Global Markets Inc.

The issue went well, and was well received by investors, a source said. "It was overbooked, and we even went back to the issuer and asked if they wanted to do more."

Given market conditions, the company opted to stick with its $250 million amount, the source said.

The issue priced in line with price talk of the 325 bps area, he said.

Honda Finance prices $1.25 billion

In the second large, two-tranche issue this week, American Honda Finance priced $1.25 billion of five and 10-year notes Wednesday.

The $550 million of 6.7% five-year notes priced at 99.904 to yield 6.723% with a spread of Treasuries plus 387.5 bps.

The $700 million of 7.625% 10-year notes priced at par to yield 7.625%, also with a spread of Treasuries plus 387.5 bps.

Both tranches priced under Rule 144A.

Banc of America Securities LLC, Deutsche Bank Securities Inc. and J.P. Morgan Securities Inc. ran the books.

On Tuesday, Caterpillar Financial Services Corp. reopened the investment grade market by pricing $1.3 billion of notes (A2/A/A+).

UGI does small issue

Electric and natural gas company UGI Utilities priced $108 million of 6.375% five-year senior notes Wednesday to finance an acquisition.

The notes priced at par to yield 6.375% with a spread of Treasuries plus 346.5 bps.

The issue was priced at a coupon, and not a spread, a source close to the deal noted.

Active bookrunner was Wachovia Capital Markets, with Citigroup and Credit Suisse Securities as passive books.

There was no formal price talk on the issue, the source said, and the company had a specific amount decided on.

Premiums make issuers pause

New issue premiums have been rising in the past year as market conditions worsened, but are high enough now that they are causing many issuers to rethink whether they really need to price a deal.

"We'll see what happens tomorrow," a source said. "It could be busy if issuers could stomach the [new issue] premiums."

The precedent was set Tuesday, when Caterpillar Financial reportedly paid a 100 bps premium for its issue.

Investors and other issuers were dismayed Wednesday morning when the spreads did not tighten as much as expected.

Although there are now data points to look at, it will likely take more issuers to coax some companies into the market.

"Everyone's just being very cautious right now," a source said. "You assume there are going to be more deals."

Issuers, investors cautious

Companies waiting on the sidelines waiting for market conditions to improve during the past few weeks or beyond have finally seen an issuance window open this week.

They remain cautious as Congress continues to hammer out a bailout plan, a source said. The House got its chance to voice concerns and ask questions Wednesday, after the Senate did the same Tuesday.

"I think it's safe to say every issuer for the next couple of weeks will have been waiting for a while to issue," a source said. "The window opened yesterday."

The window he's referring to came from the somewhat surprising, $1.3 billion, two-tranche deal from Caterpillar Financial Services Corp.

It was long assumed the first issuers, after weeks of little to no deals, would be small and used to feel out market tone.

"People were encouraged by the size of the deal, and quality of the name," a source said.

More encouragement came Wednesday morning, in the form of Warren Buffett's Berkshire Hathaway choosing to invest $5 billion in Goldman Sachs as a vote of confidence.

"That definitely gave it [the market] a huge boost this morning," a source said. "It's amazing how one guy can make that much difference."

Despite all of this, issuers and investors will stay cautious until a bailout bill is laid out.

"We've seen some issuers, and they've set some good standards," a source said. "People are still cautious with all that's going on in Congress."

He predicts that after this week, provided a bill is hammered out, the amount of issuance will pick up significantly.

Among the news on the plan to come out Wednesday was Treasury secretary Henry Paulson agreeing to a cap on salaries for executives of Wall Street companies benefiting from the bailout.

Federal Reserve chairman Ben Bernanke again urged lawmakers to move quickly on the bill, and was again told it needed to be treated with care and not rushed.

Buffett-backed Goldman is golden

Goldman Sachs' bonds were see having tightened smartly after the New York-based company - in the process of converting to a commercial bank from its long-held status as an investment banks - had received a $5 billion vote of confidence from Warren Buffett.

