Weakening credits put pressure on market, especially financials

By Ronda Fears

Nashville, Tenn., Oct. 7 - Weakening credits, with spreads widening to record proportions, injured the lion's share of convertibles but none quite as bad as the financial group.

Rumors about layoffs at Merrill Lynch and JPMorgan Chase weighed heavy on the markets, but JPMorgan ended higher. Banks were hurt similarly on concerns about credit losses, particularly those heavily into credit cards.

Retail still was sinking on the lock-out of West Coast longshoreman and there were a few names moving on events, like Royal Caribbean Cruses Ltd. and Carnival Corp. The cruise ship names were both lower on regulators' providing no barrier to either merger proposal with Princess P&O, which means the struggle continues.

"Credit spreads continue to balloon out. The pressure is immense," said the head convertible trader at a major investment bank.

"Not only are the converts themselves hurt but the default swaps as well. It's a double whammy to us."

Average spreads in the Bear Stearns high yield index last week widened by 23 basis points to 1,117 basis points, which is 9 basis points past the previous all-time high.

Average spreads for the Merrill Lynch high yield index for the week ending Thursday widened 4 basis points to 995 basis points from 973 basis points.

The trouble is by no means limited to junk paper, though.

Worries over the major global banks and investment banks, along with the troubles bombarding utilities, have severely affected all credit spreads.

El Paso Corp. credit default swaps, for example, are at about 1,500 basis points bid, 1,600 basis points asked.

"Investment banking spreads are also under pressure as capital markets activity continues to wilt in tune with the season. There does not appear to be any impetus for a turnaround in revenues that would lead us to revise our underweight recommendation," said Banc of America Securities high grade bond analyst Stan August in a report.

"Recent unconfirmed stories that JPMorgan Chase and Merrill Lynch are considering large staff reductions indicate that companies will take further steps to hunker down to wait out this storm."

JPMorgan, however, rose against the tide of financial names heading south.

The Jardine Matheson/JPMorgan 4.75% due 2007 was quoted 4.5 points higher at 97.5 bid, 98.5 asked. JPMorgan shares closed up 23c to $16.77.

Merrill's 0% convertible due 2032 ended down 0.5 point to 91.875 bid, 92.125 asked and the 0% convertible due 2031 was slightly lower at 51.5 bid, 51.625 asked. Merrill shares dropped $1.74 to close at $28.43.

Lehman Brothers' floater due 2022 was also hit as the stock dropped $2.32 to end at $42.59. The convert lost 0.75 point to 95.75 bid, 96.25 asked.

Other financials sharply lower included Amerus Group, Commerce Bancorp, E*Trade Group, Capital One and Countrywide Credit.

Most insurance names were also lower, but Ohio Casualty, which has been popular since the convert priced earlier this year, was higher.

Ohio Casualty's 5% convertible due 2022 added 1.25 points to 102.25 bid, 102.75 asked as the stock gained 22c to $16.07.

Selling also continued in utility and power names on the heels of TXU Corp.'s warning last week, with TXU leading the downward spiral.

TXU shares fell another $4.40 to $22.64. The convertible preferreds dropped anywhere from 2 to over 4 points.

El Paso's 0% convertible due 2021 dropped 2.75 points to 26 bid, 28 asked. The stock lost 83c to $5.66.

Royal Caribbean and Carnival did not get much closer to settling their disputed bids for Princess P&O, as the FTC ruled not to block either proposal.

Both declined in the convert market.

Royal Caribbean's 0% convertible due February 2021 lost 0.5 point to 32.375 bid, 35.375 asked and the 0% convertible due May 2021 lost 0.875 point to 37.25 bid, 40.25 asked. Royal Caribbean stock closed down 86c to $15.01.

Carnival's 0% convertible due 2021 fell 1.125 points to 54 bid, 54.25 asked and the 2% convertible due 2021 fell 1.75 points to 98.75 bid, 99.25 asked. Carnival shares lost $1.38 to $22.30.

It is widely accepted, even by Princess, that the Carnival offer is a better offer for stockholders, but Princess board members have expressed a preference to the Royal Caribbean deal.

In general, onlookers say the perception is that Carnival would be hurt more by the merger than Royal Caribbean would benefit. Also, watchers speculate that investors in both Carnival and Royal Caribbean think the merger is a bad idea right now, given the economic climate.

"The thinking seems to be that if there is no end in sight to the economy's doldrums, then it doesn't really make sense for cruise ships to be merging, unless they could do it without adding any leverage, which doesn't seem likely," said a dealer.

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