By Nancy Leinfuss
NEW YORK, March 24 (Reuters) - U.S. corporate bond yield spreads ended wider on Monday in cautious trade, but steered clear of the steep selloff in stocks, as hopes for a quick U.S.-led war with Iraq diminished, traders said.
"Spreads are ending wider today but we did not spiral downward with equities," one trader said.
Over the weekend, U.S.-led forces suffered their heaviest casualties in the five-day-old conflict with Iraq, encountering stiff resistance at the towns of Nassiriya, Najaf, Basra and the key port of Umm Qasr.
The Dow Jones Industrial average plunged 307.29 points to end Monday's session at 8,214.68, a drop of 3.61 percent. Before that, the Dow had been driven up a hefty 13 percent in an eight-day rally, as investors banked on a quick U.S. victory.
Spreads, the difference between yields on corporate bonds and U.S. Treasuries, moved out by 0.02 to 0.03 percentage point, traders said.
Corporate bonds had rallied with equities last week as coalition forces met few setbacks during the first days of the war against Iraq.
Despite risks, some strategists are optimistic that the corporate market has more upside over the longer term. If equities remain volatile and yields on Treasuries remain low, investors should show continued appetite for corporate bonds.
An indication of the still very strong demand for corporate issues came on Monday, as AmSouth Bancorporation easily sold $500 million of an oversubscribed 10-year subordinated note sale. The issue was priced at a yield spread of 87.5 percentage point over U.S. Treasuries.
Jim Esposito, managing director of credit syndicate at Goldman Sachs & Co., which underwrote the sale, said the deal went very well despite the market volatility.
"Despite a very volatile equity market, the Amsouth Bank financing, highlights that high-quality, infrequent, issuers remain very much in favor with corporate bond investors," Esposito said. "The sale is proof positive that the technical condition of the corporate bond market remains in excellent shape, despite concerns regarding the conflict in the Middle East."
Meanwhile, the pace of corporate debt sales, ramped up over recent weeks, is expected to slow as funding plans are wrapped up now that military conflict is well under way.
U.S. firms last week sold $7.2 billion of investment-grade offerings, after average sales of $11.5 billion per week for the first half of the month.
In other markets, prices of U.S. Treasuries rose as investors opted for the safety of government bonds amid the volatility. Ten-year Treasury notes gained 1-4/32, pushing their yields down to 3.965 percent.
TOYS R US SLASHED TO JUNK
Fitch Ratings cut its long-term debt ratings on Toys R Us Inc. to junk on Monday, citing soft operating results, a weak retail environment and growing competition from major discount chains.
S&P cut the company's senior notes by one notch to "BB-plus," its highest junk rating, from "BBB-minus," and its commercial paper to "B" from "F3," affecting $2.5 billion of debt. The rating outlook is stable. Ratings cuts often increase borrowing costs.
"Soft operations have exerted pressure on Toy's bondholder protection measures," Fitch said.
The firm has two debt issues totaling $800 million that mature in January and February of 2004, but is expected to have enough access to the capital markets to pre-finance these maturities this year, it said.
The retailer filed with the U.S. Securities and Exchange Commission to periodically sell up to $800 million in debt securities. It plans to use the proceeds from the offering for general corporate purposes, which may include debt repayment, working capital, capital spending and acquisitions.
HEALTHSOUTH
HealthSouth Corp. , accused by federal regulators of accounting fraud, said on Monday that its past financial statements should not be relied upon and that it hired forensic accountants and a turnaround firm as the company faces concerns about its finances.
The firm is facing an April 1 maturity of approximately $350 million of convertible bonds, a frozen credit line and SEC allegations that the firm inflated profits by $1.4 billion since 1999 and assets by $800 million.
Prices on its bonds have plummeted to "distressed" levels since last week where they currently remain. HealthSouth's 7.625 percent notes maturing in 2012 were quoted unchanged at 45 cents on the dollar on Monday. They have lost nearly half of their value since last week, traders said.