AIG, AGL, BP price as Fed cuts rates a disappointing 25 bps, market softens on news

By Andrea Heisinger and Paul Deckelman

Omaha, Dec. 11 - The stream of new issues continued Tuesday with American International Group, Inc., AGL Capital Corp. and BP Capital Markets plc pricing on a quiet day punctuated by another rate cut announcement from the Federal Reserve.

The 25 basis point cut to the federal funds rate was less than what many were hoping for. It was the third cut since September.

"The markets were hoping for a 50 bps cut," a market source said. "It was definitely soft after the announcement. Stuff sold off."

Another source called the rate cut a "nonevent."

"I don't think it's really going to affect anything," the source said. "Those guys are too conservative."

In the secondary market Tuesday, financial names were seen "a touch weaker" a trader said, following the Fed's failure to cut key interest rates by more than ¼ point. Meantime, Washington Mutual's bonds were seen doing better, now that the big thrift has bit the bullet and declared its plans to take $1.6 billion of charges to write down the value of goodwill at its mortgage lending operation, and has also chosen to bolster its liquidity with a $2.5 billion convertible debt sale.

But other financial names were seen wider, particularly in the credit-default swaps market for such brokerage names as Bear Stearns and Lehman Brothers and such banking names as Bank of America and Citigroup.

AIG brings $1 billion

In new issue activity, AIG priced $1 billion in 7.7% 60-year junior subordinated debentures priced at par of $25.

The issue was announced Monday and was not previously expected to price until Wednesday.

Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Inc., Morgan Stanley & Co. Inc., UBS Securities LLC and Wachovia Capital Markets, LLC were bookrunners.

BP priced $1.5 billion five-year guaranteed extendible floating-rate notes at par.

They have an initial one-year maturity, but holders can extend them in 366 day increments up to the final maturity in 2012.

The notes have a coupon of three-month Libor plus 10 bps for the first year. After this they step up 2 bps and then by 1 bps each year until the final maturity.

Bookrunners were Goldman Sachs & Co. and HSBC Securities.

This deal was surprising to one market source who said it's sold primarily to money market accounts which have not been active lately.

AGL, a unit of AGL Resources Inc., reopened its 6.375% 10-year senior notes to add $125 million.

This brings the total issuance to $300 million.

Bookrunners were Goldman Sachs & Co., SunTrust Robinson Humphrey and Wachovia Capital Securities LLC.

More deals expected

Issuance should step up Wednesday, sources said, although not to the level of previous weeks as backlog was brought into the market.

"We're not going to see anything more than we did last week," a source said. "There should be a couple of deals, but I'd be surprised if there were more than that."

Most issuers have already done their deals before the end of the year, meaning things should slow down in the next couple of weeks, the source said.

"That backlog is pared down and we're just not going to see the volume we did the last week or two," he said.

Financial weaker

A trader said that "in general, the investment-grade financials were a touch weaker" after the Fed news hit the market.

He said that Washington Mutual's bonds "were a lot better" than recent levels in the morning, quoting the 7¼% notes due 2017 as trading around 350 basis points over Treasuries in the morning, well in from the levels around 450-500 bps seen over a week ago. He had not seen them following the Fed rate cut announcement.

A market source saw the company's 8¼% notes due 2010 trading at 607 bps, a more than 80 bps tightening from recent levels.

Also seen tightening were Goldman Sachs' 5.15% notes due 2014, which narrowed about 15 bps to the 110 bps level.

However some financial issues reacted badly to the lack of a bigger rate cut by the Fed.

Merrill Lynch's 6.40% notes due 2017, for instance were seen having widened out markedly to the 197 bps level.

CDS give up early gains

In the CDS market, a trader said that while debt-protection costs for major banks and brokerages initially tightened from Monday's levels about 1 to 3 bps for the banks and about 5 bps for the brokerages, that was all gone by the end of the day. He said that that after the Fed, the bank names were between 4 and 7 bps wider on the day and the brokerages 5 to 10 bps wider.

He pegged Bear Stearns' debt-protection costs at 168 bps bid, 175 bps offered, Lehman Brothers at 125 bps bid, 132 bps offered, Merrill Lynch's at 128 bps bid, 135 bps offered, and Morgan Stanley at 91 bps bid, 96 bps offered.

Among the banks, BofA's CDS spread widened to 46 bps bid, 51 bps offered, Citigroup's to 69 bps bid, 74 bps offered, JP Morgan's at 45 bps bid, 51 bps offered and Wachovia at 80 bps bid, 87 bps offered.

Washington Mutual, which earlier was in 15 bps from Monday's level to 300 bps bid, 315 bps offered, gave it all back to end unchanged at 315 bps bid, 330 bps offered.

CVS wider

Apart from the financial names, drugstore giant CVS Caremark Corp.'s new 6.943% pass-through bonds due 2030 were seen about 5 bps wider than their opening levels, moving out to 305 bps. The bonds priced at a spread of 312.5 bps a week ago.

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