Traders turn eye to Bear Stearns' plunge on quiet Friday; new deals move tighter

By Andrea Heisinger and Paul Deckelman

Omaha, March 14 - With little in the way of new issues Friday, traders turned their attention to news of the Bear Stearns bail out by the Federal Reserve and JPMorgan.

The negative news came at the end of a busy week with more than $17 billion in new issues.

"It was a pretty bad one," a market source said of Friday. "The markets were just kind of confused at first when the news came across."

The news was that Bear Stearns was in dire straits because of liquidity problems and took a loan from the Fed and JPMorgan in the short-term. There is talk that the investment bank could be facing a buyout.

"The first thought was good, that the Fed was willing to step up," a source said. "Then the realization set in that this was a real solvency issue."

There was no impact immediately felt on the broad investment-grade market.

Still, the news doesn't bode well for the rest of the financials, a source said, adding that banks should be OK.

Earlier in the day, a source said there was "zero happening.

"Everyone's just looking at Bear Stearns," he said. "There's still a calendar ahead, and new issue premiums are still a lot. Other than that, not much is happening."

In the investment-grade secondary market Friday advancing issues outnumbered decliners by around an 11-to-10 ratio, while overall market activity, reflected in dollar volumes, eased about 5.5% from Thursday's levels.

Spreads in general widened out, as Treasury yields came in markedly, the benchmark 10-year issue, for instance, narrowing by nearly a dozen basis points.

The major news was the sharp slide in Bear Stearns Cos.' cash bonds and the gapping out of its credit-default swap spreads, even in the wake of news that JP Morgan Chase and the Federal Reserve had come to the aid of the beleaguered broker.

Elsewhere, some of the newly priced issues were seen trading tighter, including bonds of American Express Co., PPG Industries and Medco Health Solutions Inc.

Market on hold

Many traders simply closed up shop Friday and stopped sending out runs, a source said.

It was a day where many people decided to pass and see what happens Monday, he said.

The beginning of next week could also see a lack of business ahead of Tuesday's Fed meeting.

Prior to Friday, a majority of people were predicting a 75 basis point cut to Fed rates at the meeting. By Friday, it had flip-flopped with around 56% predicting a 100 bps cut.

One source said he was doubtful this would have much impact, at least on the investment-grade market.

"The thought of more liquidity doesn't really affect the markets that much," he said. "The only bump we could get is the faith that the Fed is willing to make bolder moves in times like this."

As it has in the last couple of months, it is still a day-to-day market.

"There's been a lot of negativity, but if we get a positive headline [next week], the clouds could part," a source said.

Several issuers were able to price during the window that opened this week.

Those who priced more than $1 billion included the European Investment Bank, Marathon Oil Co., BP Capital Markets plc, American Express Co., PPG Industries, Inc. and Medco Health Solutions Inc.

Other smaller issuers included U.S. Bancorp, Consumers Energy Co., Dover Corp., Burlington Northern Santa Fe Corp., Carolina Power & Light Co. d/b/a Progress Energy Carolinas Inc., HSBC Finance Corp., Lockheed Martin Corp., Northern States Power Co., PPL Energy Supply, LLC, General Mills, Inc., SunTrust Bank, Georgia Power Co., and Equitable Resources Inc.

A split-rated issue was also priced from American Electric Power Co., Inc.

One issue was also announced, and then pulled.

Bunge Ltd. Finance Corp. announced in a Securities and Exchange Commission filing that it would issue a two-tranche issue of five and 10-year senior notes to repay outstanding debt.

It was then pulled due to market conditions, sources said.

Wounded Bear growls

A trader said that "the market was really active in Bear Stearns," and this overshadowed everything.

The Number-Five U.S. brokerage's bonds had widened out on Thursday amid new Wall Street rumors that it faced a liquidity crunch - market talk exacerbated by a Wall Street Journal story indicating that some hedge funds and others on the Street were reluctant to enter into any agreement with Bear as a counterparty, fearing that it would not have the liquidity to complete its end of the bargain. That caused company officials to deny that anything was wrong - but by then the damage had been done.

By Friday morning, there had been the Wall Street equivalent of a bank run against Bear Stearns, forcing its top executives - who 24 hours earlier had been denying there was a cash crunch - to now admit that the company's liquidity situation had deteriorated "significantly."

To the rescue rode fellow Wall Street giant JP Morgan Chase, along with the Federal Reserve, crafting an arrangement under which JP Morgan would provide Bear with a 28-day facility, which would give the beleaguered brokerage some breathing room to either arrange a more long-term liquidity source, or, perhaps, its own sale. JP Morgan was mentioned as a potential buyer.

News of the liquidity injection caused Bear Stearns' debt-protection costs to tighten as low as 530 bps Friday morning, from the 685 bps mark seen at the end of Thursday - but that CDS spread widened back out later in the day to around the 730 bps mark as market players ignored the fact of the temporary rescue plan and focused instead on their angst over its need in the first place.

Other financial CDS costs also widened out - JP Morgan's own expanding to 200 bps from 155 bps on Thursday.

Back in the cash bond market, spreads on Bear Stearns bonds widened out dramatically - a market source saw the spread on the 6.4% notes due 2017 balloon out to 825 bps from Thursday's levels around 655 bps,

But another trader - noting the sharp nosedive in the dollar prices of many Bear Stearns bonds - said that at the prices they are now trading around "nobody is even paying attention to the spreads anymore" since they had in some of cases, gapped out beyond 1,000 bps over Treasuries - the traditional indicator that a particular credit is considered distressed.

One trader, for example, noted that the Bear Stearns 2 7/8% notes coming due on July 2, fell about 20 points on the session to the 77 level, a slide that he called "unbelievable." With a yield of nearly 107%, he opined, "if I were in the market, this would be a good bet for a personal account," with such a fat yield and the prospect that JP Morgan and the Fed had stepped in to save Bear Stearns and likely would not then step back and let it go under should the company encounter further trouble. "I think an investment like that would be a home run."

Bear Stearns' bonds dominated the list of most active high-grade issues - all of them battered down to very junky levels in the 60s or 70s. Maybe the most active was its 7¼% notes due 2018 - the company priced $300 million of the bonds at just a shade below par on Jan. 29 - but barely six weeks later, the bonds were being quoted as low as 74 bid, before going out a bit off that low, at 79 bid, down more than 6½ points on the day. Another big loser was Bear's 5.70% notes due 2014, seen down some 14 points on the session at 68.5, and its 6.95% notes due 2012, seen off more than 11 points, through at a relatively solid 83 level.

New issues mostly tighten

Apart from Bear Stearns-related dealings, a trader said that the new PPG Industries 7.79% notes due 2038 were trading as tightly as 314 bps over Treasuries, in from 330 bps when the bonds priced on Thursday. The company's 6.65% notes due 2018 were bid at 290 bps over, versus 312.5 bps at the pricing. The new 5.75% notes due 2013 traded at 315 bps bid, in by 10 bps from their pricing level.

He saw the new PPL Energy 6.5% notes due 2018, which had priced at 295 bps on Tuesday, offered at 298 bps.

Medco Health Solutions' new 6.125% notes due 2013 narrowed to 365 bps bid, 345 bps offered, in from 375 bps at their pricing Thursday, and while he had not seen the companion 7.125% notes due 2018, which priced at that same 375 bps spread, he surmised that it was also in "about 10 to 20 [bps] tighter than where they came."

American Express' new 7% notes due 2018 "came in quite a bit," the trader said. The new bonds got as tight as 325 bps bid, 315 bps offered, well in from Thursday's pricing spread at 362.5 bps.

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