Caterpillar Financial prices short bond; Countrywide sinks; financials weaker, Target wider

By Andrea Heisinger and Paul Deckelman

Omaha, Nov. 20 - New issues slowed to a trickle Tuesday ahead of the long holiday weekend, with Caterpillar Financial Services Corp. about the only company pricing.

The financing arm of Caterpillar priced $400 million three-month Libor plus 12 basis points one-year floaters at par via bookrunner J.P. Morgan.

Market sources again had a dim outlook for investment grade, saying new issue premiums and spreads remained high.

This combined with shaky market conditions was making many issuers shy away from the market.

Big new deal premiums

One source called Monday's issues from American Express and Cargill, Inc. "very interesting transactions."

"The spreads they came at were surprising, or rather the price that was paid," he said.

"Six months ago people would have never paid that."

The source estimated there was a 50 to 60 bps new issue premium paid to get American Express in the market.

They also noted the company wanted to issue five-year notes, but ended up with a three-year issue at the same spread it would have previously done for the longer bond.

American Express last issued a three-year bond in July at about Libor plus 8 bps, a source said, compared to this one that came at about Libor plus 110 bps.

Issuers entering the market now are likely getting in before spreads widen further, sources said.

"I think there's a fear down that road that people don't know what spreads will do," a market source said.

Issuance is likely done for the week, sources said, with the early market close Wednesday and nothing Friday.

"We'll see what transpires next week," a source said. "Equity's up a little, but we'll have to wait and see what happens Monday."

Countrywide plunges

In the secondary market Tuesday the tone was relatively even, with advancing issues and decliners almost in balance. Overall market volume was seen up about 16% over Monday's quiet levels.

Countrywide Financial Corp.'s bonds gyrated around at mostly lower levels, stung by market rumors that the Calabasas, Calif.-based mortgage giant was having liquidity troubles and might even have to file for bankruptcy - rumors which company officials hotly challenged.

With Countrywide's troubles, and those of government-sponsored mortgage buyer Freddie Mac monopolizing the headlines, the financial sector in general was soft. Traders reported that credit-default swap spreads for big brokerage houses like Bear Stearns and Merrill Lynch widened out from Monday's levels.

Elsewhere, Target Corp.'s bonds were seen wider as the big discount retailer reported disappointing third-quarter earnings and announced plans for a $10 billion share buyback - to be funded at least partially through the issuance of additional debt.

Countrywide liquidity concerns

Countrywide Financial's bonds and shares fell and its credit-default swaps widened dramatically - a sign of eroding investor confidence in the big mortgage company's viability - amid renewed market concerns about possible liquidity problems, which forced company officials to take the step of denying market rumors that it might be forced into a bankruptcy filing - speculation which Countrywide called "absolutely false."

Countrywide's 6¼% notes due 2016 - nominally split-rated at Ba2/BBB/BBB - were seen having fallen as low as 61 bid from the prior session's close at 65, before finally stabilizing in the 62 area, in busy trading. Its 5.8% notes due 2012, meanwhile - technically considered high-grade at Baa3/BBB+/BBB+ - opened below their Monday close of 72, and actually fell below 70 for a time, although they managed to push higher near Tuesday's close with the help of several large trades which lifted the bonds back to around the mid-70s. The similarly-rated 3¼% notes due 2008, one of the most busily traded issues of the day, were seen having gyrated wildly within a 10-point swing between the mid-80s and the mid-90s before finally coming to rest down 2 points on the day at 88.

A junk trader said ironically that at his shop, the "investment-grade/crossover guys had a lot of fun today with Countrywide. Rumors abounded, and we heard the 'B' word thrown around a couple of times." He said that the debt "was all over the place. It gapped wider [on spreads] again. We flashed back to the summer for those levels." Despite its nominally high grade ratings, Countrywide's bonds, he said, are now being quoted on a dollar-price basis just like common junk bonds.

He added that while he had seen that "some investment-grade hands are still in them, most companies buying are high-yield type accounts," or at least are a mixture of junk and high-grade customers, with "investment-grade/crossover accounts on the sell side."

At another shop, a trader said that Countrywide's bonds "got smoked," citing rumors that the company would file for bankruptcy Tuesday. But while the company later denied that they had any intention to file, one trader was not necessarily buying their story.

"We kind of chuckle whenever we hear 'absolutely no intent'," he said. "Nobody intends to file bankruptcy."

He added that "I would imagine their next set of numbers will show a tremendous amount of defaults."

