Landsbanki, Kaupthing cap off week of more than $24 billion in issues

By Andrea Heisinger and Paul Deckelman

Omaha, Oct. 12 - Iceland's Landsbanki and Kaupthing Bank hf priced issues of notes Friday, ending a week with more than $24 billion of new issues.

Kaupthing priced $400 million in 9% perpetual subordinated bonds, increased from the $300 million the issue was launched at.

Landsbanki also priced $400 million, but in 7.431% perpetual securities priced at par with a spread of Treasuries plus 275 basis points.

"It was a pretty average Friday," a market source said. "Things should get busier next week."

"It was just really quiet today," another source said.

In secondary trading - which saw a slightly easier tone on Friday, with declining issues edging out advancers by about a six to 5.5 ratio - the news that Citigroup racked up some big fixed-income losses during the third quarter, leading to some executive suite bloodletting Friday, had little impact on the banking giant's bonds, traders said. In fact, its paper was not seen among the most actively traded issues.

Debt-protection costs for some major brokerage names such as Bear Stearns and Lehman Brothers were seen having widened out about 1 or 2 bps.

Overall activity was blunted by the "Friday factor," with many market participants opting for an early exit, and the fact that new-deal activity was pretty much limited to the Icelandic bank issue - in contrast to recent sessions, when benchmark-sized deals for such well-known issuers as Goldman Sachs, John Deere Capital Corp. and American Express came to market and then traded actively, mostly tightening up.

American Water expected

An upcoming issue from American Water Capital Corp., a subsidiary of American Water Works Co., was announced, with pricing expected next week. Goldman, Sachs & Co. is one of the bookrunners. No guidance has been set, an informed source said Friday.

There weren't a large number of issuers for the week, but most of those that did issue were over the $1 billion mark.

Citigroup, Inc. and Deutsche Bank each issued $3 billion of notes and Goldman Sachs Group Inc. issued $2 billion.

ERAC USA priced $2.75 billion of notes and a unit of American Express issued $1.5 billion in two tranches.

HSBC Holdings plc and Austrian bank OeKB each priced $1.75 billion in notes, while ING USA Global Funding Trust and South Korea's Kexim priced $1.5 billion each.

Among the non-financial issuers was Darden Restaurants, Inc., pricing $1.15 billion in three tranches.

The notes priced Wednesday and by Thursday each of the tranches had tightened significantly in secondary trading. In the case of the 30-year notes it was by 21 basis points.

Other companies pricing issues included New York Life Global Funding, KfW, HCP, Inc., VF Corp., Pricoa Global Funding, Alabama Power Co. and John Deere Capital Corp.

The issuance for the week was a considerable increase from the first week of October that had about $9 billion.

"I think this week is a fair guide going forward," a market source said in regard to the coming week's issuance amount.

Citi little changed on shuffle news

The news that heads were rolling at Citigroup - which had warned that profits for the quarter, to be reported probably Monday, will have fallen some 60% from year-earlier levels due to big fixed-income charges - did not have much of an impact, if any at all, on the banking giant's bonds, several participants said.

"I don't think so," one trader said when asked whether there had been any widening out in the company's cash bonds or credit default swaps costs.

He noted that the news was "an odd lot for them, the biggest bank in the world. I don't think they're any changed."

"Spreads in general were a touch softer," another trader said, "But Citigroup really didn't react any differently than the rest of the broad market."

"Over the past week, there's been a really great spread tightening" in the overall financial sector, a source at another desk said, "at least 10 basis points, across the board" - and this with the previously disclosed information about Citi's upcoming bad numbers already apparently factored in.

The company had previously said it expects a 60% decline in third-quarter net income from a year ago, implying profit of $2.2 billion, with the major culprit the nearly $6 billion in charges which it is taking to account for fixed-income losses during the mid-year credit crunch.

Change - but not too much

Perhaps one reason why there was only muted movement in its bonds was that the personnel changes announced Friday do not include Citi's chief executive officer, Charles Prince, who famously told a Financial Times interviewer at the beginning of the third quarter, referring to the rash of private-equity deals Citi was helping to finance that "as long as the music is playing, you have got to get up and dance. We are still dancing."

That colorful quote has come back to haunt Prince, who has been criticized in the financial community for his allegedly sluggish stewardship of the financial leviathan, especially when its performance has been matched against that of other large players in the industry; investment banking behemoth Goldmans Sachs, for instance, which recently reported strong earnings that blew right through most analysts' estimates, cleverly bet that mortgage-backed securities would go down, which they did, and took only about one-quarter of the massive charges which Citi was forced to take.

While Prince dodged a bullet, Citi's head of trading and investment banking, Thomas Maheras, and a top fixed-income executive, Randy Barker, are instead walking the plank. Prince announced that former Morgan Stanley executive Vikram Pandit is being brought in to oversee trading, investment banking and alternative investments.

Some analysts said that Citigroup has not done enough to correct its problems. Deutsche Bank analyst Michael Mayo said in a research note that "changes in the office of the chairman, which we feel are needed," are unlikely to be forthcoming. He dropped his recommendation on Citigroup's stock to "sell" from "buy," and lowered his price target to $44 from $60.

Likewise, Bear Stearns analyst David Hilder said that the charges that Citigroup took "showed clearly that Citigroup's senior management either lacked the understanding or the ability to quickly change the risk profile of its investment bank in a market disruption."

Broker CDS slightly wider

Elsewhere, a trader said that credit-protection costs for major brokerage names were mostly a little higher, essentially erasing Thursday's gains. This was a temporary break from the recent tightening trend, which has been a sign of continued investor confidence in the sector, with CDS spreads generally coming in steadily over the past few weeks, particularly since the unexpectedly large Federal Reserve rate cut, which gave a credit-crunch-wary Wall Street a dramatic shot in the arm.

However, in Friday's dealings, the trader saw the cost of a five-year CDS contract to hedge against a possible event of default in Bear Stearns' paper having widened by 2 basis points to 70/75 bps from 68/73 bps on Thursday. The same held true for Merrill Lynch, whose debt-protection costs rose by 2 bps to 40/45 bps, but not Morgan Stanley, seen 1 bp tighter at 38/43 bps. Debt-protection costs for Lehman Brothers' bonds were 2 bps wider at 60/65 bps.

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