Seized WaMu dominates junk trading; Wachovia bonds also walloped; GM, rest of market mostly off

By Paul Deckelman and Paul A. Harris

New York, Sept. 26 - Washington Mutual Inc.'s bonds completely dominated junk market trading on Friday, with most issues falling badly in the wake of the seizure of the faltering thrift by federal regulators on Thursday night and its closure, followed by the sale of its useable assets - but not its liabilities - to J.P. Morgan Chase & Co. However, several of the WaMu issues actually rose in price from the levels seen late Thursday.

Junk desks were also trading the still-nominally investment-grade bonds of rival banks Wachovia Corp. and Morgan Stanley, both of which have beaten well down from their previous par levels and are trading - especially Wachovia's paper - like distressed junk.

Wachovia and Morgan Stanley credit default swaps were trading in points up front, according to two separate sources, a hedge fund manager and a high-yield syndicate source.

The latter added that for this reason, alone, a belief seemed to be taking hold on the Street that the government's hand might be forced with respect to a financial rescue package.

Outside of the financials names, the WaMu debacle was generally dragging bonds down by multiple points across the board, including the widely held automotive bellwethers, General Motors Corp. and Ford Motor Co.

Nortel Networks Corp. bonds continued to take a pounding despite the lack of fresh news out on the Toronto-based telecommunications equipment manufacturer.

The primary market failed to turn out any news on Friday.

There are expectations that the downsized Fresenius Kabi $800 million bond offering, via Deutsche Bank, Credit Suisse and JP Morgan, could launch early in the September-October crossover week.

However it could be pushed back, one sell-sider said late Friday.

Earlier in the week the bond portion was downsized by $500 million, from $1.3 billion, with that amount shifted to the $2.95 billion bank deal (Baa2/BBB-).

Prior to this week's downsizing the Fresenius high yield bridge had already been downsized to $1.3 billion from $1.65 billion.

Market barometers slide

The widely followed CDX index of junk bond performance, which rose 5/8 point on Thursday, lost ¼ point on Friday, a trader said, quoting it at 90 5/8 bid, 91 1/8 offered. The KDP High Yield Daily Index plunged by 76 basis points to end at 65.84, as its yield shot up by 19 bps to 11.80%.

But the CDX index outperformed cash on Friday, a syndicate official noted, saying cash bonds were down 1 to 3 points.

In the broader market, advancing issues trailed decliners by a three-to-one margin. Activity, represented by dollar volume, zoomed by 88% from the levels seen on Thursday, and actually outpaced that of the usually busier investment-grade market.

WaMu the disaster of the day

WaMu's bonds were on the hot seat on Friday, and most wilted under the intense scrutiny. They were extremely actively traded and at most shops the name was essentially the only thing changing hands.

"If you weren't trading WaMu," a trader said, "you weren't trading anything."

Its 4% notes coming due in January 2009 were seen having opened at 9 bid on news of the troubled thrift's seizure by federal regulators and sale.

After that, the bonds moved up, mostly trading during the day in a wide range between lows around 20 and highs around 40, around where they closed, on very heavy dealings of over $350 million. At one point, late in the day, the bonds were seen having dropped as low as 4.5 in a sizable trade - but there followed a number of other big-block transactions that lifted the bonds back up to above the 40 mark.

"They began as teenagers [i.e. trading in the low teens] and ended middle-aged," trading in the low 40s, a trader said. At his shop, he said, "we were jammin'," trading WaMu bonds from 730 a.m. to 5 p.m. ET almost non-stop.

Another very active issue, with over $200 million traded, was the WaMu 5¼% notes due 2017. Those bonds also finished on the upside, up nearly 20 points, at 39 bid. And yet another gainer was its 5½% notes due 2011, which also moved up to that 39 range where the senior bonds seemed to be settling, up 14 points.

However most of the WaMu bonds were seen on the downside, as junior issues all fell to under 1 point bid. Perhaps the most active issue in this category were the 5.6% subordinated notes due 2014, down some 24 points on the day, while WaMu's 5½% notes due 2013 seen down a breath-taking nearly 30 points in heavy dealings.

From the opening bell, Washington Mutual was the center of attention, as investors in both the junk and equity markets reacted to the not unexpected but still jarring news that regulators from the Office of Thrift Supervision and the Federal Deposit Insurance Corp. had stepped in on Thursday night, declaring the company failing and unstable after a panicky depositor run on the eponymous banking unit, and arranging to sell its branch network and other valuable assets to J.P. Morgan Chase & Co.

