(Adds Citigroup, quotes, new sales)
By Walden Siew
NEW YORK Nov 25 Goldman Sachs (GS.N) boosted its bond sale under a new government lending program on Tuesday, a promising first attempt at thawing frozen credit markets that may unleash $600 billion in new debt sales.
Goldman's inaugural $5 billion sale is the first test as U.S. banks line up to sell bonds guaranteed by the Federal Deposit Insurance Corp. after sluggish investment-grade and junk bond sales in recent months.
The plan comes as banks face significant capital constraints, high borrowing costs and massive amounts of debt that are maturing and need to be rolled over next year.
Citigroup (C.N), JPMorgan (JPM.N) , Morgan Stanley (MS.N) and Bank of America (BAC.N) also are preparing sales in what may be the start of a flood of new sales.
Goldman's debt sale, which carry top ratings by all three ratings firms, was nearly double initial talk of between $2 billion to $3 billion after decent demand, as the debt is guaranteed under the FDIC's so-called Temporary Liquidity Guarantee Program. Investors are watching the deal as an indicator of demand for bonds under the new program.
"The offering by Goldman Sachs is extremely well received," said David Dietze, chief investment officer of Point View Financial Services in Summit, New Jersey.
"The beauty of it is that the cost to issue this debt is much less than their cost to issue it naked, as it were, without the FDIC backing."
Goldman's debt priced at 200 basis points, tighter than original price talk of 220 basis points over U.S. Treasuries.
Dietze said the debt is more attractive to investors than agency debt such as Fannie Mae and Freddie Mac because of the explicit government guarantee.
The FDIC's program, approved on Friday, follows a similar British plan put in place in October to help fill a financing gap for banks shut out of the corporate bond market due to tight credit conditions.
"It all goes back to restoring confidence in the system," said Jason Polun, a banking analyst at mutual fund T. Rowe Price. "People always talk about frozen markets. Well, this will help bring liquidity."
JPMorgan Chase said on Tuesday it planned to sell three-year debt, denominated in euros and in sterling and both in benchmark size, which typically means $500 million or more.
The lending program is "a key step in getting these companies to resume lending to consumers and businesses and allow them to rebuild capital," Dietze said. "Clearly people want security and these bonds offer security."
Citigroup's sale may price next week, according to a source familiar with the deal. Morgan Stanley also announced a guaranteed debt issue on Tuesday, while Bank of America plans a similar sale that may price next week, according to IFR, a Thomson Reuters publication.
A Barclays Capital analyst said the new FDIC program may result in as much as $600 billion in total debt sales. The market could see about $50 billion in issuance per month until the deadline for debt issuance next June, or about $400 billion of new sales, Bank of America estimated in a report.
Through 2009, about $900 billion of maturing debt in the United States and Europe are putting the squeeze on companies that need to borrow at a high cost.
Investment-grade bonds, for example, recently traded at double-digit yields, while high-yield bond are now trading at more than 22 percent, a sign of what investors are demanding to take on the risk of holding those securities. For more details, click [ID:nN21490786] (Additional reporting by Elinor Comlay and Joseph Giannone in New York and Jane Baird in London; Editing by Leslie Adler)