SunTrust prices as others wait for Fed cut; volume expected to pick up next week; secondary weak

By Andrea Heisinger and Paul Deckelman

Omaha, Oct. 31 - SunTrust Banks, Inc. priced a deal on a Wednesday that was light on new issues while the market was generally locked in anticipation of the Federal Reserve's rate cut.

The Fed meeting produced a reduction of 25 basis points in the federal funds rate, dropping it from 4.75% to 4.5% in an effort to stop the economy from weakening further.

This was no surprise to investment-grade traders who were predicting a cut of this size on Tuesday.

The last easing was on Sept. 18, when it dropped to 4.75% from 5.25%.

The SunTrust issue launched Tuesday and some sources said they were surprised to see it price Wednesday morning before the Fed announcement.

SunTrust priced $500 million of 5.25% five-year senior notes at 99.665 to yield 5.327% at a spread of Treasuries plus 125 bps.

Bookrunners were Morgan Stanley and SunTrust Robinson Humphrey.

An upcoming issue from Korea's Kookmin Bank was announced. The bank will issue up to $300 million in five-year bonds (Aa3/A) via Barclays Capital, Citigroup and Merrill Lynch.

The Fed rate cut had little effect on investment grade business Wednesday, one market source said.

"It was not so much a credit event as an equity event," the source said. "It was just seen as something to get out of the way."

Spreads weren't really affected before or after the cut was announced.

"Things are still a little volatile day to day," a source said. "And the cut was expected."

Volume won't pick up much the rest of this week, sources said.

"Tomorrow should be fairly active pending how things open," one trader said. "I think then things will quiet down Friday. Next week will be fairly active."

Other sources also predicted an upswing in volume next week.

"We should be really busy starting next week," a source said. "There could be a couple guys pushed into this week, but I think next week will be active."

Secondary heads down

In the secondary market Wednesday, a more negative tone was seen, with declining issues outpacing advancers by a not quite three-to-two ratio. Overall market volume was up about 2% from Tuesday's moderate pace.

The Federal Reserve's widely expected 25 bps cut in key interest rates came and went with nary a flurry in the market, which had already pretty much priced that rate cut in - although Fed boss Ben Bernanke and his colleagues signaled to the financial markets in the language of their communiqué that further rate cuts should not be taken for granted - they will be made only after careful deliberations if the data justifies it.

Broker CDS soft

Among individual issues, Bear Stearns & Co. was weaker, although there was no fresh news seen out on the big brokerage firm, which has had its problems in recent months as it wrestled with the credit crunch. Its credit-default swaps debt-protection costs were seen wider, along with those of such sector peers as Lehman Brothers and Morgan Stanley. Other financial sector bonds such as Deutsche Bank and Goldman Sachs were also seen off on the day.

Elsewhere, Exelon Generation Co. LLC's 6.20% notes due 2017 were actively traded, although there was no fresh news seen out on the Chicago-based utility, but were little moved on a spread basis, a potential widening averted by the sizable rise in Treasury yields on strong gross domestic product data.

Those higher Treasury yields also likely counteracted potential spread-widening in Clorox Co. bonds after the consumer products company released lackluster fiscal first-quarter numbers and announced plans for a nearly $1 billion acquisition, which caused the major ratings agencies to all express some dismay.

No surprises from the Fed

The Federal Reserve rate cut "was pretty much as we expected," said Amy Walkington, a portfolio manager at Horizon Cash Management LLC. "We were expecting a 25 bp move, and expecting that they might move the discount rate as well, which they did, by 25 bps."

Walkington, whose Chicago-based company manages $3 billion of mostly short-term fixed-income assets, said that with such widespread expectations of a quarter-point cut - this despite some recent financial press chatter that the Fed might decide to hold off on any cut, given the strong GDP number out in the morning and other bullish data - "the market seems as though they are a little disappointed in it - they were really hoping for a little bit more," perhaps along the lines of last month's surprisingly large 50 bp cut.

