Constellation Energy prices issue, capping $15 billion week; coming days seen slower on low supply

By Andrea Heisinger and Paul Deckelman

Omaha, June 20 - A new issue from Constellation Energy Group, Inc. priced Friday to cap a week of about $15 billion in issuance.

This was "one of the slowest weeks in a while," a market source said.

"It was a slow week, but felt busier only because we were in on a lot of the trades," he said.

This compares with the previous week's issuance of about $11 billion, affected mostly by negative headlines and bank funding woes.

In the investment-grade secondary market Friday, advancing issues led decliners by around a six-to-five ratio, while overall market activity, reflected in dollar volumes, fell by 17% from Thursday's pace.

Spreads in general were seen wider as Treasury yields moved lower; the yield on the benchmark 10-year issue, for instance, tightened by 4 basis points to 4.17%.

Constellation sells junior deal

Constellation Energy priced $450 million of 8.625% junior subordinated debentures at $25. The issue was announced Thursday.

The securities have an initial maturity of June 15, 2063, and a final maturity of June 15, 2068. The maturity is automatically extended unless the notes are redeemed between June 15, 2013 and March 15, 2018.

They also have an over-allotment option of $67.5 million, to be used within 30 days.

Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Inc., Morgan Stanley & Co., Inc., UBS Investment Bank and Wachovia Capital Markets were bookrunners.

Market sources said this was the only issue they saw cross their screens Friday.

Other issuers for the week were primarily non-financial names, with a few breaking the $1 billion mark.

Those issuers were Time Warner Cable Inc., Thomson Reuters Corp., Export Development Canada, KfW and Johnson & Johnson.

Other smaller issuers included Vulcan Materials Co., MetLife Global Funding and Best Buy Co., Inc.

The large issue from Time Warner led off the week and surprised some sources with its $5 billion size. Others said they knew it was coming this week, but not that it would price Monday.

The issue from Johnson & Johnson was also not surprising, mostly because it's a recognizable name with good credit, a source said.

"They could get an issue done any day," he said.

Pace seen easing

The coming week will likely continue a slowdown in issues that started a couple of weeks ago.

This coincides with a decrease in the backlog that had built up due to previous poor market conditions and a new round of adverse news that has made companies wary of bringing new offerings, along with syndicate people hesitant to give anyone the go-ahead to price an issue.

"I think we'll see less, especially if the markets don't perform," a source said. "We don't have much of a backlog right now."

Friday was virtually drama-free, he said, but it will likely be Tuesday and not Monday that will bring any coming issues out of the woodwork.

"Unless the markets are just ripping tighter on Monday, we're not going to see much," he said.

"One of the ways people gauge things is to see how the markets perform on Monday. Then people price on Tuesday or Wednesday."

Oil prices are a contributing factor to issuance right now, a source said, and price news continues to drive companies' willingness to price anything.

The price to come into the market itself has also become a "real factor," he said, as to whether a company will issue or not. High yields have kept some out of the market, he added.

One source said they had one or maybe two issues on the calendar for the coming week, with another saying they thought there were a couple upcoming, but maybe less.

"I think things are just slowing down for a variety of reasons, one of them being, it's summer," a source said.

Best Buy edges better

A trader saw the new Best Buy 6.75% notes due 2013 offered at 310 bps over comparable Treasury issues, versus the 312.5 bps level at which the Richfield, Minn.-based consumer electronics retailer priced $500 million of the notes on Thursday.

He meantime saw no trace of the new Constellation Energy 8.625% 60-year debentures, characterizing the session as "a pretty inactive day."

Financial CDS prices widen out

The news that Moody's Investors Service had stripped troubled bond insurers MBIA Inc. and Ambac Financial Group Inc. of their treasured Aaa ratings helped push the debt-protection costs of those companies out - a sign of investor unease with their prospects down the line.

A market source saw the cost of a five-year credit-default swap contract protecting holders of MBIA debt against a default widening out to an up-front payment of 38.5%, out from 31% on Thursday, plus 500 bps per year, while Ambac's CDS cost ballooned out to a 38% up front, versus 32% Thursday, plus 500 bps annually.

The latest MBIA/Ambac situation was not the only problem facing the financial sector on Friday; there were rumors flying around that brokerage giant Merrill Lynch & Co. would make some sort of an announcement to the effect that it would miss analysts' earnings estimates. No such announcement was forthcoming on Friday, but the Big Bull would neither specifically confirm nor deny the speculation, causing its stock to fall and its CDS spread to widen out.

A trader said that Merrill "led the pack on the way down" as big-bank CDS costs widened out by anywhere from 2 bps to 10 bps and major brokerage CDS costs moved out by 10 bps to 20 bps. He quoted the cost of protecting Merrill Lynch's debt 20 bps wider at 225 bps bid, 235 bps offered. At another desk, a market source saw the company's debt-protection costs widen 25 bps to a midpoint of 225 bps, while yet another saw those costs 31 bps higher, at 226 bps.

The first trader also saw troubled Lehman Brothers Holdings' CDS costs 10 bps wider at 250 bps bid. 260 bps offered, while problem-plagued thrift giant Washington Mutual's CDS cost was out by 10 bps on the session.

Financial bonds lower

Back among the cash bonds, a number of financials were seen wider, reflecting soggy sector sentiment. Among them were Wachovia Bank's 5.25% notes due 2014, seen having widened out 30 bps on the session to 240 bps over and Wells Fargo's 5.625% notes due 2017, seen 25 bps wider at the 200 bps level.

Avnet takes a tumble

A market source saw Avnet Inc.'s 5 7/8% notes due 2014 bonds sharply lower in very active trading, seeing them widen out to a spread of about 331 bps over Treasuries. On a dollar-price basis, the source had the bonds down some 4 points on the session at 96 bid. There was no specific news seen out about the Phoenix-based electronics manufacturer that might explain the downturn.

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