JPMorgan, Morgan Stanley price FDIC-backed deals, others expected to follow

By Andrea Heisinger and Paul Deckelman

New York, Nov. 26 - Morgan Stanley and JPMorgan Chase priced the second and third in an expected series of government-backed bonds Wednesday, ahead of the long holiday weekend.

The issue follows in the footsteps of Goldman Sachs Group Inc.'s $5 billion deal that priced Tuesday and was largely viewed as a test case for the guaranteed notes.

In the investment-grade secondary market Wednesday, advancing issues again led decliners by a better-than-four-to-three ratio. Overall market activity in the shortened pre-holiday session, reflected in dollar volumes, was down some 54% from Tuesday's pace.

Spreads in general were seen wider, in line with lower Treasury yields; for instance, the yield on the benchmark 10-year issue fell by 12 basis points to 2.98%.

Morgan Stanley prices FDIC-backed notes

The $5.25 billion deal from Morgan Stanley was priced by mid-morning in anticipation of the early market close. It was split into three tranches of fixed- and floating-rate notes.

The $2.25 billion of 2.9% two-year notes priced at 99.94 with a spread of Treasuries plus 180 basis points.

The $2.5 billion of 3.25% three-year fixed-rate notes priced at 99.966 with a spread of Treasuries plus 186 bps.

The third tranche was $500 million of three-year floating-rate notes with a coupon of three-month Libor plus 85 bps. They priced at par to yield three-month Libor plus 85 bps.

Later in the day, Morgan Stanley announced a fourth tranche, this one $500 million of 3.5-year floating-rate notes price at par to yield one-month Libor plus 74 bps.

The deal, like Tuesday's from Goldman Sachs, is guaranteed by the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee.

Morgan Stanley ran the books on its deal. Like Goldman's it was priced off the agency desk.

JPMorgan does $6.5 billion

Financial holding company JPMorgan Chase priced the largest FDIC-backed deal yet, with $6.5 billion in two tranches.

The $5 billion of three-year fixed-rate notes priced at a spread of Treasuries plus 177.5 bps.

The $1 billion of two-year floating-rate notes priced at par to yield three-month Libor plus 50 bps.

And $500 million of three-year floating-rate notes price at par to yield one-month Libor plus 76 bps.

Due to the early market close and lateness of the pricing, full terms were not available at press time.

J.P. Morgan Securities ran the books.

More expected

Other banks are expected to take advantage of the FDIC guarantee in the next couple of weeks, sources said. They have until June, 2009, to issue AAA-rated debt protected under the government guarantee.

"There are a lot of people looking at that right now, and I think the Goldman success, and now Morgan is making it look better."

JPMorgan Chase has issued in euro and sterling denominations on top of its dollar-denominated offering Wednesday.

Banc of America intends to issue under the guarantee, he said, and Citigroup is also thought to be doing a deal.

Timing of the issues is unclear, he said, although they could be pricing after the Thanksgiving holiday.

Toyota financing arm does deal

Toyota Motor Credit Corp. priced $91 million of one-year floating-rate notes Tuesday.

The non-callable notes priced at par to yield three-month Libor plus 100 bps.

Citigroup Global Markets and Morgan Stanley were agents for the medium-term issue.

Short, but busy week

The three-day week ultimately saw about $17.625 billion in new issues if those from Goldman Sachs, JPMorgan Chase and Morgan Stanley are included. Without them, the total plummets to about $1.375 billion.

The three FDIC-backed issues, although priced like corporate bonds, were run off agency desks.

Market tone was not much better than it has been, a source said, but the time crunch to get things done before 2009 is propelling many companies into issuance.

"This week was just part of that window," a source said. "We can probably expect it to continue for the next couple of weeks."

After a short rally Monday on the Citigroup bailout, conditions were largely back to worries about the economy.

"Really, I think everyone's just trying to make it through December without anything major happening," a source said. "We're not even sure if that will happen."

December issues seen modest

A backlog that has existed since before Labor Day was eased a bit in the last few weeks as companies once again began issuing during windows of relative stability.

"Most of them kind of had to," a source said. "That's why there have been a bunch of deals, but they're all pretty small."

Until this week, issuance was almost exclusively non-financial, with deals mostly coming from utilities and well-known names.

After a successful issue from lower-rated Altria Group, the market was once again considered open for BBB rated issuers.

"It should be interesting," a source said of the coming few weeks.

"We're just going to have to see what the tone is like on Monday, and then we should see some stuff Tuesday."

Trading focuses on FDIC deals

With some desks half-staffed, if they were manned at all, and most high-grade market attention focused on the new government-backed deals from Morgan Stanley and J.P. Morgan Chase, following on the heels of Tuesday's successful pricing of Goldman Sachs' upsized government-backed benchmark issue, secondary activity was seen to have taken a back seat, as reflected in the shrunken volume level.

A trader said he thought that new Morgan Stanley deal was trading "a little tighter," but noted that as a hybrid combining features of a corporate bond with a federal guarantee, enabling the issuer to score a AAA rating, it was trading off the agency desks at most shops rather than as a straight investment-grade corporate.

Citi continues climb

Among already established bonds, Citigroup's paper was seen fairly active, mostly on the upside, helped by the momentum generated earlier in the week on news of the massive federal rescue of the beleaguered New York banking giant.

A market source saw Citi's 5.30% notes due 2012 as the day's most active issue, with some $40 million changing hands at a spread over comparable Treasuries of 605 bps, in more than 40 bps from Tuesday's levels.

However, at another desk, those bonds were quoted closer to 620 bps, out more than 10 bps on the day.

Citi's 8.30% bonds due 2057 tightened by nearly 20 bps, the first source said, to just under 1,000 bps.

Goldman, GE seen wider

Among other financials, Goldman and General Electric Capital Corp. were seen wider on Wednesday.

Goldman's 6.125% notes due 2033 were nearly 30 bps wider at 530 bps over, while its 6.875% notes due 2011 were likewise 30 bps wider, a source said, at 715 bps.

Versus week-ago levels, Goldman's 5.625% notes due 2017 stood at 769 bps, a 100 bps widening, while its 6.25% notes due 2017 held at 640 bps, 64 bps wider.

GE Capital's 5.40% notes due 2017 were 48 bps wider than recent levels at 390 bps.

Morgan Stanley's existing 4.75% notes due 2014 widened by 30 bps to 970 bps over.

Industrials tighten up

A number of industrial issues, on the other hand, were being quoted somewhat tighter, including PepsiCo's 5% notes due 2018, which improved solidly to about the 240 bps level.

Paper giant Weyerhaeuser Co.'s 6.75% notes due 2012 were seen by a source at just around the 1,000 bps over level, in by some 40 bps on the day. At another desk, those bonds were quoted as tight as 910 bps, in by some 90 bps.

Dow Chemical's 6.125% notes due 2011 closed at 425 bps over, in by 35 bps on the session.

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