Cargill, Citi, American Express price as new issue premiums keep others away, tone sours; financials dip

By Andrea Heisinger and Paul Deckelman

Omaha, Nov. 19 - High new issue premiums and volatile conditions continued to scare potential issuers away Monday, but Cargill, Inc., Citigroup Capital XX and an entity of American Express still decided to come to the market.

"New issue premiums charged continue to be pretty substantial," a market source said.

In the secondary market Monday, the financial sector was notably weak although across the investment-grade market advancing issues beat decliners by a better than seven-to-six ratio.

Financials were hit by more bad news, notably Goldman Sachs' downgrading of Citigroup's shares and its prediction that the banking giant may have to take as much as $15 billion of write-offs over the next two quarters. Despite that bad news, Citigroup's recently sold bonds were seen hanging in around their issue levels. The same held true for Wachovia Corp.'s recent new issue. However, more established issues weakened across the board.

Meanwhile, credit default swap contracts hedging against possible defaults on banking and brokerage company paper were seen having widened at least a few basis points from Friday levels - a sign of lessened investor confidence in the viability of the underlying companies.

Cargill brings $900 million

Cargill priced $900 million in 6% 10-year notes at 99.525 via Rule 144A.

Bookrunners were Banc of America, Credit Suisse, Citigroup and J.P. Morgan.

One market source estimated the new issue premium on this to be between 45 and 50 bps.

Citigroup Capital priced $750 million in 7.875% 60-year preferreds at par of $25.

And an entity of American Express priced a two-tranche issue via Credit Suisse, Merrill Lynch and RBS Greenwich Capital. Terms were not available at press time Monday.

A source said they estimated this issue also faced a substantial new issue premium of 40 to 45 bps for each tranche.

Beating widening spreads

As the end of the year gets nearer and spreads continue to creep upward, some issuers are opting to issue now.

"They think spreads are going to go wider, so they wanted to get in now," a source said.

"Everything's widening and nothing's tightening."

Market conditions deteriorated throughout the day Monday, adding to the negativity from new issue premiums.

"They continue to grow, and I think that's part of it, why people aren't issuing," a source said. "If they don't need to come to the market they're not going to. It's pretty hard to stomach what they'll have to pay."

Uncertain for Tuesday

The day did not end on a good tone, leading one market source to again say Tuesday's volume depends on how things open in the morning.

"It really just depends," a source said. "I think it will be pretty quiet tomorrow but you just never know. It's still day to day."

A market source said Tuesday's business depends on how things go with Monday's issues.

"We could pick up a couple of new deals if they go well, but that will be it for the week," the source said.

New Citis steady

A trader said that the financial sector was "weaker across the board," although he said that the new Citicorp 6 1/8% notes due 2017, which had priced last week at a spread of 190 basis points over Treasuries, were still hanging in around that issue level, at 189 bps bid, or perhaps 190 bps bid, 187 bps offered.

He also saw the new Wachovia 6% notes due 2017, which priced last week at 195 bps, were also "holding in" at around 194 bps bid, 190 bps offered.

However, he said that while he didn't see "core positions changing hands," he did see some "people with positions trying to sell them." But while the new deals remained bid-for, he said, "other paper that's been out there, and just been kind of sitting, is not moving."

He said the new issues might be hanging onto their levels only because "a new-issue bid [is] holding them in."

Another market source saw Citigroup's 5.3% notes due 2012 widen out by about 14 bps to 177 bps in apparent investor response to the Goldman downgrade of its shares to "sell" and its warning that further large write-offs may loom at the largest U.S. bank.

Broker, bank CDS widen

Elsewhere, a trader said that brokerage-house CDS gradually crept wider, finishing anywhere from 8 bps to 15 bps wider than the levels they'd held on Friday.

He saw Bear Stearns' debt-protection costs widen to 162 bps bid, 172 bps offered versus 150 bps bid, 160 bps offered in the morning and 145 bps bid, 153 bps offered Friday afternoon.

He saw Lehman Brothers' CDS cost widen to 135 bps bid, 145 bps offered from 130 bps bid, 140 bps offered at the opening and 124 bps bid, 132 bps offered Friday afternoon.

Merrill Lynch's credit-swap spread widened to 135 bps bid, 145 bps offered from 125 bps bid, 135 bps offered in the morning and 122 bps bid, 130 bps offered Friday afternoon, while Morgan Stanley's moved out to 105 bps bid, 115 bps offered versus 100 bps bid, 110 bps offered Monday morning and 97 bps bid, 105 bps offered Friday afternoon

Among the banks, he saw spreads about 5 bps to 6 bps wider pretty much across the board, other than Washington Mutual, which widened considerably more. He quoted Citigroup's CDS at 85 bps bid, 90 bps offered, Bank of America's and JP Morgan's at 60 bps bid, 65 bps offered, and Wachovia's at 96 bps bid, 101 bps offered, investors in the latter apparently not much impressed by news that company chief executive Kenneth Thompson had bought an additional 100,000 shares of the company's stock.

Washington Mutual's CDS price, always far above those of other institutions, widened out by 35 bps to 420 bps bid, 445 bps offered, the trader said.

Meantime, giant mortgage operator Fannie Mae's CDS was quoted having widened out to about 54.5 bps, a 1.5 bps widening on the session. That spread was also about a dozen bps wider in the past three sessions - and was roughly double what it was at the beginning of the month.

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