High-grade pace quickens after Fed cut; GE, Lehman, JPMorgan, Weyerhaeuser among day's issuers

By Andrea Heisinger and Paul Deckelman

Omaha, Sept. 19 - The pace of investment-grade activity picked up significantly Wednesday following the Federal Reserve's interest rate cut.

Potential issuers held back Monday and Tuesday waiting to see what the Fed would decide.

Those who came to the market Wednesday included GE Capital Corp., Lehman Brothers Holdings Inc., JPMorgan Chase & Co., Weyerhaeuser Co., Canadian National Railway Co. and Southwest Airlines Co.

Much of the investment grade secondary market's focus Wednesday was on newly priced issues, a trader said, noting that attention was particularly concentrated in the financial sphere, given the boost which the sector has gotten the past two days from the unexpectedly large and pro-active 50 basis point cut in the Federal Reserve's benchmark discount rate, as well as better-than-expected earnings from Lehman Brothers Holdings Inc.

He said such new deals as J.P. Morgan Chase & Co., Lehman and General Electric Capital Corp. had all tightened markedly in initial aftermarket dealings from the spreads at which they had priced.

In general, participants said, the investment-grade secondary pretty much hung onto the gains it notched Tuesday - and not even lower-than-expected fiscal third-quarter earnings from Morgan Stanley could rain on the parade.

GE, Lehman, JPMorgan at $3 billion and up

In the primary, GE priced $3 billion in 5.625% 10-year global medium-term notes at 99.663 to yield 5.67%, at a spread of Treasuries plus 115 basis points.

But that deal size was topped by Lehman's $3.25 billion of notes in two tranches. They sold $2.25 billion of 6.2% seven-year notes at 99.916 to yield 6.215%, at a spread of Treasuries plus 190 bps.

The second tranche of $1 billion in 7% 20-year notes priced at 99.808 to yield 7.018% at a spread of Treasuries plus 220 bps.

JPMorgan Chase had a total of $4 billion in two different deals.

It priced $3 billion in 6% 10-year notes at a spread of Treasuries plus 150 bps, and $1 billion in three-month Libor plus 32 bps three-year floaters at par.

Canadian National, Weyerhaeuser bring deals

Canadian National sold $550 million of notes in two tranches. The $250 million of 5.85% 10-year notes priced at 99.683 to yield 5.89% at a spread of Treasuries plus 135 bps. The $300 million of 6.375% 30-year notes priced at 99.743 to yield 6.393% at a spread of Treasuries plus 155 bps.

Weyerhaeuser sold $450 million in three-month Libor plus 100 bps two-year floaters at par.

A $500 million issue of class A and B passthrough certificates from Southwest Airlines priced late Wednesday. Full terms were not available at press time.

Suncor Energy Inc. added $400 million to a previous issue of 6.5% 31-year bonds, bringing the total issuance to $1.5 billion. The notes have a price of 100.296 to yield 6.477%, with a spread of Treasuries plus 163 bps.

HCC Insurance Holdings Inc. announced an issue of $300 million in 10-year senior notes via Rule 144A. The notes will price this week, an informed source said.

An issue of non-cumulative dollar preference shares from The Royal Bank of Scotland Group plc announced earlier in the week will price Friday, sources said.

Market firm

The Fed rate cut led to some improvement in investment-grade trading, sources said.

"Corporate spreads are definitely more stable," one source said. "The Treasuries traded two to three basis points weaker."

The day had "good tone," a source said.

"The market has decent tone for investment grade issues to come out. It's able to get the focus of investors."

$12.5 billion day

It looked like there was more volume Wednesday, but that was by comparison to the beginning of the week when new issues were scarce.

"The volume is jacked up right now, just because of the backlog," a source said.

The larger issues from GE, Lehman and JPMorgan Chase also skewed things, the source said, and Thursday there will likely be the same number of issuers but not as large an amount.

There were more than $12.15 billion in new issues Wednesday, and more than $13.7 billion so far this week.

J.P. Morgan, Lehman, GE tighter

Back in the secondary, the trader said the J.P. Morgan 10-year issue, which priced at a spread of 150 bps over Treasuries, is now trading at 143 bps over; the new Lehman Brothers 20-year issue, which priced at 220 bps over tightened to 213 bps, while the seven-year piece narrowed by 5 bps from the 190 bps issue spread to 185 bps. He said the new GE 10-year deal, after pricing at 115 bps, was trading around 109 bps.

The trader said generally speaking, "everything was better across the board," even in the wake of lower-than-expected earnings from Number-Two investment bank Morgan Stanley.