A trader said that Goldman "did a little better across the board. It probably ended the day flat from where it started [in morning trading, though up from Tuesday's levels] and it did do a little bit better at the end."

He said that Goldman seemed to be the major focus of the secondary market that the bonds were mostly being quoted in dollar-price terms, although "here and there" a spread might be quoted.

The most actively traded Goldman issue was its 6 7/8% notes due 2011, which saw over $150 million bonds changing hands. He saw the bonds going out around a 95 bid level, "a little bit better during the course of the day," suggesting that there might be "a little bit of a short in that one, or something."

Another market source said that the bonds had gone home on Tuesday trading just below 93, for a spread of 855 bps, but had opened up more than 1½ points, with the spread having come in to about 760 bps. The bonds bounced around at generally higher levels, mostly on smallish trades, although here and there was a round-lot, pushing up to a high of around 96.5, up 3½ points on the day, with the spread having tightened to 670 bps. At another desk, the bonds were seen having done even better, closing at just below 97, up more than 4 points on the day.

A source saw Goldman's 5.70% notes due 2012 tightening 260 bps to a spread of 590 bps on the news, versus an 850 bps level Tuesday, while the dollar price of its bonds shot up nearly 8 points to around 90.5.

Also up were Goldman's 6.65% notes due 2009, seen 280 bps tighter, around the 525 bps level, versus 805 bps on Tuesday, while its price improved 1¾ points to just under par. Goldman's 6.15% notes due 2018, which had been quoted around 450 bps, tightened to 443 bps, its price up ¾ point to just under 87.

At the long end of the curve, Goldman's 6¾% bonds due 2037 were up 5 points on the session at just under 75.

Goldman's New York Stock Exchange-traded shares meantime rose $7.95, or 6.36%, to end at an even $133, on volume of 46 million, three times the usual level.

The bonds tightened and the shares rose as investors reacted to the news - released too late in the day on Tuesday to have any market impact then - that Buffett, through his Berkshire Hathaway Inc. investment vehicle, had agreed to buy $5 billion of Goldman's perpetual preferred stock, along with warrants to additionally buy $5 billion of common shares at $115 per share any time over the next five years.

The purchase is the latest in a long series of shrewd transactions by the 78-year-old multibillionaire investor - whose lucrative deals over the years have earned him the nickname "the Oracle of Omaha" and have made him the world's richest person, according to the annual Forbes survey earlier this year, with an estimated net worth of some $62 billion. It stands to fatten his wallet even further, as the preferred shares pay a 10% dividend - about nine times the current dividend yield on the firm's common shares. Should Goldman wish to buy the preferred shares back from Buffett, it would pay a 10% repurchase premium.

While Goldman is paying a high price for its capital infusion, it reaps $5 billion of good publicity at a time when the entire financial sector has been shell-shocked - cachet that helped Goldman raise another $5 billion through a sale of common shares, twice what the company had originally planned.

Morgan Stanley weaker

The first trader also said that Morgan Stanley's bonds were "off from their highs, and probably a little lower than where they opened by a point or so, maybe two points off from where they started in the morning."

A market source at another desk, however, saw the Morgan Stanley paper also catching a bid, helped by the rise in Goldman. The company's 3 7/8% notes due 2009, its most heavily trafficked issue, bounced around in a 7 point range before finally going home at 94.5 bid, up about 2 points on the day.

Its 6.75% notes due 2011 were likewise seen up a deuce at just under 80.

CDS costs widen out

However, in the credit-default swaps market, a trader said, the costs of protecting bank and broker-dealer paper against a default all widened out. He saw the bank CDS costs 15 bps to 120 bps wider, with Wachovia Corp.'s CDS cost out the full 120 bps to 700 bps bid, 840 bps offered.

Among the brokers, Morgan Stanley's debt-protection costs were 120 bps higher at 730 bps bid, 780 bps offered, while even Goldman Sachs was out 10 bps at 370 bps bid, 390 bps offered.

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