JPMorgan brings $2.35 billion notes; Wells Fargo prices $1 billion floaters; Merrill CDS wider

By Sheri Kasprzak

New York, Jan. 17 - JPMorgan Chase & Co. led another active day for pricings in which financial sector issuers were again prominent.

The bank negotiating the terms of $2.35 billion in two-year floating-rate series G notes at Libor plus 50 basis points.

The notes, due Jan. 22, 2010, were priced at par and are non-callable.

J.P. Morgan Securities is the lead manager.

In the investment-grade secondary market Thursday, advancing issues outnumbered decliners by a three-to-two ratio. Overall activity, reflected in dollar volume, was up about 12% from Wednesday's levels.

The news that Merrill Lynch had taken some $15 billion of write-downs and other adjustments on its way to reporting a nearly $10 billion fourth-quart loss, surprisingly, did not have much impact on the brokerage giant's bonds, which actually were a little tighter on the session, investors having expected the red ink and having discounted it.

However, that was not the case in the credit-default swaps market, where the cost of protecting the Big Bull's debt from a possible default widened out substantially, leading most other financial-sector CDS prices higher as well - a sign of increased investor unease with the underlying credits.

Elsewhere, United Parcel Service's recently priced bonds continued tighten, and Target Corp., which also brought a big new mega-deal to market this past week, were also seen better

Banks raising cash

The JPMorgan new offering was one of several offerings brought by banks this week. A market insider said Thursday afternoon that banks frequently issue notes but recently there has been a surge in the number of banks in the market.

"We see a lot of banks, but there have been a lot of troubles in the banking sector so I think that's causing a lot of them to go in search of capital," said the sell-sider.

When asked about the recent announcement that Citigroup Global Markets may be conducting an offering of non-convertible preferreds, the sell-sider said this doesn't surprise him.

"They've had a hard time and it seems to be part of their restructuring," he said. "I think a lot of banks right now are in the same boat."

Citi may be getting closer to pricing those preferreds, according to a preliminary prospectus filed with the Securities and Exchange Commission on Thursday.

Citi's preferreds

A source reached Thursday at Citi said he could confirm what was in the preliminary prospectus but could not provide additional details.

"We're still working on the deal so I'm not at liberty to divulge any additional information," he said.

Citi is the bookrunner for the deal.

Proceeds from the offering will be used for general corporate purposes, including the financing of operating units and subsidiaries, the financing of acquisitions or business expansions and the refinancing of existing debt obligations, according to the SEC filing. The bank may also use the proceeds to hedge its exposure to payments it may have to make on index warrants and indexed notes

Citi acknowledged earlier this week that it was considering selling non-convertible preferreds as part of a plan to strengthen its capital base. The offering also includes $12.5 billion in convertible preferreds in a private offering and $2 billion in a public offering.

Citi said Tuesday it plans to lower its quarterly dividend to 32 cents per share, payable on Feb. 22, 2008. The bank also intends to continue selling its non-core assets.

Wells Fargo notes

Another banking company, Wells Fargo & Co. priced $1 billion in three-year series G floating-rating notes.

The notes, due Jan. 24, 2011, have a coupon of Libor plus 45 basis points and were priced at 99.717. The interest rate resets quarterly.

The spread on the notes came in at Treasuries plus 45 basis points, according to a term sheet.

The notes are expected to settle on Jan. 24.

Morgan Stanley & Co. Inc. is the lead agent.

State Street's APEX

Elsewhere State Street Corp. priced $500 million in 8.25% fixed-to-floating rate Normal Automatic Preferred Enhanced Capital Securities.

The securities pay distributions at 8.25% through March 15, 2011, then switch to a floating rate of Libor plus 499 basis points.

The securities, issued by State Street Capital Trust III, are initially backed by a junior subordinated debenture and a stock purchase contract.

On March 15, 2011, the purchase contract is exercised and the securities will be backed by preferred stock.

Goldman, Sachs & Co. is the bookrunner with Lehman Brothers, Morgan Stanley, Siebert Capital Markets and the Williams Capital Group, LP.

The deal fulfills State Street's announcement on Tuesday that it would bring $500 million of non-dilutive securities eligible for treatment as tier 1 regulatory capital.

Merrill CDS weak

Merrill Lynch reported a fourth-quarter net loss of $9.8 billion, or $12.01 a share, the largest in the company's history. That stands in stark contrast to a year ago, when it turned a profit of $2.3 billion, or $2.41 a share. The big loss was chiefly attributable to the $15 billion of write-downs and adjustments it took related to mortgage-related problems.