"I think the Fed's wording [indicates] that they're trying to head off the market, and let them realize that unless there are a lot more poor economic numbers released, they're not anticipating having to move [on interest rates] again."

Walkington said her shop is of the opinion that there will be no further rate moves through the end of the year.

She said that Fed chairman Bernanke "didn't want everyone believing that he's just giving in to the market's pricing in this move. He did believe that [the Fed] needed to make this move - but doesn't want the market to think they can keep pricing in another 25 [bps] or another 50 [bps in cuts] and that he's going to continue to move along that track."

The central bank, she predicted, is going to be "data-dependent - and depending on the numbers that come out, that's going to be how they react." She said the Fed's next decision on what to do about interest rates "is not going to be dependent on how the market is pricing in [an anticipated] Fed move."

Walkington concluded that "given that this move was expected, it's not going to have much of an impact on the credit markets. Issuers that need to come to market are going to come to market. They may have to issue deals at a little bit wider spreads than they want to, to get them done - but they will still be able to get them done."

Bear widens, other financials ease

In the important financial sector, Bear Stearns's 6.40% notes due 2017 were among the day's most actively traded issues, and those bonds moved solidly to the downside, although there was no fresh specific negative news out about the company. The bonds' spread versus comparable Treasuries widened out to about the 195 bps level, a 30 bps deterioration from Tuesday's close, equivalent to a nearly 3 point drop in their dollar price to just under par, from well north of 102 bid previously.

Other financial issues were likewise seen in a funk, perhaps due to the perceived reluctance of the Fed to extend future rate cuts. Goldman Sachs' 6¾% bonds due 2037 were seen having widened out to the equivalent of nearly a 1 point drop in the bonds' price. Other downsiders from the sector included such names as Deutsche Bank, JP Morgan Chase and Citigroup.

A trader saw brokerage CDS spreads mostly wider, jibing that "maybe they were unhappy because the Fed didn't cut interest rates all the way down to zero."

He quoted the cost of hedging against a possible default in Bear Stearns' bonds as having widened to 107 bps bid, 112 bps offered by day's end from their Tuesday levels at 103 bps bid, 108 bps offered. He saw Lehman's cost at 100 bps bid, 105 bps offered versus 98 bps bid, 103 bps offered Tuesday, Merrill Lynch's at 83 bps bid, 88 bps offered, about unchanged on the day, and Morgan Stanley's at 74 bps, 79 bps offered against 67 bps bid, 72 bps offered the session before.

Exelon, Clorox ease, but spreads little changed

Elsewhere Exelon Generation's 6.20% bonds were being quoted going home down about ½ point on a price basis, in fairly active trading - though no fresh negative news was seen - but its spread was little changed, at 164 bps.

Clorox's 4.20% notes due 2010 likewise held steady quoted at about 121 bps over, unmoved by the Oakland, Calif.-based consumer products company's report that its profit in the 2008 fiscal first quarter ended Sept. 30 fell 1% 1 percent to $111 million from $112 million, although per-share earnings actually increased to 76 cents from 73 cents on a reduced number of shares. The company blamed the profit dip on costs related to a restructuring plan, which offset higher sales.

Clorox also announced plans to buy Burt's Bees, a maker of all-natural lip balms and other personal-care products in a $925 million all-cash deal which is expected to be largely debt-financed.

The news had the ratings agencies buzzing, and not in a friendly manner. Both Standard & Poor's and Moody's Investors Service put Clorox under scrutiny for a possible downgrade of its ratings, and Fitch Ratings actually cut the company one notch to BBB, warning of potentially weaker credit metrics and financial flexibility.

S&P said it expects the company's total debt-to-EBITDA ratio to rise to about mid-3 times in the near term from the current mid-2 times, although it also expects the company to tap free cash flow to cut leverage over the intermediate term.

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