Primary eyes headlines, awaits Tuesday data; secondary sees Merrill tighter, AIG, Lehman decline

By Andrea Heisinger

New York, Sept. 15 - Those in the investment-grade market watched from the sidelines Monday as once bulletproof names like Lehman Brothers Holdings Inc., American International Group, Inc. and Merrill Lynch & Co. succumbed to a lack of capital.

The day began with the news of Lehman filing for bankruptcy after failing to find a buyer and news that AIG was looking for $40 billion in financing. It ended with more uncertainty as neither had been fully resolved.

The secondary market was almost exclusively focused on these financial names, with the non-financial side nearly coming to a halt.

Those in the secondary, and some in the primary, commented that they've never seen anything like the current state of the financial sector.

Primary awaits Fed action

The primary market remained fixated on the evolving news from Lehman and AIG Monday, with nothing happening for new issues.

Many were also waiting for Tuesday to see what happened at a Federal Reserve meeting.

"Everyone's waiting to see whether rates are going to move tomorrow," a source said. "It will be a data point for companies to see where to go from here."

Many issuers have remained on the sideline for lack of any recent issues on which to get a reading on pricing or other data.

Market liquidity is likely to remain shaky until there are at least a couple of solid issues to provide these data points, a source said.

"Tomorrow is going to be a large data point as far as the Fed rate," he said.

"I think we're going to see as we did in the last couple of weeks, with people standing on the sidelines waiting for others to do something before they will."

Continued news of AIG is likely to drag the market down until some sort of resolution is reached, a source said.

The insurance company was seeking $40 billion in loans, which it first tried to get from the Fed. After being denied, New York governor David Paterson announced the state would provide $20 billion in financing.

After the market close Monday, it was reported that the Fed had fostered a deal between JPMorgan Chase & Co. and the Goldman Sachs Group Inc. for loans totaling at least $70 billion.

When asked whether the AIG bailout was considered good in the market's eyes, a source said, "It's a better alternative than them falling into the same place Lehman did."

At the end of the day Monday, Lehman was in the process of liquidation after its Chapter 11 filing.

It was unclear what the fate of its employees would be, or what would happen with any backlogged deals in which it was tapped as a bookrunner.

It was also unclear what would happen with those that Merrill Lynch was to work on.

Those details are not at the top of the priority list for those in the primary market.

"Everyone's just trying to keep up with the headlines," a source said of the mood at his syndicate desk.

InterNotes canceled, closed

Offerings of InterNotes from AIG subsidiaries International Lease Finance Corp. and American General Finance were canceled for the week due to the unrest in the market, said Incapital LLC CEO Tom Ricketts.

In a news release Monday, Incapital announced the week's offerings from both issuers had been canceled, while those from several other InterNotes programs had been immediately closed.

Those programs included American Express InterNotes, Associated Banc, Banc of America, CAT PowerNotes, Dow InterNotes and General Electric Capital Corp., among others.

Ricketts clarified the cancelation announcement, saying that ILFC and American General were canceled for just this week and not permanently.

"When there's a lot of volatility, it's hard to get a good read on prices, so we just shut them down," he said in explanation of why they were pulled.

As for the closing of the other issuers' notes, he also had a comment.

"We close out early when the market rallies," he said. "When the market rallies like it did this morning, we close it all down."

Secondary focused on financials

Anything not involved with the names AIG, Bank of America, Merrill Lynch or Lehman Brothers was off the radar Monday in the secondary, a source said.

The focus has broadened slightly from Friday, when it was fixated on what would happen with Lehman. As more news developed throughout the weekend, the focus shifted.

"We kind of closed on the lows of the day," a source said. "There was no liquidity."

He added that "all of the focus was on this half of the market," meaning the financial names.

"It was just a bad day," he said, seeming at a loss for words.

Asked if this was like anything seen recently in the financial world, a source said, "I've been doing this for 17 years and I haven't seen anything like it."

Non-financial secondary stalls

The retail and industrial side of the investment-grade market was being struck a different blow as everyone grapples with the fallout of the financial sector.

This has been the case in recent weeks and culminated in trading of anything non-financial essentially grinding to a halt.

"We're seeing offerings without a bid," a secondary source said with some amazement.

Many of the offerings are at the same level as last week, except "the bids have disappeared," he said.

Even those that are still trading haven't shifted much, perhaps going 5 to 10 bps tighter.

"There is so little activity," a source said. "It's such new territory for us. We're all wondering what's going to happen. There's nothing even trading."

Lehman slides, trades heavily

Lehman Brothers Holdings' bonds dominated secondary trading volume early Monday afternoon as it continued liquidation.

The most heavily traded were the bank's 6.875% notes due 2018, plummeting to the "low 30s," a source said, referring to the dollar price. They were in the 80s on Friday.

In comparison, AIG's 5.85% notes due 2018 were in the low 50s on Monday, dropping about 17 from Friday's dollar price.

B of A wider, Merrill unchanged

Bank of America's outstanding bonds were seen 60 bps to 70 bps wider on bid late Monday afternoon, a source said, after the announcement it would acquire Merrill Lynch.

Merrill bonds were seen mostly unchanged on the news.

"There wasn't much change, which is the odd thing," a source said.

Bank CDS wider

The credit default swap costs for major banks were seen 35 bps to 140 bps wider on the financial turmoil touching many names.

Washington Mutual Inc. was out 7.5 percentage points for upfront cost to 46% to 49%, or plus 500 bps annually.

Brokerage CDS costs were seen mixed, with Merrill Lynch 125 bps tighter on the Bank of America acquisition, a trader said.

The Merrill notes were at 315 bps bid, 355 bps offered.

Other brokerage names' CDS costs were seen wider, such as Morgan Stanley & Co. Inc. out 170 bps at 450 bps bid, 470 bps offered.

Merrill, GE biggest movers

Merrill Lynch saw its 6.875% bonds due 2018 tighten more than 95 bps Monday after news of its acquisition.

On the other end was General Electric Capital Corp., which saw its 5.875% notes due 2038 widen 27 bps.

© 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.