Rough tone ends short week of more than $3.45 billion in issuance; issuers wait to see what Monday brings

By Andrea Heisinger and Paul Deckelman

Omaha, Nov. 21 - New issue screens were blank Wednesday ahead of an early market close and long holiday weekend.

"Things are as bad as we've ever seen," one market source said. "It's typically bad ahead of a holiday."

Another source's assessment was not as dire, saying the tone is not as bad as it has been, although the market is pretty weak.

There's a ton of supply right now, the source said, and issuance is "beyond day to day right now."

"If there's a window, people will come," they said. "Hopefully things will get better after the holiday."

Spreads were wider in general from Tuesday, the source said.

A "quasi-sovereign" deal from Eksportfinans ASA was pulled Tuesday, he said, which did not give off good signals to others thinking of entering the market.

"If that couldn't get done, it doesn't bode well for the rest of them trying to get in," the source said.

What will Monday bring?

Most potential issuers will be waiting to see what Monday's tone looks like.

"Monday's going to be interesting," a source said. "There's quite a few on the sidelines and a lot of them would like to see a successful deal or two enter the market before they do. The last couple to come have caught some head winds."

It's a matter of who's going to take the first step, the source said, and if some successful deals enter the market, others will follow.

Issuers for the short week included Cargill, Inc. with $900 million in 10-year notes, Citigroup Capital XX with $750 million in preferreds, American Express subsidiaries with $550 million in three-year notes, Caterpillar Financial Services Corp. with $400 million in one-year floaters and Wachovia Corp. with $850 million in two-year floaters.

The issuance for the short week was more than $3.45 billion.

Secondary better

In the secondary market Wednesday trading had a generally firmer tone to it, with advancing issues leading decliners by a better-than five-to-four margin. But overall market volume was down about 40% from Tuesday's levels, and traders said they saw little in the way of issues moving around.

Even new bonds for Cargill Inc. merely hung around their issue price, while Wachovia Corp.'s recent issue was being quoted several basis points wider.

Traders saw credit-default swap spreads for brokerage names like Bear Stearns and Merrill Lynch having widened out over Tuesday's levels.

Countywide Financial Corp.'s nominally investment-grade rated bonds continued to fall on liquidity concerns about the big mortgage company. Despite their rating, some issues of the bonds are now trading at prices more appropriate to distressed junk paper, and are being quoted in dollar-price terms rather than on spread.

Activity down

A trader said that "zero, zero and less" was going on during the abbreviated pre-holiday session. "There's really nothing going on," he declared. "Spreads are a little bit wider - but that's just because there's no liquidity out there. Today and Friday are going to really be just nothing days." He said a lot of those people who were in on Wednesday were 'just doing their book-keeping stuff for the week, more than anything else."

He saw the new Cargill 6% notes due 2017, which had priced at 200 bps over comparable Treasuries on Monday, continuing to hover around 200/199 bps, "so there's really no change in that." He also saw not a trace of the new Caterpillar Financial one-year floating-rate notes, which had priced Tuesday at 12 bps over the three-month Libor rate.

He also saw no activity in Deere & Co. bonds, even though the heavy-equipment company had posted blowout earnings for the fiscal fourth quarter, its $1.88 per share far exceeding the roughly $1.55 per share Wall Street had been looking for.

Among the financial issues, a trader said that it was "a thin market - things are weaker by about 2 to 5 bps.

He noted that Wachovia Corp.'s new 6% notes due 2017, which priced the week before at 195 bps over, were now being quoted at 197 bps bid, 193 bps offered, having widened out from 194 bps bid, 190 bps offered on Tuesday.

He also said it appeared that Washington Mutual was "taking it on the chin a little bit," and noted the continued turmoil in Countrywide bonds, sparked by continued rumors about possible liquidity problems.

Countrywide carnage continues

At another desk, a market source saw the Countrywide 6¼% notes due 2016, which had lost 3 or 4 points in heavy trading on Tuesday, pick up right where they had left off and fall another 4 points to 59.5 in Wednesday's dealings, on continued investor angst about the Calabasas, Calif.-based mortgage giant's liquidity situation - this despite a pronouncement from the company Tuesday afternoon that everything was fine on that front, despite scary headlines and market buzz otherwise.

The renewed market concern over a possible liquidity crunch at the nation's largest independent mortgage provider stemmed from poor quarterly results from government-sponsored mortgage financier Freddie Mac, which raised the specter that the latter company might have to stop buying pools of securitized mortgages from companies such as Countrywide.

Despite Countrywide management's reassuring words Tuesday - which had allowed it to minimize its stock losses on the day - its New York Stock Exchange-traded shares again headed south on Wednesday, falling 86 cents, or 8.37%, to $9.42. Heavy volume of 120 million shares was three times the average daily turnover.

Broker CDS spreads widen

A trader said that brokerage-house CDS moved wider versus the levels they had held on Tuesday.

He saw Bear Stearns' debt-protection costs widen to 195 bps bid, 205 bps offered, versus 185 bps bid, 195 bps offered Tuesday at the close.

He saw Lehman Brothers' CDS cost at 160 bps bid, 170 bps offered, compared with 142 bps bid, 147 bps offered on Tuesday. Merrill's credit-swap spread widened to 165 bps bid, 175 bps offered from 137 bps bid, 142 bps offered, while Morgan Stanley's moved out to 125 bps bid, 135 bps offered versus 117 bps bid, 127 bps offered Tuesday afternoon.

Bank CDS were also wider, by about 5 to 10 bps, Citigroup at 100 bps bid, 105 bps offered, Bank of America and JP Morgan each at 72 bps bid, 77 bps offered, and Wachovia at 115 bps bid, 123 bps offered. Washington Mutual's stood at 465 bps bid, 495 bps offered, while Fannie Mae and Freddie Mac were each seen at 67 bps bid, 72 bps offered, about 5 bps wider on the day.

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