Fannie Mae prices preferreds, ending week of more than $14.5 billion volume, quiet week ahead expected

By Andrea Heisinger and Paul Deckelman

Omaha, Nov. 16 - It was a quiet end to a quiet week Friday, with Fannie Mae pricing an issue of preferreds.

The mortgage lender sold $500 million, or 20 million shares, of 7.625% perpetual non-cumulative preferred stock at $25 per share.

Bookrunners were Lehman Brothers and Morgan Stanley.

Other than that there wasn't much action, source said.

"I talked to a couple of potential issuers who decided to hold off until next week," one market source said.

In the secondary market, Friday was considered a fairly quiet day, with volume off from Thursday's session and advancing issues leading decliners by about a six-to-five margin.

Starbucks Corp. bonds were seen wider as the Seattle-based coffee-bar chain operator reported a fall-off in customers coming to its ubiquitous stores for their lattes and capuccinos, causing the company to scale back its optimistic expansion plans and trim its financial forecasts.

Elsewhere, Merrill Lynch's bonds were seen a little firmer, perhaps enjoying a belated boost from the mid-week announcement that the Big Bull had moved quickly to replace the ousted chief executive Stanley O'Neal with veteran Wall Streeter - though Merrill novice - John Thain.

With no new announcements Friday by big banks, brokerages or other financial firms of executive bloodletting or further huge anticipated mortgage-related writedowns and with a new captain taking command of the staggering ship, Merrill's credit-default swaps, and those of such sector peers as Bear Stearns, Lehman Brothers and Morgan Stanley were seen to have mostly tightened a bit on the day, a sign of increased investor confidence.

Citi preferreds expected

Back in the primary, an issue of preferreds from Citigroup Capital XX that was announced Thursday will likely be Monday or Tuesday's business, a source said.

An amount has not been set, and it was launched at the standard $300 million but will likely be more than that.

Week totals $14.5 billion

There was more than $14.5 billion in new issues for the four-day week, mostly coming from utilities and financials.

UnitedHealth Group Inc. priced $1.6 billion in four tranches and Citigroup, Inc. did $4 billion. J.P. Morgan priced $1.5 billion and Fiserv, Inc. $1.75 billion.

Parts of Wachovia had several new issues including those from Wachovia Bank NA, Wachovia Corp. and Wachovia Capital Trust X.

Bank of America Corp., Japan Bank for International Cooperation, Nstar Electric Co., Xstrata Finance (Canada) Ltd., Potomac Electric Power Co. and Wisconsin Public Service Corp. also priced issues.

An issue from Hyundai Capital Services was postponed due to market conditions. It was announced at a benchmark-size issue of five-year bonds.

It is another short week ahead, with new business likely only taking place Monday and Tuesday.

"I think people who didn't issue this week will take another look at the market Monday and decide whether to go or not," a source said.

Spreads continue to look vulnerable, with new issue premiums staying around 20 basis points.

"When the premium is 15 to 20 bps you have issuers really thinking whether they want to get into the market," a source said.

There could be a couple of smaller issues Tuesday, and that will likely be the end of issues before the Thanksgiving holiday.

"There's a little window at the beginning of the week, but there's not expected to be much. Everyone will just wait to see what happens Monday morning," a market source said.

New bonds straddle issue spreads

In the secondary market, a trader called conditions "extremely quiet."

He also saw a little bit of trading - though minimal price movement - on big new issues which came to market earlier in the week, pegging the $4 billion of new Citigroup 10-year bonds that priced Wednesday at 191 bps bid, 189 bps offered over Treasuries, straddling their 190 bps pricing level.

He also saw Wachovia Bank's $1 billion of new 6% bank notes due 2017, which priced on Thursday at 195 bps over, at 195 bps bid, 193 bps offered.

Starbucks widens on bearish forecast

Starbucks bonds widened out, in line with a drop in its shares, when investors found that the company's financial projections weren't quite their cup of tea.

Its 6¼% notes due 2017, which on Thursday had gone home at around 151 bps over, ballooned out as far as about 184 bps, a market source saw, before coming back in and trading most of the session around 177 bps. Some late buying, however, lifted the bonds, which ended the equivalent of only ½ point lower in dollar-price terms, or about 5 bps wider, at 156 bps.

That widening out came in tandem with a retreat in its Nasdaq-traded shares, which ended down 93 cents, or 3.86%, at $23.17, on volume of 65 million, or more than six times the usual turnover, as company officials woke up and smelled the coffee when it came to the likely impact that a slowdown in consumer spending, increased competition from such rivals as McDonald's and Dunkin' Donuts and higher dairy prices, among other factors, will have on its finances.

Starbucks said U.S. traffic at its established locations fell 1% in the quarter - its first ever year-over-year drop - as economic worries and price rises spooked consumers.

Despite its 35% profit jump for the fiscal fourth quarter, the company lowered its fiscal 2008 revenue and earnings projections from previous levels, and also to below what most analysts are expecting. It also said that it would open 100 fewer new stores than previously planned during the coming year.

Merrill moves up

Elsewhere, Merrill Lynch's 4.79% notes due 2010 were seen having tightened about 12 bps on the session to around 217 bps, apparently aided by the end to the uncertainty about the big brokerage's future following the recent ouster of O'Neal amid wider-than-expected writedowns and losses. The company said at midweek that former Goldman Sachs executive Thain - most recently in a key position with the New York Stock Exchange - will assume the CEO duties, the first time Merrill has ever gone outside its own ranks for its top official.

Broker spreads tighten

A trader said that Merrill Lynch's CDS tightened Friday to 115 bps bid, 123 bps offered, versus its late-Thursday level of 120 bps bid, 130 bps offered.

He also saw Bear Stearns narrow to 144 bps bid, 152 bps offered versus 147 bps bid, 157 bps offered late Thursday, Lehman move down to 120 bps bid, 128 bps offered from 124 bps bid, 134 bps offered late Thursday, although Morgan Stanley's was more or less static at 97 bps bid, 105 bps offered versus 97 bps bid, 107 bps offered late Thursday.

Also in the CDS market, Fannie Mae's credit protection costs were seen to have risen after the company completed a conference call with investors to discuss accounting matters. The CDS spread widened by 3 bps to about the 53 bps bid area, and has widened some 10 bps over the past two sessions.

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