BP Capital sells oversubscribed deal; more upcoming deals expected; energy sector tightens

By Andrea Heisinger and Cristal Cody

New York, Sept. 28 - The focus of the investment-grade bond market narrowed Tuesday to one new deal from BP Capital Markets plc.

The company sold $3.5 billion in two tranches by late afternoon, following in the lead of a large deal from NBC Universal, Inc. that priced on Monday to strong demand.

The BP deal, which consisted of $2 billion of five-year notes and $1.5 billion of 10-year notes, was roughly four times oversubscribed, showing that the market is still going strong.

"I don't know when things are going to slow down, but if BP can get this much done it's good," a market source away from the sale said.

It was the first bond issue from the funding arm of BP plc since August of 2009 and since an oil rig BP was leasing exploded in the Gulf of Mexico, causing a massive oil spill that will cost the company billions of dollars in damages.

"It's a good indicator for the market and the company," a source who worked on the BP deal said of the fact that they priced such a large deal at the tight end of guidance and with books oversubscribed.

It's unclear how many new deals will come to the market on Wednesday. Projections had been for $20 billion to $25 billion in new deals to price throughout the week, and so far only about $14.5 billion has priced.

In the secondary market, BP Capital Markets' new paper firmed about 15 points in trading, while the energy sector continued to perform well, sources said.

Overall investment-grade Trace volume rose 15% to $13 billion, a source said.

Also in the secondary, two of the four tranches of senior unsecured notes (Baa2/BBB+) NBC Universal sold on Monday were active in trading, a source said.

The Markit CDX Series 14 North American investment-grade index regained the point lost the previous day to end 1 basis point tighter at a spread of 109 bps, according to Markit Group Ltd.

Treasuries rose, sending yields down, on softer economic data and after the government sold five-year notes with a record-low yield on Tuesday.

The yield on the 10-year note dropped 6 bps to 2.47% on Tuesday. The yield on the 30-year bond fell to 3.66% from 3.72%.

"We're in trading range," said Robert Stovall, investment strategist at Wood Asset Management. "It may bump the bottom of the trading range, but I don't think they're going to go much lower."

BP Capital sells $3.5 billion

BP Capital Markets priced an upsized $3.5 billion of guaranteed notes (A2/A) in two tranches by the time the market closed, a source close to the sale said.

The size was raised from an initial minimum of $3 billion due to demand, with roughly $12 billion on the books by early afternoon, the source said.

The "reception was strong," another source said, adding that there was about $13 billion on the books when all was said and done, with demand split fairly evenly between the two notes.

"It was very well-received," he said.

The $2 billion of 3.125% five-year notes priced at a spread of 195 bps over Treasuries. Initial guidance was whispered in the low-to-mid-200 bps, with revised talk in the 200 bps area. The tranche priced at the tight end of that.

A $1.5 billion tranche of 4.25% 10-year notes priced at Treasuries plus 210 bps. Initial guidance was also whispered in the low-to-mid 200 bps and was later revised to the 215 bps area, which the notes priced at the tight end of.

Barclays Capital Inc., BNP Paribas Securities, Citigroup Global Markets, Mizuho Securities USA Inc. and RBS Securities were active bookrunners.

Proceeds are going for general corporate purposes, including working capital for BP and other companies in the BP Group, and for the repayment of existing borrowings of BP and its subsidiaries.

The deal is guaranteed by BP.

BP Capital Markets last priced bonds in a $2 billion deal in two tranches on Aug. 6, 2009. Its last sale of five-year notes had a coupon of 3.625% and priced at a spread of 165 bps over Treasuries on May 1, 2009. Its last 10-year notes were part of a $3.25 billion three-tranche sale on March 5, 2009. Those 4.75% notes due 2019 priced at Treasuries plus 200 bps.

The company hasn't issued recently due to the oil rig explosion and subsequent oil spill. Its credit ratings were downgraded, and confidence in the company took a hit. This sale was regarded as "maybe a return to confidence" for BP, a source away from the sale said.

BP, an oil and gas company, and its funding arm are based in London.

BP, energy sector firms

BP Capital Markets' new deal traded 15 bps tighter in the secondary market, sources told Prospect News.

The notes due 2015 were seen firmer at 183 bps bid, 181 bps offered after pricing earlier at 195 bps plus Treasuries, a trader said.

The tranche of notes due 2020 priced at 210 bps plus Treasuries and traded tighter also at 196 bps bid, 192 bps offered, the trader said.

"BP represent a more interesting opportunity, given this is the first financing since the Gulf spill for them," said Jason Mandel, managing director of Chapdelaine Credit Partners, the fixed income division of New York-based Chapdelaine & Co. CCP. "For the size of the company and at least the historical ratings, the bonds look cheap."

The deal comes a day after several energy issuers priced new high-grade debt.

Exelon Generation Co., Entergy Gulf States Louisiana LLC and Alabama Power Co. were among the power companies in the market on Monday.

"The market tone for the sector is still fairly good," Mandel said. "The availability of financing right now and the openness of the high-grade market has really significantly reduced a lot of the refinancing risk in the space as maturities have been approaching."

Power companies, like any other sector, are looking for cheap available money, he said.

"The three key reasons have really been financing the short-term debt, financing [mergers and acquisitions] and to some extent [because] raising debt at entities within the structures in other markets would be difficult," he said.

Most of the energy deals priced on Monday are "trading relatively well on the break," Mandel said. "It's not nearly the same type of significant tightening seen on the break a couple months ago, but most deals are trading relatively well."

Secondary considers NBC deal

Two of the four tranches of senior unsecured notes (Baa2/BBB+) NBC Universal sold on Monday were active in secondary trading, a source said.

The tranche of 2.1% notes due 2014 priced at a spread of 145 bps over Treasuries and the 5.95% bonds due 2041 priced at a spread of 225 bps over Treasuries were not seen trading on Tuesday.

But the tranche of 2.875% notes due 2016, which priced at Treasuries plus 160 bps, firmed on the offer side to 156 bps, the source said.

Also seen in trading, the 4.375% notes due 2021 that priced at Treasuries plus 185 bps firmed on the bid side to 174 bps.

The broadcasting and entertainment company is based in New York.

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