Market mops up after heavy day of issues; coming week to see moderate calendar barring bad headlines

By Andrea Heisinger and Paul Deckelman

Omaha, March 20 - The investment-grade market was quiet Thursday ahead of an early close and long holiday weekend.

"We're just mopping stuff up from yesterday," a trader said. "Not much happening other than that."

In the investment-grade secondary market Thursday, advancing issues outnumbered decliners by a six-to-five ratio, while overall market activity, reflected in dollar volumes, fell by about 36% from Wednesday's levels.

Treasury yields were seen mixed, with the benchmark 10-year issue, for instance, declining 1 basis point to 3.33%.

Weatherford International, Ltd.'s newly priced paper was seen having firmed, while most of the other bonds that priced in Wednesday's busy session were little changed.

CIT Group Inc.'s bonds continued to erode badly, trading at distressed junk-like levels, particularly after the company announced it was forced to completely draw down its credit lines. Credit default swaps protecting CIT bondholders against a possible event of default also widened.

However, CDS spreads of banks such was Wachovia and Washington Mutual, and brokerages such as Bear Stearns, narrowed - a sign of increased investor confidence in the recently shaky financial sector.

One-day issuance surge

Reviewing the holiday-shortened week in the primary, issuers took advantage of a one-day window Wednesday, bringing more than 10 new issues into the market.

This, along with a couple of other issues comprised the week's issuance.

PNC Bank NA priced an issue before the Federal Reserve meeting Tuesday, leading a market source to say it had to have been pre-sold for the company to be brave enough to issue before a rate cut announcement.

Hartford Life Global Funding priced an issue of extendible floating-rate notes at the beginning of the week.

The bulk of issuers came on Wednesday, including those from British Telecommunications plc, Kroger Co., Commonwealth Edison Co., Packaging Corp. of America, MidAmerican Energy Co., Appalachian Power Co., Bank of New York Mellon Corp., Caterpillar Financial Services Corp., International Lease Finance Corp. and Weatherford International.

Issuance for the week totaled more than $7.5 billion, comparing to last week's more than $17 billion.

One issue was announced Wednesday, and then pulled.

Dun & Bradstreet Corp. announced an issue of five-year senior notes through a Securities and Exchange Commission filing.

It was later pulled, with market sources saying they saw no official reason announced as to why.

The coming week should have a healthy amount of new issues, sources said Friday, but not as much volume as the last couple of weeks.

"There's not an overwhelming calendar for the next week, but there are issuers on the sidelines lining up," a source said.

"I think we'll see trades Monday."

This is all dependent on continued stability. Friday was stable in the relative sense, a source said.

"A single day's worth of headlines can make or break the market," he added. "It's definitely still day to day."

Weatherford narrows

A trader said that Weatherford International's new 10-year notes, which had priced at a spread of 270 bps over comparable Treasuries on Wednesday, were about 10 bps better than that pricing spread and were the "most active" among the new-deal names. Most of the other bonds which had priced in the big deluge of new paper on Wednesday were trading around issue, he said.

Wells Fargo, JPMorgan better

Among existing issues, upsiders included financial operators Wells Fargo, whose 5.625% notes due 2017 tightened to 174 bps, JP Morgan Chase, whose 6% notes due 2018 narrowed to 126 bps over, and Bear Stearns, whose 4.55% notes due 2010 improved to 861 bps over from previous levels approaching 1,000 bps over.

A downsider was Wal-Mart Stores, whose 4.5% notes due 2015 widened out to 174 bps.

CIT slide continues

But the major loser on the day was CIT Group's nominally investment-grade paper, which continued to trade at levels more befitting distressed junk bonds - depths to which the New York-based commercial lender's paper had fallen following a series of ratings downgrades earlier in the week which shut off the money spigots of the commercial paper market, forcing the company to draw down its backup bank credit lines.

With spreads on most of the CIT paper having ballooned out beyond 1,000 bps over Treasuries - the traditional mark of distressed debt - traders were freely quoting the bonds on a dollar-price basis.

A trader saw its 4¾% notes due 2010 trading at 70 bid, 72 offered, well down from prior levels around 83. Some CIT issues had slid more than 10 points in Wednesday's dealings.

"Anybody with any leverage, [investors] are just taking them out and shooting them in the head," the trader said. "Any kind of leverage - except for these primary dealers, who can go to the Fed window [to borrow capital to sustain their liquidity]. So they're just taking over all of these positions from these people who are in a weak position. They'll probably hold it and sell it off at a later date."

With no such access to the Federal Reserve's borrowing window, CIT Group was forced to completely draw down its $7.3 billion emergency credit line after ratings downgrades earlier in the week left it unable to finance its operations with commercial paper. CIT also said Thursday that it may also have to sell assets - billions of dollars of loans and perhaps some of its businesses - and is currently seeking a strategic funding partner.

Its numerous issues of bonds seemed to dominate the lists of the most active movers, with all of them listing badly to the downside.

A junk trader noted that at his desk, it seemed, the day's action "was all CIT," as its nominally high-grade bonds moved "from investment grade yields down to around 18% to 24%." He quoted the 4¾% notes at 67 bid, 69 offered - and frankly allowed that "we weren't following it" up until now at his shop. Its 5.60% notes due 2011 fell to 66 bid, well down from prior levels in recent weeks at least 20 points higher.

Another trader saw the company's 3 7/8% notes coming due on Nov. 3 at 75 in odd-lot trading and at 79 in round-lot trading - a yield of 47%, "not bad for a A3/A- bond - which they won't continue to be, I'm sure they will be downgraded again" following this week's downgrades by the major ratings agencies.

Another junk bond trader said that CIT hasn't been trading at his shop - yet - "but we will be involved in CIT."

But the fall in CIT paper was by no means universal. A market source said that the company's 4¾% notes due 2010 were up more than a point at about the 71 level, while its 4.65% notes due 2010 - seen having plunged as much as 18 points Wednesday down to around the 71 level - regained a little of that on Thursday, finishing at 72.5 in busy dealings.

CIT's NYSE-traded shares plunged $2.01, or 17.27%, in Thursday's dealings to end at $9.63. Volume of 77 million shares was nearly 13 times the average daily handle.

CIT's CDS costs rose to 27 bps upfront plus 500 bps annually, from 24.5 bps up front plus 500 bps annually on Wednesday.

Financial CDS spreads mostly unchanged to tighter

A trader meantime saw debt-protection costs for major bank names narrow anywhere from 2 bps to 10 bps, with Wachovia Bank's CDS cost in by 10 bps at 165 bps bid, 180 bps offered.

Citigroup's CDS cost narrowed by 2 bps, while Washington Mutual's spread tightened by 10 bps to 590 bps bid, 610 bps offered.

The banks, he said, "were better across the board."

Brokers on the other hand were sort of a mixed bag. He saw Bear Stearns' CDS cost improve by 25 bps to 330 bps bid, 350 bps offered - less than half the level at which those debt-protection contracts had been trading a week earlier, before JP Morgan emerged as Bear's buyer and its debtholders' rescuer.

But Merrill Lynch's CDS cost widened by 15 bps to 260 bps bid, 275 bps offered. Lehman Brothers' CDS were at 260 bps bid, 280 bps offered, while Morgan Stanley was at 193 bps bid, 203 bps offered, both unchanged on the day.

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