"They held in fine," he said of the latter's bonds, as well as other sector names - and even non-sector names. "Everything was well bid-for," carried along by the momentum generated by the Fed and Lehman.

Another trader, watching the behavior of credit default swaps spreads linked to the bonds of the various brokers, agreed that things stayed strong, even with the Morgan Stanley earnings decline. A decline in the spreads is a sign of increased investor confidence in the underlying bonds.

He noted that the cost of hedging Morgan Stanley's bonds against a possible event of default stood at 41/46 bps Wednesday afternoon, well down from 59/63 bps on Monday - before the Fed cut rates.

Finance CDS contract

He also saw other financial CDS spreads not having given up the hefty tightening they enjoyed after the Fed move, with Bear Stearns Cos. Inc.'s CDS spreads at 90/95 bps, versus 123/128 bps on Monday; Lehman's at 82/87 bps, versus 123/128 bps; and Merrill Lynch & Co.'s at 47/52 bps, well in from 59/63 bps before.

Goldman Sachs Group Inc.'s CDS spread level stood around 50 bps, in about 9 bps from Monday's levels.

Number-Two investment bank Morgan Stanley reported that net income fell 17% from year-ago levels to $1.54 billion ($1.44 a share) during the fiscal third quarter ended Aug. 31, from $2.58 billion ($1.75 per share). The numbers came in below Wall Street's expectations of profits of about $1.54 per share.

On a continuing-operations basis, excluding the partial-quarter results from its former credit card unit, Discover Financial Services, which separated from the parent in June, one month into the quarter, profit fell to $1.47 billion ($1.38 per share) from $1.59 billion ($1.50 per share) a year ago.

The company's numbers reflected the fact that it was forced to write down nearly $1 billion worth of loans amid the summer's global credit crisis.

Company officials attempted to put the best possible face on the lackluster results.

"This was an abnormal market with incredibly poor liquidity and many poorly performing hedges," Morgan Stanley's chief financial officer, David Sidwell, said on its conference call with analysts and investors following the release of the results. "I think given the extraordinarily difficult markets, we actually performed OK - and we view ourselves as very well positioned to take advantage of opportunities that arise as the markets settle down."

The Morgan Stanley numbers followed by a day the release of Lehman's - which, although they showed a clear deterioration from year-ago levels, thanks to the credit crunch, came in above expectations, giving the company's bonds a boost in the early going Tuesday, and bringing other financial issues up along with them. That rise continued later in the session after the Federal Reserve's announcement of an unexpectedly large 50 basis point cut in the federal funds rate to 4.75%.

Investors will meantime be closely watching the tape Thursday, when Goldman and Bear Stearns report.

Broader market strong

The trader meantime said that the non-financial sector "hadn't sold off as much" as the investment banking and brokerage names hard hit by the recent credit crunch linked to the troubles in the mortgage industry, "so they're not going to move back in as much - but everything across the board is pretty well bid for, as far as I can see."

While noting the Weyerhaeuser and Canadian National Oil new deals, the trader said that it seemed the financial names were pretty much dominant.

Among the established names as well, the financial area continued to lead the whole high grade sphere higher, with Citigroup's 4 1/8% notes due 2010 seen by a market source as having tightened 10 bps to 94 bps over, and its 5% notes due 2014 tightening 12 bps to 105 bps over.

On the other hand, Lehman's existing issues were seen either unchanged, its 4% notes due 2008 holding steady at 76 bps over - while its 6½% notes due 2017 were actually seen having widened by 9 bps to 199 bps over - perhaps a function of the company's two-part mega-deal.

Telecom names gain

In the non-financial area, the source indicated that there seem to be some solid spread tightening among some of the communications names, with Verizon Communications 6 ¼% notes due 2037 having tightened to 139 bps over, a pickup of nearly 20 bps, and Sprint Nextel's 6% notes due 2016 seen 10 bps tighter at 185 bps over. AT&T Broadband's 8 3/8% notes due 2013 were also seen having tightened handsomely to the 149 bps level.

Countrywide Financial Corp.'s Ba1/BBB+/BBB- rated 6¼% notes due 2016, which have lately been quoted in dollar terms, as though they were distressed junk bonds, after the big mortgage lender ran into liquidity problems last month and had to draw down its credit line and arrange a big investment from Bank of America to generate operating capital, were seen at 89.5, up from 86 previously.

The bonds, and the company's shares, got a boost after CEO Angelo Mozilo delivered optimistic remarks at a B of A conference on Tuesday, said he was "bullish" on the company's prospects and outlined its expansion plans - and as Citigroup analyst Bradley Ball wrote in a research note that market fears about the company being unable to continue as a going concern were "overblown."

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