Fannie Mae, Compass Banc price issues, September sets record $101 billion issuance for month

By Andrea Heisinger and Paul Deckelman

Omaha, Oct. 1 - October got off to a slow start Monday with few investment-grade issues pricing, following a record September.

Fannie Mae and Compass Banc priced new issues, both under Rule 144A.

In the secondary market, advancing issues were seen outnumbering the decliners by about a seven-to-five margin.

The big news out of the important financial sector - that banking giants Citigroup Inc. and UBS AG plan to report major losses linked to the ongoing problems of the subprime lending industry - did not, as might be expected, push banking-sector bonds lower; investors instead seemed to focus on the idea that the current disclosures will be as bad as things get and they can only improve from here.

In primary action, Fannie Mae sold $375 million in 6.75% non-cumulative perpetual preferred stock totaling 15 million shares. It priced at $25 per share.

Compass Banc priced its issue of two-year notes late Monday. It was launched at $250 million, but terms of the deal were not available at press time.

Bookrunners were Citigroup Global Markets Inc. and Morgan Stanley & Co., Inc.

Kimco, Northwest coming

Other issues were announced Monday but not expected to price until Tuesday, informed sources said.

Kimco Realty Corp. is expected to price an issue of cumulative preferred stock at $25 per share.

Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., UBS Investment Bank and Wachovia Capital Securities LLC are bookrunners.

Northwest Airlines, Inc. will price a total of $454.3 million in class A and B pass-through certificates. Pricing is expected for midday Tuesday, an informed source said.

Morgan Stanley & Co., Inc., Citigroup Global Markets Inc. and J.P. Morgan Securities Inc. are bookrunners.

Both of these were expected to be overnight issues when they were announced, a source said.

More backlog expected to surface

Stability in the investment-grade market continued Monday, sources said, with predictions that part of the backlog of issues will come out this week.

"The market opened soft, and I think that deterred a lot of people from coming in," a source said.

Compass Banc was the only issue anyone expected to price with the others holding off until later in the week, the source said.

Record September

Analysts from Bank of America said in a report that new issue supply was $101 billion for September, setting a record for the month.

Last year there were $89 billion in new issues for the same month.

The trend of heavy supply is expected to continue in October with between $80 and $90 billion in new issues, analyst Hans Mikkelsen wrote in the report.

This is about on par with what market sources predicted during the last week of September.

"I think it will be a little bit of a stretch to beat September," a market source said Monday. "About $80 billion is where we expect it to be."

There will be about $150 billion in new issues left for November and December, with the year's total reaching $1 trillion, Mikkelsen wrote.

GECC firm in trading

In the secondary market on Monday, General Electric Capital Corp. bonds were seen among the more active names, with several of its issues having tightened on the day.

As financial issues were actually better on hopes the worst is over, the cost of hedging against a possible event of default in bank or brokerage paper using credit default swaps contracts, while initially widening a little for Citi and UBS debt, had, by the end of the day, come back to around opening levels on each, and was seen either holding in or even tightening for other banking and brokerage names such as Bank of America, Goldman Sachs & Co., Lehman Brothers, Merrill Lynch and Morgan Stanley.

Citigroup, the biggest U.S. banking company, said that it lost $1.3 billion during the latest quarter on collateralized debt obligations linked to subprime mortgages and loans, and further said that it will write down $1.4 billion before taxes on leveraged finance commitments. Its total credit and trading losses on loans and mortgage-backed securities will come to some $5.9 billion. It estimated that total earnings for the just-concluded third quarter will slide some 60% from year-ago levels, thanks largely to the subprime debacle and related problems.

Meantime, UBS - Europe's biggest banking company - warned that it will show a pretax loss after writing down the value of subprime-mortgage backed securities by the equivalent of around $3.4 billion.

Bank bonds little moved by bad news

But that double-dose of bad news had little impact on financial-sector bonds. A trader said that he saw "some 10-year Deutsche Bank paper out there that came not too long ago that are actually trading better," at spreads over comparable Treasuries of 124/120 bps, which he called "a couple[of basis points] better."

He said that Citigroup's paper "held in as well - it didn't really widen. It did a little bit better, versus widening at all." He added that he "did not see a lot trading in the name."

At another desk, the Citigroup paper was seen around the levels it held on Friday, with its 4 1/8% notes due 2010 at 89 bps over the three-year Treasury and its 5% notes due 2014 around 99 bps over the 10-year.

The first trader said that there was "a handful of things trading in the GE [Capital] name, and the Merrills and some of the brokerages, but it hasn't really translated into much in terms of things moving tighter or wider - it was a pretty benign day across the board, even with the news on Citi."

CDS spreads end little changed

The cost of protecting investors against a possible default on Citi or UBS bank paper was seen to have initially widened out after their earnings warnings, but both later came back in to around unchanged levels, according to market sources.

Citigroup's bearish forecast pushed the cost of a CDS contract letting an investor hedge against the possibility of an event of default on its paper out by about 2 to 3 bps in early dealings to 35 bps, or $35,000 per year to insure $10 million of bonds for five years, although that figure later came back down to around 32 bps, roughly unchanged.

Debt-protection costs for Switzerland-based UBS's senior bonds also widened out by 3 bps to around the 28 bps mark, but eventually tightened back down to 25 bps, even shrugging off a not-unexpected ratings cut by Standard & Poor's to AA from AA+ previously, while its subordinated debt CDS protection costs hung in around 34 bps.

Among other major banking names, Bank of America's debt-protection costs were being quoted about 32 bps, J.P. Morgan Chase's in the 35-36 bps area, and Goldman Sachs Group's around 45 bps, all pretty much unchanged on the session.

A trader meantime said debt-protection costs for brokerage names were for the most part a little tighter on Monday. While he saw Bear Stearns' CDS contract price unchanged at 90/95 bps, other brokerages were in by a basis point or two, with Lehman Brothers at 78/83 bps, a 2-bp narrowing, and Merrill Lynch and Morgan Stanley each 1 bp tighter, at 58/63 bps and 56/61 bps, respectively.

CDS debt-protection costs move inversely to investor confidence in the health of a company and the soundness of its underlying securities. Investment-grade CDS costs, on average, are in the low-to-mid double-digit basis point range, while CDS costs for riskier credits, like junk bonds, are almost always up in the triple-digit neighborhood.

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