However, despite that ocean of red ink, the company's 6.05% notes due 2012 were being quoted about 5 bps tighter on the session, at about the 230 bps level. Also in the financial sector, Bear Stearns' 5.55% notes due 2017 came in by about 10 bps on the day to the 330 bps level.

But while Merrill's bonds were not thrown for a loop by the big loss, investors in the CDS market were looking at things differently. A trader said that major bank and brokerage house debt-protection costs were anywhere from 10 bps to 19 bps wider on the day - and he saw Merrill leading the way there, out 19 bps to 158 bps bid, 163 bps offered.

MBIA plunges

Traders were meantime watching the spectacular fall of MBIA Inc.'s 14% surplus notes due 2032, which had priced at par just a week ago but which have been falling ever since as the bad news continued to mount for the bond insurance industry.

A trader quoted the bonds at 80 bid, 83 offered, well down from 89 bid, 91 offered on Wednesday - but that was one of the more conservative quotes around.

"The MBIA '14s continued to be under pressure," a market source at another desk said, quoting the paper as having traded down around 70 bid at the end of the day, after having opened at 83 bid, 86 offered and having traded around 86 during the morning.

"It was a very volatile name," he added, "definitely one to ask around about."

Another trader saw the MBIA bonds "everywhere, all over the place. They were kind of a touchy subject." He saw the notes going home at 74 bid, 77 offered, well down from their prior levels in the high 80s.

The proximate cause of the big slide in MBIA paper was Moody's Investors Service's pronouncement late Wednesday that it may downgrade rival bond insurer Ambac Financial Group Inc.'s Aaa financial strength rating - which could have the effect of finishing the company as an insurer, since a sterling rating is considered an imperative to getting any new business. That caused Ambac's shares to lose more than half their value on Thursday, and spelled trouble for other companies in that same sector, including MBIA, whose New York Stock Exchange-traded shares plummeted some 32%. And the news got worse as the day wore on, with Moody's saying it would also scrutinize MBIA's Aaa rating, with a possible eye towards downgrading it.

The bond insurers are the latest victims in the spiraling credit crunch that grew out of last year's subprime mortgage industry meltdown. Companies like MBIA, Ambac and ACA Capital Holdings Inc. guarantee more than $2 trillion principal amount of various types of bonds against default - including many mortgage-backed securities which may include subprime loans as part of their collateral. The insurers agree to make payments to cover principal and interest on bonds should issuers be unable to pay their obligations in the event of a default.

With the rising number of foreclosures among borrowers with subprime mortgage, paper secured by such loans, even if only in part, is looking increasingly risky to Wall Street. Moody's and the other ratings agencies have expressed concern whether the insurers have the resources to meet any sharp rise in defaults and insurance payouts. Ambac on Wednesday announced plans to raise $1 billion of new capital - after estimating that a $3.5 billion after-tax write-down it will take for the fourth quarter would erase nearly two-thirds of the company's net worth. Fitch Ratings had previously said that without the additional $1 billion of capital, it would lower Ambac's ratings. Moody's raised the possibility that it would cut Ambac's ratings even with the $1 billion infusion.

MBIA, while larger than Ambac, is hurt by many of the same deteriorating industry dynamics. Fitch also prodded MBIA to augment its capital in order to keep its AAA rating, and MBIA responded with last Friday's sale of $1 billion of 14% notes. It also said it would sharply cut its dividend and take out reinsurance to bolster its capital reserves.

Moody's said that because of the potential MBIA downgrade, all bonds insured by MBIA will also be put on review for potential downgrades.

Meantime, the cost of protecting MBIA's debt against default rose to 25% in a lump sum upfront payment, plus 500 bps a year, up from 16% up front plus 500 bps.

UPS tighter

Outside of the financial-sector bonds, there continued to be substantial interest in the recently priced UPS issues.

The parcel delivery company's short piece, the 4.50% notes due 2013, were seen having tightened another 5 bps on the bid side to 125 bps; they priced a week ago at 145 bps over comparable Treasuries.

Target better

And Target's bonds continue to attract buyers, including the big discount retailer's existing paper, which had initially widened out on supply concerns but which then started to move back up along with the new paper, after Monday's $4 billion pricing.

Its 5 3/8% notes due 2017 were in about 5 bps on the day, a market source said, trading at around the 220 bps bid level.

Meanwhile, the new 6% Target notes due 2018 were at the 217 bps level - well in from their 235 bps spread at pricing.

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