WaMu's shares - which had been already pounded down over the previous several sessions - lost nearly $1.53, or 90.51% to close at 16 cents, although volume of 102.3 million shares was about 10% under its usual level.

"It was a beautiful deal for the country, and for J.P. Morgan," a trader said, though WaMu investors might be understandably less than thrilled at how things shook out once it became obvious that their bank wasn't going to find a deep-pocketed rescuer. "J.P. Morgan took the branches, the FDIC ended up getting $1.9 billion out of it, they got no liabilities, and everything got stuck to the shareholders and bondholders."

Despite analyst and media warnings prior to the seizure by the regulators that such a step could end up costing the FDIC's Deposit Insurance Fund as much as $24 billion, the fund paid out not a dime.

JPMorgan Chase - which on the personal orders of its CEO, Jamie Dimon, had shrewdly gotten out of the subprime lending game two years ago, when WaMu and other lenders were jumping into the then-lucrative field with both feet, sparing JPM most of the troubles that subsequently laid WaMu and other industry peers low - said it was not acquiring any senior unsecured debt, subordinated debt, or preferred stock of WaMu's banks, or any assets or liabilities of the Washington Mutual Inc. holding company.

JPMorgan also said it will not assume any of the numerous lawsuits by investors, mortgage borrowers or other critics facing the holding company. The presence of those liabilities had prevented WaMu from reaching an agreement to be taken over whole by J.P. Morgan, Citigroup Inc., Wells Fargo & Co., Toronto Dominion Bank, HSBC or Banco Santander SA, all of whom had been kicking WaMu's tires over the previous several days.

Wachovia beaten down

With WaMu now history, Wall Street's focus was turning to which financial institution would be the next one to be picked off, and many were thinking about Charlotte, N.C.-based Wachovia, the fourth-biggest U.S. banking company behind crosstown rival Bank of America Corp., J.P. Morgan Chase and Citigroup. Fears that Wachovia - which, like WaMu, has a heavy portfolio of troubled mortgage loans - might follow in the thrift's footsteps caused investors to beat down its shares by as much as 41.4% in intraday dealings and take its bonds solidly lower.

In the latter sphere, Wachovia's 5.5% notes due 2015 saw over $250 million of the bonds traded, with levels falling more than 21 points to 50 bid. Its 5¾% notes due 2018, with some $200 million traded, were down a more sedate 9 points to 55 bid.

Wachovia's NYSE-traded shares ended down $3.70, or 27.01%, at an even $10 per share. Volume of some 329 million shares was over three times the usual turnover.

The shares had come up from their lows later in the session on the news that Wachovia had entered into preliminary M&A talks with a handful of possible buyers. Citi was the name most often mentioned, although Wells Fargo and Spain-based Banco Santander were also seen as possibilities.

But while WaMu had been negotiating with a gun figuratively pressed to its corporate head - or at least a stopwatch, with the regulators waiting to swoop in when depositors began pulling too much money out - the better-capitalized Wachovia was reported to be feeling no such extreme pressure to strike a deal, or else.

A trader specializing in financial issues cautioned against drawing too close an analogy between Wachovia and WaMu.

"I think Wachovia is not in the same state as WaMu," he declared, noting that it can raise the capital it needs and "they're too major to go that way."

Morgan Stanley trades lower

For the moment, there are no worries about Morgan Stanley going away, since it announced plans to convert to a commercial bank, as well as the sale of a 20% stake to Japan's Mitsubishi UFJ Financial Group. However, that relative stability did not impress its bondholders, who took its 5 3/8% notes due 2015 down more than 12 points in heavy trading to 60.5.

Auto names lower

Outside of the financials, a trader saw General Motors' benchmark 8 3/8% bonds due 2033 trading at 42 bid, 44 offered, down 2 points, while Ford Motor Co.'s 7.45% bonds due 2031 were also down a deuce at 46 bid, 48 offered.

Anther trader, who had seen the GM long bonds at lower levels on Thursday, saw them "actually up a point," at 44.He saw GMAC LLC's 8% bonds due 2031 at 40 bid, down 2 points.

Yet a third saw the GM 8s down 2 points at 42 bid, 44 offered, the Ford long bonds at 44 bid, 46 offered and the GMACS down 2 points at 38 bid, 41 offered. He said generally, the automotive names were down 1 or 2 points "across the board."

Elsewhere, a trader saw Nortel Networks' 10 1/8% notes due 2013 - which had fallen sharply on Thursday to around the 70 level, on no news - again getting "roughed up pretty good," down 8 to 9 points on the day at 59 bid, 60 offered. However, another market source saw those bonds only down around 3 points to the 67 level.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.