Atlantic City Electric does small deal, primary pauses after Altria; new deals keep gaining; Constellation drops

By Andrea Heisinger and Paul Deckelman

New York, Nov. 6 - Atlantic City Electric Co. priced a small issue of first-mortgage bonds on a Thursday that was not as busy as expected.

The deal follows in the footsteps of the $6 billion issue from Altria Group that reinvigorated the primary market. Sources had predicted this would further open up the backlog of issues that has been building, but were not counting on the flood of bad economic news that hit Thursday.

"I think people were just scared to come in today," a source said. "We thought we'd see a couple more deals."

In the investment-grade secondary market Thursday, advancing issues again led decliners, by a not-quite seven-to-six ratio. Overall market activity, reflected in dollar volumes, was down 6% from Wednesday's pace.

Spreads in general were seen steady, in line with little-changed Treasury yields; for instance, the yield on the benchmark 10-year note edged down by 1 basis point to 3.69%.

Atlantic City Electric's new issue firmed a little when it was freed for aftermarket dealings.

The recent trend of newly priced issues firming solidly in the secondary - a factor of too-cheap pricing levels - seemed to continue Thursday; among such names were Altria Group Inc. and Virginia Electric & Power Co. However, the new BP Capital Markets plc deal seemed to buck the trend.

Among the established issues, Constellation Energy Group Inc.'s bonds widened out sharply as the issue fell some 7 points on a dollar-price basis after the electric generating company announced poor third-quarter results, including a slide into the red in net earnings and a big drop in operating profits.

Atlantic City Electric prices

Wilmington, Del., utility Atlantic City Electric priced $250 million of 7.75% 10-year first-mortgage bonds at 99.541 to yield 7.817% with a spread of Treasuries plus 412.5 basis points.

J.P. Morgan Securities Inc., Morgan Stanley, and RBS Greenwich Capital ran the books.

Primary quiets again

Momentum that was expected to come from Wednesday's large, somewhat surprising issue from Altria Group Inc.'s $6 billion, three-tranche deal did not materialize Thursday.

It was thought the issue would crack open the market for lower-rated issuers that have mostly avoided pricing in the last couple of months.

"Yeah, it was a little surprising," a source said of the mostly empty new issue market. He cited the economic news from the retail and auto industry as possibly having an effect.

The announcements brought the stock market further down from its Tuesday rally.

It's possible there could be more issues Friday, but no one was willing to venture a guess as to which companies or how many issues could be seen.

"It's still a day-to-day market," a source said. He added that employment numbers come out Friday, and if they are bad could once again shut down the market for new issues.

"That could set the tone for tomorrow," he said.

The lack of deals Thursday may have had a simpler explanation, connected to the size of the Altria issue.

"They took a big chunk out of the market - $6 billion," a source said. "The market needed a little breathing room."

Thursday's tone was not overly positive, with one source describing it as "soft," following the weakness of Wednesday.

"It wouldn't have been the most responsible advice for anyone to come in [to the market] today," he said. "Everyone's just waiting to see what happens tomorrow."

The Altria issue was still on the minds of syndicate desks as a bright spot in recent weeks.

"I think they saw a window and went for it," a source said. "The [Altria] bonds held tight today."

New Atlantic City Electric issue improves

When the new Atlantic City Electric issue was freed for secondary dealings, a trader saw the bonds trading at a spread over comparable Treasuries of 403 bps - versus the 412.5 bps level at which the utility had priced the $250 million of bonds earlier in the session.

Altria's new bonds come out smokin'

The trader saw tobacco giant Altria Group's three tranches of new bonds all trading well in from the 600 bps level at which those bonds had priced on Wednesday.

He saw the company's $1.5 billion of 9.95% bonds due 2038 at 565 bps bid, 558 bps offered. Its $3.1 billion of 9.70% notes due 2018 were at 583 bps bid, 578 bps offered, while its $1.4 billion of 8½% notes due 2013 traded at 577 bps bid, 572 bps offered.

Vepco bonds hold gains

Another issue which is trading at considerably tighter levels versus its issue price is Virginia Electric & Power's 8.875% bonds sue 2038. The utility priced $700 million of the paper on Monday at a spread of 456.3 bps over Treasuries, but they were seen Thursday at 433 bps bid, 428 bps offered.

BP bucks the trend

However a trader saw the BP Capital Markets 5.25% notes due 2013 at 274 bps bid, 270 bps offered, which he said was "only a little bit" tighter than the 275 bps level at which the petroleum major had priced its $3 billion mega-deal on Tuesday.

Constellation Energy no star after earnings

Constellation Energy's 7% notes due 2012 were seen by a market source having fallen as much as 7 points on a dollar-price basis on the session to below the 93 level from around par earlier in the week. The spread on the bonds ballooned out by around 250 bps to 703 bps.

Baltimore-based Constellation - which announced in September that it had agreed to be acquired by MidAmerican Energy Holdings Co., a unit of billionaire market guru Warren Buffett's Berkshire Hathaway Inc. in a $4.7 billion cash deal - said that in the third quarter, it swung to a net loss of $225.7 million, or 1.27 a share, versus a year-ago profit of $251.4 million, or $1.38 a share. Excluding special items, Constellation's operating profit slid to 76 cents a share - just slightly more than one half of its year-ago operating earnings of $1.45 a share. That downturn was largely due to poor results from the company's merchant-energy business, which in turn was hit by poor results from its energy trading business.

Debt-protection costs rise

In the credit-default swaps market Thursday, a trader saw the debt-protection costs for bonds issued by major banks 2 bps to 7 bps wider.

He also saw CDS costs for big-brokerage paper 15 bps to 20 bps wider on the day.

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