Soft start deters news deals; financials weak in trading

By Andrea Heisinger and Paul Deckelman

Omaha, Oct. 22 - The week started off with a hangover as issuers balked at entering the market that had lingering instability from Friday.

"We saw carry over from the soft tone set Friday," a market source said. "Then because of the tone set this morning they were hesitant to get in the market."

Monday didn't start off well, sources said, with negative tone and activity.

"We were dragged down by the futures this morning and the equity market wasn't doing well," a source said. "It's not the kind of market people want to step into."

Another source remarked everything was abnormally quiet.

"There was nothing [pricing] today, which kind of surprised me with the big sell-off in the equity market Friday," he said.

At the end of last week there were predictions this week would be busy.

Fifth Third Capital Trust VI, part of Fifth Third Bancorp, announced an upcoming issue of trust preferred securities.

The issue is expected to price this week, a source said.

Bookrunners are Merrill Lynch, Citigroup Global Markets Inc. and UBS Investment Bank.

This was the only new issue announced so far this week, sources said, leaving them unsure of how busy the week will actually be.

"Everything that came last week was oversubscribed and secondary spreads have widened a little but new issue premiums are still under 10 basis points," a source said.

A bright spot in the market is that the 10-year benchmark notes have rallied 90 basis points since the middle of June, the source said.

It's hard to tell whether Tuesday's pace will pick up and there will be any issues pricing, sources said.

"Provided the opening is half decent, I think there are people sitting on a few deals," a market source said.

"Things tightened up as the day went on today but we're just going to have to wait and see if it's another soft opening Tuesday."

Financials weak

In the secondary market, a generally firmer tone was seen by the end of the day, with advancing issues outpacing decliners by about a 61/2-to-five ratio. Activity remained muted, however - overall volume was only about 3% above Friday's very restrained levels.

While the board market was quietly better, the financial sector continued to have its troubles, with Merrill Lynch's bonds leading the way downward ahead of the investment bank's scheduled release of its third-quarter earnings on Wednesday. Bear Stearns bonds were also seen wider, despite its announcement of a strategic partnership with Chinese financial giant Citic.

Credit default swap spreads on financial names were mixed, with Merrill's seen having widened out, but Bear and Lehman Brothers having actually tightened.

Aside from the financials, there was busy trading - but not much actual spread movement, at the end of the day - in the bonds of Southern Copper Corp., as the mining company's Peruvian operations face possible renewed labor unrest .

Merrill debt widens ahead of numbers

Merrill Lynch's bonds were seen having widened out ahead of Wednesday's earnings report, which is expected to be yet another recitation of finance-sector gloom and doom, on top of recent bad earnings reports from such big sector players as Citigroup and Bank of America. Merrill Lynch has already said it plans to take about $5 billion in writedowns in the quarter, and could have per-share losses as high as 50 cents.

Merrill Lynch's actively traded 6.40% notes due 2017 were seen having widened out about 5 basis points, with one source pegging the bonds at 162 bps over. Another quoted them trading at 157 bps over - but called that the same 5 bps widening from recent levels.

Other Merrill paper did worse, with a source seeing its 6.11% notes due 2037 having widened out more than 20 bps on the session to 204 bps over. At another desk, 6.05% notes due 2012 were quoted at 147 bps over - a more than 30 bps widening.

Other financials feel the squeeze

Elsewhere among the financial names, Goldman Sachs' 6¼% notes due 2017 were seen having ballooned out to some 154 bps over - a more than 20 bps deterioration from recent levels at 132 bps. Lehman's 6.50% notes due 2017 moved out to 184 bps from 169 previously, while Morgan Stanley's 5 3/8% notes due 2015 were 15 bps wider at 137 bps.

A market source saw Bear Stearns' 6.40% notes due 2017 trading anywhere from 185 bps over to "at least one decent-sized piece" at 196 bps, although at another desk, the company's 5.55% notes due 2017 were seen only 3 bps wider at 177 bps.

Bear announced that it will enter into a strategic alliance with Chinese financial powerhouse Citic - but while that is seen as good news for the beleaguered Bear - still reeling from hedge-fund problems stemming from the subprime mortgage debacle and the resulting credit crunch - some observers said that the two companies' agreement to essentially invest $1 billion in each other and combine some operations in Asia falls short of a hoped-for outright equity infusion.

Broker CDS spreads widen out

Elsewhere, a trader said that credit-protection costs for major brokerage names, which on Friday had widened out substantially - a sign of increased investor unease with the financial sector's prospects, since credit default swap spreads move inversely to investor confidence - were mixed on Monday. While Merrill Lynch's debt-protection costs jumped to 85 bps/90 bps from Friday's 78 bps/83 bps, in line with the widening in the company's cash bonds, the cost of a five-year CDS contract to hedge against a possible event of default in Bear Stearns' paper came in to 92 bps/99 bps from 102 bps/110 bps by Friday's close.

Debt-protection costs for Lehman Brothers' bonds likewise eased to 87 bps/94 bps from 97 bps/105 bps Friday. Morgan Stanley's CDS costs also narrowed to 52 bps/57 bps from 57 bps/62 bps.

Southern Copper gyrates

One of the more actively traded bonds on the session, market participants said, was Southern Copper Corp.'s 7½% notes due 2035. After having firmed during the session a spreads as tight as 192 basis points over comparable Treasuries, the bonds gave up those earlier advances late in the day to finish essentially little changed on the session at around 201 bps over.

The bonds have been gyrating around in busy dealings over the past few sessions as investors warily watched the labor situation in Peru, where the Phoenix-based company has key mining operations.

Last week, its unions there said it would give the Peruvian labor ministry until this Friday to reach a pay deal with Southern Copper before taking further strike action, which could include a resumption of the more than week-long work stoppage that took place earlier this month after direct talks between the unions and the company failed to resolve their ongoing contract dispute. The unions returned to work on Oct. 10, agreeing to let the labor ministry negotiate on their behalf as they seek an 11% pay raise, a bonus, the adherence by the company to an eight-hour workday and other benefits. So far, though, the ministry has been unable to reach a pay agreement with Southern Copper within the timeframe it had guaranteed. A union official said at that time that his members could join a nationwide strike called by Peru's national mining and metalworkers federation for Nov. 5 if its demands are not met by then.

On Friday, UBS Investment Bank took note of the labor troubles in Peru as it downgraded its recommendation on the company's shares to neutral from buy previously, and reduced its estimate of the company's likely 2007 per-share earnings, citing production shortfalls and higher costs.

However, UBS did raise its earnings estimates for 2008 and 2009, citing anticipated higher copper prices going forward.

Elsewhere, a market source saw the recently-priced Yum! Brands 6¼% notes due 2018 trading at a yield of 6.26%, versus trades between 6.13% and 6.20% around the middle of last week. Those bonds were still trading better, however, than their 6.305% yield at last Tuesday's pricing.

Also in the restaurant area, the source saw some of the new Darden Restaurant 6.80% notes due 2037 trading around at a 166 bps bid, 163 bps offered spread level, "all on decent-sized pieces."

The source also saw "some decent-sized pieces" of Schering Plough's 6.55% notes due 2037 trading at spreads around 155 bps bid, 152 bps offered after the pharmaceuticals company released lower-than-anticipated third-quarter earnings - out slightly from the 151 bps seen on Friday, although the source cautioned that Friday's trading was very thin, and the 151 bps quote might not be representative.

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