Market tone, spreads change little from last week; secondary slightly better, financials mostly steady

By Andrea Heisinger and Paul Deckelman

Omaha, Nov. 26 - There were no new investment-grade issues Monday as the tone changed little from last Wednesday before the long holiday weekend.

"Spreads tried to rally a little bit early this morning, but by the close we were back to where we were last week," one source said.

The last issue to price was from Cargill, Inc., one market source said.

Monday saw another casualty of the unfavorable market conditions, with Dubai Electricity & Water Authority postponing its three tranche benchmark-size issue of bonds (A1/AA).

Barclays, Citigroup and Dubai Islamic Bank were bookrunners for the Rule 144A deal.

The last issue to get pulled was from Eksportfinans ASA last week.

There remains a "healthy backlog" said one source.

"Who else makes it to the market depends on what kind of pain they can bear," the source said, referring to large new issue premiums companies have been paying to enter the market.

Market sources estimated the last couple of issues were saddled with 40 to 50 basis points new issue premiums.

"It's a strange market - really choppy," a source said. "There are probably a dozen guys who want in, but can't do anything."

The source said the tone was a little stronger than last week, but "issuers still can't print anything."

"There are a couple of deals that could go this week depending on what happens but it's still really day to day at this point," he said.

Secondary trading was slightly stronger, a market source said.

"We still can't do anything regardless of what the secondary is doing," a source said.

In trading, advancing issues led decliners by about a three-to-two ratio. Even though there was more bad news on the financial front - with CNBC reporting that Citigroup might have to cut as many as 45,000 of its more than 300,000 full-time jobs and Goldman Sachs saying HSBC is likely to need another $12 billion of provisions for sub-prime losses - there was no widespread rout, and in fact the sector, in the view of at least one trader, hung in, particularly the new Citigroup and Wachovia issues.

However, a trader watching the credit default-swaps market said that early spread tightening in CDS prices on bank and brokerage names did not last, and those contracts ended up widening out about 5 bps or so from last week's levels.

Nominally investment-grade Countrywide Financial Corp.'s bonds were seen at best unchanged to lower on new problems for the Calabasas, Calif.-based mortgage giant.

Citi, Wachovia deals hold

A trader said that the Citigroup 6 1/8% notes due 2017, which had priced at 190 basis points over Treasuries on Nov. 14, "held its own," trading around 186 bps over, while Wachovia's 6% notes due 2017, which priced at 195 bps over on Nov. 15, were also hanging in there at 193 bps, although he said that he "didn't see a lot of" the latter issue.

He said the sector "got really quiet as the stock market started to sell off." While spreads were generally "a little weaker," there was no rout, and some issues still "held their own."

He said that even on HSBC's paper, "bids were wider, but the offerings didn't cheapen up that much at all."

Broker CDS widen

A trader said that brokerage-house CDS spreads - after initially coming in by some 10 bps to 15 bps from the levels at which they had finished during last week's abbreviated trading sessions - "sold off. They couldn't hold it" and finished about 5 bps wider on the day, with Bear Stearns' debt-protection costs widening to about 200 bps bid, 210 bps offered, Lehman Brothers' CDS cost at 165 bps bid, 175 bps offered, Merrill Lynch's credit-swap spread at 170 bps bid, 180 bps offered and Morgan Stanley's at 130 bps bid, 140 bps offered.

Bank CDS spreads were also wider, by about 5 to 10 bps, Citigroup at 105 bps bid, 110 bps offered, Bank of America and JP Morgan each at 77 bps bid, 82 bps offered, and Wachovia at 120 bps bid, 128 bps offered. Washington Mutual's stood at 475 bps bid, 500 bps offered.

Countrywide pushed lower as stock dives

A market source saw Countrywide Financial's 6¼% notes due 2016 fall about 2 points on the session to just over 58 bid on heavy volume, with a number of large block trades seen. Its bonds had gyrated around in a 5 point range during the session, and had appeared to have stabilized around the 60 area, little changed on the day, before being pushed down to their closing level in late-day dealings.

Another market source said she saw "ugliness there - I don't know if bankruptcy is in the wind for them - who knows - but there's a lot of talk."

A trader in distressed high-yield bonds said that his shop was now watching the credit, despite its still nominally investment-grade credit ratings at Baa3/BBB+/BBB+ for most of its bonds.

"It can't really be high-grade when they've got one-year paper trading at [a yield of over] 30% - it's way below high-grade now."

He called the company's 3¼% notes due 2008 "very active," chalking it up to the high current yield the bond is carrying. The $1 billion issue was most recently trading at 88, he said, translating to a 32% yield - while the price, just below the 90 level, was still respectable enough, unlike the company's longer paper, some of which trades at badly distressed levels in the 60s and even the 50s. "I think [the yield] is an indication what people really think of Countrywide," he asserted. "If you have short-term debt with those kind of yields, there's a lot of concern whether or not they make it."

Another trader agreed. He pegged Countrywide's bonds - at least its short-dated paper - "pretty much unchanged," with the 3¼% 2008 notes holding steady at 86 bid, 88 offered, while its 4¼% notes slated to mature on Dec. 19 were stable at 97.5 bid, 98.5 offered.

However, with the latter bonds scheduled to be paid off in less than a month's time, such paper would normally be trading right at the par level - but the trader said that "with as much speculation [as there is] about what's actually going to happen at Countrywide, people are leaving it alone.

"It should be at par," he continued, "but it's a couple of points off because of the uncertainty about what's actually going on with Countrywide. No one's getting a really good handle on it."

Its bonds "are up a bunch, they're down a bunch - they've been down more than up recently - but they're kind of all over," because, he reiterated, "no one has a real good handle on what exactly is going to happen. There's rumors they're not going to be able to make interest payments - so the 61/4s are trading at that 58-59.5 level, and were down 2 points on the day. So those guys were trading way off - and these [short bonds] aren't trading right on top of par, just because people are unsure what's going to happen."

Countrywide's convertible senior debentures due 2037 were meantime seen lower at 77.9205 from Friday's finish at 78.7318.

The company's New York Stock Exchange-traded shares into which the latter notes can be converted meantime nosedived $1.01, or 10.47%, to finish at $8.64 on volume of 54.8 million, nearly 1½ times the usual turnover.

Besides the turmoil affecting the financial sector of the equity and debt markets generally, there was more bad news Monday for Countrywide investors in the person of the company's frequent nemesis, Sen. Charles Schumer, who accused Countrywide of treating the Federal Home Loan Bank system "like its personal ATM," and called for an investigation of the $51.1 billion in advances from the FHLB's Atlanta branch which Countrywide had received during the nine months ended Sept. 30. Almost half of that sum - $22.27 billion - was borrowed in the third quarter, as the credit crunch intensified. Countrywide secured the FHLB loans with $62.4 billion of mortgage loans as collateral, or 78% of its mortgage holdings - but Schumer charged that at a time when Countrywide's loan portfolio "is deteriorating drastically, FHLB's exposure to Countrywide poses an unreasonable risk."

The advances to Countrywide, the nation's largest independent mortgage lender, accounted for fully 37% of the advances which FHLB Atlanta made to mortgage lenders such as Countrywide - a concentration which the New York Democrat warned "may pose a risk to the safety and soundness" of the FHLB, which is composed of 12 regional government-chartered banks owned by over 8,100 U.S. financial institutions.

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