Two deals price but Barclays pulls deal over lawsuit

By Danielle Robinson and Shankar Ramakrishnan

NEW YORK, June 25 (IFR) - Two trades priced in the US high-grade bond market Wednesday - a day full of drama as Barclays (LSE: BARC.L - news) pulled its bond offering on news it will be sued by the New York attorney general for fraud.

Barclays had already amassed more than US$4.5bn in orders for the 10-year subordinated deal, market sources said, when reports of the lawsuit hit trading screens.

"Investors just baulked," one portfolio manager who had been looking at the deal told IFR.

"If something dire does come out the suit, then that could mean that the deal has to be nullified anyway - so it was just better to pull it."

Investors said the bank was pushing for a US$1.5bn transaction at a price of 180bp over Treasuries before news of the suit emerged.

"After seeing what happened to BNP Paribas (Xetra: BNP.DE - news) and Credit Suisse, the concern is that no one knows exactly what the suit is about, in terms of just how deep it goes and if it will lead into something else," the manager said.

Barclays is reportedly to be sued on allegations that the bank's dark pool - a private trading platform - gave high-frequency traders systematic advantages over other traders.

The fact that investors immediately pulled back from the deal underscored how concerned accounts are about how hard US authorities are penalising European banks.

Subordinated European bank bonds are one of the most sought after products in the corporate bond market, because of their much higher yield than senior unsecured notes.

Had it priced at 180bp, the new bond would have locked in a spread some 20bp tighter than initial price thoughts and offered no new issue premium - an extremely good funding result for the bank.

Investors often fight for subordinated notes in particular, believing that if the bank goes under, there will be very little distinction between the recovery value of subordinated versus senior debt.

"If you believe the credit story, you may as well get paid for it and buy the subordinated bonds," said one buy-side bank analyst.

SO CLOSE

At 180bp the deal would have priced 70bp wider than the G spread on its 3.75% 2024, according to one head of financials syndicate, when some thought a 75bp senior/subordinated differential was fair value.

Fair value was determined by looking at Intesa's recent subordinated offering, which priced with an 87bp subordinated premium and is now trading 75bp wider than its senior unsecured curve.

Societe Generale (Paris: FR0000130809 - news) and BPCE senior subordinated differentials are around 70bp, which suggested the 75bp senior/sub difference was fair value for Barclays.

Some bankers were surprised that Barclays was caught off guard by the suit.

"This was obviously not mentioned in the offering memorandum, so it definitely took their Treasury department by surprise," said one syndicate manager.

"You'd think someone somewhere in management knew about this suit, and you'd think that, given this was a capital raising trade, it would have been flagged if it was thought to be an imminent concern."

Some thought the investigation was probably ongoing for some time without any word of movement by the attorney general.

TWO TRADES DONE

Issuance conditions still looked good overall, however, with two decent sized trades getting done on Wednesday.

Kansas Gas & Electric raised US$250m in 30-year FMBs that priced about 17.5bp tighter than IPTs of 112.5bp area on books of US$1bn, while Yamana Gold (Toronto: YRI.TO - news) took out US$500m pricing 10-year bonds about 35bp inside IPTs. Yamana attracted books of US$2.9bn.

"The market is looking a little less frothy than it did earlier in the year, and our advice to issuers continues to be to go now rather than wait," said one banker.

"Coming to the quarter-end, the market is looking a bit tired after the supply rush so far. But once we roll into early July, we will be off to the races again."

Year-to-date the US investment-grade bond grade market has priced a whopping US$595.398bn - which is on pace for 2014 to top 2013's full-year record US$982.314bn.

With issuance Thursday expected to be similar to today, the focus is shifting to early next week, when at least one large-sized trade is being anticipated.

Some said it could be from Monsanto Company (NYSE: MON - news) , which has said it intended to begin a public offering of senior notes in the near term.

The company is expected to use proceeds to fund a US$10bn share repurchase programme over the next two years including an accelerated buyback target of US$6bn within the next year, said Morningstar (NasdaqGS: MORN - news) .

"Although operating performance has remained strong, we think the proposed increase in debt will raise company leverage to a level that no longer supports the current A+ rating level," it said.

"We would expect these balance-sheet adjustments to result in lowering our rating by one or two notches."

KANSAS GAS & ELECTRIC

Kansas Gas & Electric (WR), A2/A/A- (s/s/p), announced a USD250m 144A/Reg S 30-year FMB. The notes contain a MWC and a 6mo par call prior to maturity. The active bookrunners include Barc, JPM and MUS. Co-mgrs: BAML/BNP (Paris: FR0000131104 - news) /DB/GS (KSE: 078935.KS - news) /WFC. UOP: A distribution to KG&E's parent corporation WEI which it will use to retire US$250m in aggregate principal amount of its FMBs, 6.00% 2014 Series. Settle: 7/02/14.

IPTs: +112.5bp area

PRICE GUIDANCE: T+100bp area (+/- 5bp)

LAUNCH: USD250m at T+95bp

PRICED: USD250m 4.30% 30-year (7/15/44). At 99.747, yld 4.315%. T+95bp. MWC+15bp. 1st pay: 1/15/15.

BOOKS: north of US$1bn

NIC (NasdaqGS: EGOV - news) : 10bp

COMPS:

WR 4.625% September 2043 at T+85bp (US$106.47)

WR 4.100% April 2043 at T+83bp (US$98.92)

YAMANA GOLD

Yamana Gold Inc (YRICN), Baa3/BB+/BBB- (s/p/s), announced a USD500m (no grow) 144A/Reg S w/ reg rights 10-year (7/15/24) senior unsecured offering. The notes contain a 101% put upon CoC or downgrade below IG (LSE: IGG.L - news) , a MWC, and a 3mo par call prior to maturity. The active bookrunners are Citi, MS and RBC (MCX: RBCM.ME - news) . UOP: To repay the Term Loan entered into to fund, in part, the Acquisition, and to pay related fees and expenses. Settle: T+3 6/30/14).

IPTs: +275bp area

PRICE GUIDANCE: T+250bp area (+/- 10bp)

LAUNCH: USD500m at T+240bp

PRICED: USD500m 4.95% 10-year (7/15/24). At 99.895, yld 4.963%. T+240bp.

BOOKS: US$2.9bn

BARCLAYS (Postponed)

Barclays PLC (BACR), exp issue rating Ba1/BBB-/A-, announced a US$ benchmark SEC registered 10-year (7/02/24) subordinated Tier II notes. Barc is sole bookrunner. Settle: T+5 (7/02/14).

IPTs: +200bp area

PRICE GUIDANCE: T+185bp area (+/- 5bp)

UPDATE: Deal postponed due to headline risk (Reporting by Danielle Robinson and Shankar Ramakrishnan; Editing by Marc Carnegie)