CSX prices equipment notes on slow start to week ahead of Fed meeting

By Andrea Heisinger and Paul Deckelman

Omaha, Dec. 10 - The week started off slowly ahead of Tuesday's Federal Reserve meeting, with CSX Transportation, Inc. pricing about the only new issue.

The company issued $380.821 million 6.251% secondary equipment notes due 2023 priced at par to yield 6.251% at a spread of Treasuries plus 210 basis points.

Citigroup Global Markets and Morgan Stanley & Co. Inc. ran the books.

"I think it did pretty well," a source close to the deal said. "It came tighter than I thought it would and it's selling well."

In the secondary market Monday, overall volume jumped by nearly 70% over Friday's anemic levels, and declining issues outnumbered advancers by about a 7½ to 6 margin.

However, the important financial sector was seen hanging in there, buoyed by anticipation of an interest rate cut at Tuesday's Federal Reserve meeting, and further news that sector players are moving to shore up their liquidity, including European banking giant UBS, which will be getting $11.5 billion from Singapore and an unidentified second investor, bond insurer MBIA, which has lined up a cash infusion of up to $1 billion from Warburg Pincus, and Washington Mutual, which will sell $2.5 billion of convertible debt.

Among the financial bonds seen doing better was Wells Fargo's recently priced issue.

AIG plans juniors

American International Group, Inc. announced an issue of junior subordinated debentures priced at par of $25. The issue will price at some point after the Fed meeting, a source said.

Bookrunners are Citigroup, Merrill Lynch, Pierce, Fenner & Smith Inc., Morgan Stanley, UBS Investment Bank and Wachovia Capital Securities LLC.

The 10-year Treasury was sitting at 4.16% Monday, weaker from recently being at 3.85%, a market source said.

Futures had the majority of dealers thinking the Fed will cut rates by 25 bps, with about 30% thinking there will be a 50 bps cut, a source said late Monday.

The last Fed meeting resulted in a 25 bps interest rate cut.

"That's one reason we just didn't see a lot today because investors don't want to put out money ahead of the Fed," a market source said.

Recent stability in the last couple of weeks has greatly eased the amount of new issue backlog that existed from less ideal times. That was another reason issuers didn't go before the Fed.

"We just don't have a lot to price before the end of the year," a source said.

"The last couple of weeks have pretty much taken care of any backlog."

After the anticipated announcement of the rate cut, there will likely be a more issuers in the second half of the week.

"We'll probably see a lot of guys lined up tomorrow," a source said. "They're just waiting to see what happens."

Financials gain

A trader said that the financials were "better across the board - generically, I would say they were 5 to 10 basis points better."

He saw the new Wells Fargo 5 5/8% notes due 2017, which priced on Dec. 3 at 183 bps over comparable Treasuries, begin the day at 175 bps bid, 165 bps offered, but by the end of the day, he said, the bonds had tightened to a bid of 165 bps.

He also saw Washington Mutual's bonds "kind of holding their own," even with the big thrift saying late in the session that it expects to report a net loss in the fourth quarter after recording a $1.6 billion non-cash charge for writing down all of the goodwill associated with its struggling home loans business. WaMu also said it would slash both its dividend and its workforce, and would tap the convertibles market to shore up its liquidity.

A market source said that the company's 7¼% bonds due 2017 had tightened to about 478 bps over by day's end, probably helped by the announcement of the coming convertible issue, versus a 501 bps spread going home on Friday.

Other financials doing better included Goldman Sachs' 6.345% bonds due 2034, 17 bps tighter at 275 bps.

CDS spreads tighten

A trader said that Bank of America's CDS cost initially widened out on the news that the Number-Two U.S. bank will close a privately placed money market fund for institutional investors - a nagging reminder to the market of more potential fallout from the credit crisis. However, by midday, he said, its spread was back to being tighter on the day versus Friday's levels at 41 bps bid, 46 bps offered, a 1 bp tightening.

Other major banks' debt-protection costs were also tighter versus Friday, including Citigroup at 63 bps bid, 68 bps offered, and JP Morgan at 39 bps bid, 44 bps offered, Wells Fargo at 40 bps bid, 45 bps offered, and Wachovia at 74 bps bid, 81 bps offered, all some 2 bps tighter.

Among the savings and loan names, Washington Mutual's CDS cost tightened 50 bps to 285 bps bid, 305 bps offered. In the agencies, Fannie Mae was seen 4 bps tighter at 32 bps bid, 37 bps offered, while Freddie Mac was 5 bps tighter at 31 bps bid, 36 bps offered.

The trader also saw CDS spreads of major brokerage houses unchanged to 5 bps tighter, with Bear Stearns at 171 bps bid, 178 bps offered, Lehman Brothers at 123 bps bid, 130 bps offered, Merrill Lynch at 128 bps bid, 135 bps offered, and Morgan Stanley at 90 bps bid, 97 bps offered.

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