Week's issuance uncertain; Bear rebounds strongly; Merrill, Lehman CDS narrow

By Andrea Heisinger and Paul Deckelman

Omaha, March 17 - The big news in the investment-grade market Monday - some might say the only real news - was that Bear Stearns, facing almost certain bankruptcy, agreed to be bought by larger rival J.P. Morgan Chase at essentially a firesale price - around $240 million, or $2 per share, for a company which had been trading at $30 per share Friday and for around twice that as recently as Thursday.

But while Bear Stearns' New York Stock Exchange-traded shares were decimated, its bonds were flying high, both on a spread basis and in dollar-price terms. Bear's credit-default swap spreads, which last week had ballooned out to badly distressed levels, came in smartly on the JP Morgan news.

Debt-protection costs for other brokerage names, including Merrill Lynch and Lehman Brothers, were also seen having narrowed.

Bear bounces back

Propelled by the news of the company's acquisition by JP Morgan, a market source saw Bear Stearns' 5.50% notes due 2017 having come in by more than 400 bps from Friday's bloated spread levels, finishing Monday at just below 500 bps.

Another source likewise saw the company's 6.40% notes due 2017 tighten as far as 435 bps over from late-Friday levels around 640 bps, before giving up some of that spread tightening to close at 533 bps over - still a pickup of more than 100 bps. Its 7.25% notes due 2018, which had gone home Friday at a spread of around 730 bps over, came in as far as the 470 bps mark before finally finishing around 529 bps over - around a 200 bps pickup.

The gains were also evident in the bonds' dollar-price, since some of those issues had been quoted around in that manner over the past few days as they'd fallen sharply.

A trader - who on Friday had seen the company's 2 7/8% notes coming due this July trading down at the 77 level, for a bloated yield of over 100% - rhetorically asked "how funny is it that now they're trading at 94.5-95?" Buying at the lower level the bonds hit during Friday's turmoil should have been "a no-brainer," he said.

It was not just those short-dated bonds that zoomed back upward. The 7¼% 2018 notes, which had fallen to 79 bid on Friday, jumped to as high as 96 on Monday before coming off that peak level to still close up some 12 points on the session at 91. Its 6.4% 2017 notes got as good as the 91 level before falling back to finish still up some 7 points on the day at 86 bid.

A trader said that the cost of protecting Bear Stearns debtholders from a default in that paper tightened Monday by a breathtaking 325 bps, to 395 bps bid, 435 bps offered, "much, much tighter" than the levels seen last week.

Other brokerages gain

He said that also helped the CDS costs for other brokerages to tighten substantially.

He saw Lehman Brothers 25 bps tighter, at 425 bps bid, 450 bps offered, while Merrill Lynch tightened by 15 bps to 320 bps bid, 340 bps offered. Morgan Stanley's CDS was also 15 bps tighter at 295 bps bid, 315 bps offered.

Bank CDS, he said, were unchanged to 10 bps wider, with JP Morgan 5 bps wider at 170 bps bid, 185 bps offered.

Back among the cash bonds, aside from Bear Stearns, the financials were a mixed bag. While Lehman's bonds were off - its 5% notes due 2011 were quoted about 100 bps wider at just under 600 bps, and its 5.75% notes due 2017 and 5.625% notes due 2013 were also substantially wider on the day - Merrill Lynch's 5.45% notes due 2013 were seen having come in more than 60 bps to the 335 bps level.

Spreads wider

Overall in the investment-grade secondary market Monday, declining issues outnumbered advancers by around an 11 to 10 ratio, while overall market activity, reflected in dollar volumes, eased about 9% from Friday's levels.

Spreads in general widened out, as Treasury yields came in markedly, the benchmark 10-year issue, for instance, narrowing by some 15 basis points.

Primary slow

The news of Bear Stearns Cos.' troubles and JPMorgan's acquisition of the brokerage firm combined with the impending Federal Reserve meeting made for a sluggish Monday in the investment grade primary market.

Even if the new round of troubles had not bee anticipated, a slow pace for deals had been partially expected, as sources predicted at the end of last week that there would be little in the way of new issues before Tuesday's Fed meeting where a large cut to a key rate is expected.

A source said futures trading is predicting more than an 80% chance of a 100 basis point cut, and a small chance of a 125 bps cut.

How much of a boost this would give the investment-grade market remains to be seen.

When asked if there were any issues expected Tuesday, one source said: "It's unclear at this point."

The volatility that began Friday ended a busy week of more than $17 billion in new issues. The window that opened at the beginning of the week then slammed shut as the Bear Stearns news began to emerge.

"It's not that the news over the weekend was really bad," a market source said.

"There's just a lot of uncertainty right now and probably will be throughout the week."

There's a possibility that a company could decide to issue after the Fed announcement Tuesday, but that seems unlikely, sources said.

"I wouldn't say tomorrow is a window of opportunity, really," a source said. "People are going to wait until Wednesday. There are a few [deals] strategically placed this week."

If there is some kind of incredible rally, there could be issuers Tuesday, but it seems improbable, the source said.

He added that he wouldn't rule out issuers Wednesday.

The investment-grade market has fared better than others during the recent volatility, and even Monday credit was tighter on the day, a source said.

"Credit has just done a better job of pricing credit risk than the equity markets," he said. "They're just handling it better."

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