The Credit Market Heats Up - Deals Of The Day

Includes: CAG, CLX, D, EXC, MRK, PEG, RIG
by: Rubicon Associates

After two lackluster weeks, the credit market heated up Monday with a decent amount of deals across various sectors being priced. Among the deals that priced Monday:

Issuer Rating Tenor Size Spread
Merck & Co (NYSE:MRK) A1/AA 5yr $1,000MM +50
Merck & Co A1/AA 10yr $1,000MM +75
Merck & Co A1/AA 30yr $500MM +90
Transocean (NYSE:RIG) Baa3/BBB- 5yr $750MM +190
Transocean Baa3/BBB- 10yr $750MM +220
Clorox Co (NYSE:CLX) Baa1/BBB+ 10yr $600MM +140
Tyco Flow Control Baa2/BBB 5yr $350MM +125
Tyco Flow Control Baa2/BBB 10yr $550MM +150
ConAgra Foods (NYSE:CAG) Baa2/BBB 3yr $250MM +110
ConAgra Foods Baa2/BBB 5.5yr $250MM +150
ConAgra Foods Baa2/BBB 10yr $250MM +165
Dominion Resources (NYSE:D) Baa2/A- 5yr $350MM +78
Dominion Resources Baa2/A- 10yr $350MM +110
Dominion Resources Baa2/A- 30yr $350MM +130
Peco Energy (NYSE:EXC) A1/A- 10yr $350MM +70e
PSEG (NYSE:PEG) A1/A- 30yr $350MM +85e

NOTE: "e" is estimated spread, EXC and PEG are first mortgage bonds.

The treasury curve (source: Bloomberg) for approximate yields (add spread to treasury rate) is:

3yr: 0.32%

5yr: 0.64%

10yr: 1.66%

30yr: 2.81%

You will notice that all in yields are pretty low and spreads, while attractive from a risk premium standpoint, continue to hold in well despite a somewhat flat growth environment.

While many may find the Transocean bonds to be the most appealing (based on being the highest yield/most spread), it is important to remember that there are still headwinds facing the company through the Macondo Well ($2.0B reserved for potential liability which has not yet been determined), The Brazilian Frade Field where there is an injunction which would require RIG to cease conducting extraction or transportation activities in Brazil within 30 calendar days (the injunction has not yet been delivered by the court) and the loss that will be incurred due to the sale of 37 jack-up rigs announced yesterday. While there are significant risks embedded in the credit of RIG, the yield chasers will be buying. The prospectus is here.

Clorox is interesting given its decent credit profile (it has actually been increasing and the company's recent results have shown strength) although it is being priced essentially at the market. While 3% may not seem attractive to many buyers, this is a credit that is getting stronger and should tighten in a few basis points as it begins to trade. The prospectus is here and the term sheet is here.

Bottom Line: The credit market is back to creating decent new issue flow with issuers across sectors. Spreads are still attractive from a risk premium standpoint (the percent of yield which spread to treasury comprises), but absolute yields are hardly exciting. Dedicated fixed income managers will find some value in these names, but investors free to buy the entire capital structure might find better value in the equities.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is for informational purposes only, it is not a recommendation to buy or sell any security and is strictly the opinion of Rubicon Associates LLC. Every investor is strongly encouraged to do their own research prior to investing.