Week ends on high note, government plan brings optimism; bank, broker names tighten more than 100 bps

By Andrea Heisinger

New York, Sept. 19 - A rally in the stock market continued Friday after details of the government's economic bailout plan came out in the morning.

The plan has a handful of parts, some of which are not fully fleshed out, and won't be until Congress passes them.

This announcement provided a boost for the primary market, with sources hoping issuers are preparing to come back into the market in the coming week.

The secondary continued to be mostly dominated by financial issuers that are in the headlines.

It was the same focus as in previous days, sources said, although the tone was markedly improved.

Lehman hurts bonds

The bankruptcy filing of Lehman Brothers had many consequences, including a default on its outstanding bonds.

According to a report from JPMorgan, Lehman had more than $100 billion in debt when it filed for Chapter 11 protection. Its bond default could damage the investment-grade market for some time, especially for other financials wanting to issue debt.

The report says spreads on investment-grade bonds were higher this week because of the default risk at other financial companies. The bankruptcy also caused a drop in returns.

Week ends on high

After days filled with one negative headline after another, the tone took a swift, upward turn Friday on news of a government plan to help the ailing economy.

Sources said the tone was much improved, although it's still unlikely any company will issue bonds until sometime during this coming week.

"Everyone wants to get back to doing what we do," a source said. "We're tired of watching the news and reading all of the headlines."

The ongoing talk of Morgan Stanley and its possible merger with Wachovia Corp. left some uncertainty going into the weekend. Morgan Stanley is said to have intensified the merger talks Friday, although the government's plan may give it more time to make a decision about its future.

The government's multi-part plan included a ban on short selling of some financial stocks, following the lead of the United Kingdom which did the same Thursday.

The Treasury is also planning to guarantee money market funds up to $50 billion to help resolve solvency issues.

The government will be able to buy distressed debt, namely mortgages, at a discount.

The Federal Reserve also has a part. This includes opening the discount window to broker dealers so they can purchase assets from money market funds.

"It definitely helped, but we'll see if the tone carries into Monday," a source said after Friday's market close.

Coming week optimistic

Those whose job it is to sell new investment-grade bonds are hoping the optimistic tone holds over the weekend so some issuance can make its way into the market.

"I've talked to a few issuers," one source said. "I think some high-quality names could dip their toe in to see if they could get something done. We're not going to see any large multi-tranche deals, but if one or two companies have a successful deal, things could really pick up steam quickly."

There was one small issue this week from Laclede Gas Co., which priced $80 million in 30-year first mortgage bonds Thursday. Some took this as a positive sign and proof that the investment-grade new issue market wasn't truly closed.

"It was kind of amazing," a source said. Another said they weren't too surprised because the bookrunner, Edward Jones, always manages to get issues done in trying times.

"They could have just sold it all to one investor they know in the Midwest or something," he said.

Most syndicate desks are trying to remain upbeat about prospects for the coming week and beyond.

A source said that in talking with people at other syndicate desks, they are hopeful the tone continues.

"We're all kind of hoping we can put this mess behind us, at least in the short term," he said.

Among those issuers eying the market, some are opportunistic, while others must issue by a certain time.

"Some are looking forward to getting into the market," a source said. "Some have been waiting since August."

A backlog existed since well before Labor Day, with predictions of September producing $80 billion to $100 billion in new issues.

The last two weeks of the market mostly sitting idle will mean the month's total will come out well below that. It also means the backlog has built up considerably.

Some issuers are concerned about the amount of time they have left to come into the market before the end of the year, with holiday breaks and earnings blackouts in the remaining months of 2008.

"We really have a limited time until the end of the year," a source said. "People were planning to get a lot of it out of the way this month, but that's not going to happen."

Financials tighten sharply

Most bank and financial names were seen significantly tighter, a source said, with a generic 50 to 100 basis points improvement for most names after the government's bailout plan was unveiled.

The bonds were on the upswing starting Thursday when the rumors of the plan began swirling around.

These issuers remained the focus, ending a week where the industrial and retail half of the market was ignored.

"It was just kind of the same story," a source said about the day. "Things were definitely better today, but everybody's just watching the banks and financials."

Wachovia, Morgan Stanley bonds tighten

Wachovia and Morgan Stanley were seen tightening on continued merger talks.

The financial institutions continued the discussions from Thursday as Morgan Stanley gained some time due to the government plan. Morgan Stanley is also reportedly in talks with China Investment Corp. for capital in an effort to stay independent.

Wachovia was seen as the day's biggest mover, seen coming in more than 160 bps by late afternoon, with Goldman Sachs also seen moving in favorably more than 140 bps. Merrill Lynch tightened more than 85 bps, at the end of the week where it was bought out by Bank of America.

Morgan Stanley most active

The top bond by trading volume Friday afternoon came from Morgan Stanley as it continued with its merger talks.

The investment bank's 6.625% notes due 2018 were at the top of the volume list mostly dominated by financial names.

Bank, broker CDS much tighter

Credit-default swaps for bank names were seen 15 bps to 130 bps tighter on the government relief news.

Wachovia was called "a star" coming in about 130 bps by mid-afternoon, to 500 bps bid, 550 bps offered.

Brokerage names covered a wide spread, and were seen 60 to 220 bps tighter.

Morgan Stanley was 220 bps tighter, to 530 bps bid, 580 bps offered.

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