The trader said Countrywide's 4¼% notes coming due next month - which would normally be bid at or above par on expectations that they are money-good and will certainly be redeemed - were offered at 98, "all you want."

Countrywide CDS passes 1000

While the bonds were going down, the price investors would have to pay to hedge against a possible default on those bonds was meantime skyrocketing, with one trader seeing those CDS contracts balloon out by 500 basis points in the course of just one session to 1,250 bps from an already-bloated 750 bps previously. He said that besides the widening out, the stock was tumbling, put-option volume, seen as a bearish bet against the company's shares, was "spiking." He said that the "usual set of rumors and innuendo is circulating. Short spreads and short tails are going bananas!"

Market buzz that the company might be having liquidity problems drove its New York Stock Exchange-traded shares down 22% at one point in the session. Those shares eventually recovered a lot of their early losses to end down 29 cents (2.74%) at $10.28. Volume of 152 million shares was nearly four times the usual turnover.

Freddie troubles hurt sentiment

Countrywide got clobbered after government-sponsored mortgage financier Freddie Mac reported that it lost $2 billion in the third quarter, and said it reserved $1.2 billion for bad loans. Analysts predicted that those losses and the slowdown in the housing market could severely limit Freddie Mac's ability to purchase pools of mortgages from lenders such as Countrywide, which generate capital to keep making new loans by securitizing massive bundles of loans they have written and selling them, either to private-sector investment banks or to government-sponsored enterprises such as Freddie Mac and its larger companion, Fannie Mae. While investment banks have recently been pulling in their horns as far as buying loans from the mortgage lenders, the GSEs had seemed like reliable financing sources of last resort - until Tuesday's Freddie Mac results led to market fears that this funding source too could dry up.

With rumors flying around that troubled mortgage lenders like Countrywide might find their liquidity cut off and be forced into Chapter 11, company executives counter-attacked in the media, declaring that such talk was "absolutely untrue."

Later, Countrywide issued a statement - which presumably helped its battered shares bounce back from their early lows - in which it said that it continues to believe that it has ample liquidity and capital and will be a beneficiary of ongoing mortgage market consolidation. The statement said that it had $35.4 billion in highly reliable liquidity available as of Oct. 31, up from $33.6 billion available at the end of September. It said that Countrywide Bank, its primary operating entity, "has sufficient liquidity available to meet its projected operating and growth needs and has accumulated significant contingent liquidity in response to evolving market conditions."

The company further insisted that Countrywide Home Loans "is expected to service debt maturities beyond 2008 without additional debt issuance," said that it has "excess regulatory and credit-rating agency capital," and touted the fact that Moody's Investors Services on Monday confirmed Countrywide's investment grade credit ratings, while it still enjoys investment grade ratings on most of its debt from Standard & Poor's and Fitch Ratings.

Financial sector weaker

Financial names were generally easier on the fallout from the continual flood of bad news, which on Tuesday centered around Countrywide and Freddie Mac.

Merrill Lynch's 6.05% notes due 2012 were seen having widened by 15 basis points to stand at 218 bps over Treasuries.

Citigroup's 5% notes due 2014 were seen having widened out to 196 bps over, while the price on its bonds fell the equivalent of some 2 points on the session to just below 95 bid.

Broker CDS spreads widen

A trader said that brokerage-house CDS spreads moved wider versus the levels they had held on Monday.

He saw Bear Stearns' debt-protection costs widen to 175 bps bid, 183 bps offered, versus 162 bps bid, 172 bps offered Monday afternoon. He saw Lehman Brothers' CDS cost at 133 bps bid, 140 bps offered, compared with 135 bps bid, 145 bps offered on Monday.

Merrill's credit-swap spread widened a bit to 138 bps bid, 145 bps offered from 135 bps bid, 145 bps offered Monday, while Morgan Stanley's moved out to 112 bps bid, 119 bps offered versus 105 bps bid, 115 bps offered Monday afternoon.

Target misses its mark

Elsewhere, Target's 6½% notes due 2037 were seen 16 bps wider at 209 bps, while a source put its 5 3/8% notes due 2017 as much as 30 bps wider at 175 bps over.

That followed the company's announcement that its third-quarter earnings fell to $483 million, or 56 cents per share, from $506 million, or 59 cents per share, in the prior year. Wall Street was expecting earnings above 60 cents per share.

Target also said that its board has authorized a new $10 billion share buyback program, to be partly funded by additional debt. At current prices the buyback would cover 20% of its outstanding shares.

Fitch Ratings - which expects most of the stock buyback to be debt-funded - downgraded $11.2 billion of Target's long-term debt by one notch.

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