Volatile tone continues to scare away issuers; week sees more than $11 billion issuance; uncertainty ahead

By Andrea Heisinger and Paul Deckelman

Omaha, Nov. 2 - The week ended with a thud in investment grade as issuers again shied away from the market.

"I don't think anyone did anything today," one source said Friday.

This echoed Thursday's tone as the market took a tumble and most new bond issuance stopped.

"It was a weak open today, after a pretty sloppy day yesterday [Thursday]," a source said.

"Obviously there was a lot of volatility today."

The week ended with more than $11 billion in new issues, most of them pricing prior to the Wednesday announcement by the Federal Reserve of a 25 basis point cut to the federal funds rate.

Predictions going into the meeting were that an interest rate cut would propel new issues, but that was before Thursday's volatility in other sectors of the market.

In the secondary market on Friday, advancing issues - surprisingly - topped decliners by about a six-to-five ratio. One might not have thought that was the case, judging by the continuing turmoil in the important financial industry, with bonds of Citigroup and Merrill Lynch leading the way downward on negative comments about the two companies by Deutsche Bank and by Moody's Investors Service. Other financial names like Lehman Brothers were wider as a result, and the credit-default swaps spreads of names like Lehman and Bear Stearns also moved outward.

October hits $80 billion

The month of October saw nearly $80 billion in new issues, compared to September with about $101 billion.

Among the week's issuers were Coca-Cola Co., Motorola, Inc., Commonwealth Bank of Australia, McGraw-Hill Cos., Morgan Stanley, Tesco plc, Petrobras, SunTrust Banks, Inc., MassMutual Global Funding II, Textron Financial Corp. and Toyota Motor Credit Corp.

Upcoming issues were announced from Korea's Kookmin Bank, set to issue up to $300 million in five-year bonds, and China's Country Garden, with $1.5 billion or greater in two tranches.

Hyundai Capital Services announced a roadshow in the coming week for an issue of notes.

Wait-and-see mode

Prior to Thursday's market meltdown, sources were predicting a busy week ahead. That perspective changed.

"We're just going to have to go day by day now," a market source said.

"It's hard to see the future from here and I think we're looking at a pretty healthy backlog from all of this [volatility]."

Another source commented that there "could be a couple of issues Monday" but that issuers would "just have to wait and see."

Things improved late Friday afternoon from the weak open, a source said.

The month of November will likely look much like October, the source said, with around $80 billion in new issues.

"That could change if this volatility continues," he said. "We could see it pared back about $10 billion if that happens."

Citi, Merrill bonds head lower

Citigroup and Merrill Lynch were among the losers, their bonds falling along with their shares, after Deutsche Bank analyst Mike Mayo warned that each would probably have to take additional write-downs of about $4 billion for the current quarter, mostly due to their heavy exposure to subprime mortgages and collateralized debt obligations. That kind of exposure forced Merrill to take a total of $8.4 billion of write-downs when it reported third-quarter results last month. The company lost a sharply wider than expected $2.23 billion for the quarter, greasing the skids under chief executive officer Stanley O'Neal, who was forced to resign.

Citi's recently issued 5.3% notes due 2013 were quoted as having widened to a spread of about 125 basis points over comparable Treasuries at mid-afternoon, a source said, with the closing spread probably somewhat wider.

Meanwhile, Merrill's 6.4% notes due 2017 - one of the day's most actively traded issues - closed at 220 bps over, a source said - versus 190 bps at Thursday's close. On a dollar-price basis, those bonds fell nearly 2 points on the session.

Other financials follow suit

A trader said that "all of the banks were about 20 to 30 basis points wider" on the day, the sector pulled down by investor angst over the prospect that the big losses and writedowns racked up by the banking and brokerage giants are not yet over.

For instance, Lehman's 7% notes due 2027, whose price declined more than 1½ points, widened by 17 bps to about 250 bps by the close.

Deutsche Bank's Mayo said that besides Citi and Lehman, such banks as Bear Steans, Bank of America and Morgan Stanley might also have to take writedowns. He estimated total additional writedowns for the big banks this quarter at $10 billion, minimum.

Broker CDS spreads widen

Besides the cash bonds, the CDS debt-protection costs of major brokerage names also widened out by at least 20 bps on the day on average, reflecting investor angst.

A trader saw Bear Stearns' CDS spread widen to 160 bps bid, 175 bps offered versus 145 bps bid, 160 bps offered earlier in the session and 125 bps bid, 135 bps offered late Thursday.

He likewise saw Lehman's debt-protection costs jump to 145 bps bid, 160 bps offered versus 135 bps bid, 150 bps offered earlier, and 118 bps bid, 128 bps offered late Thursday.

Merrill Lynch's CDS cost stood at 125 bps bid, 140 bps offered - actually unchanged from earlier in the day, though wider than late Thursday's 99 bps bid, 106 bps offered. And Morgan Stanley's cost was 100 bps bid, 115 bps offered versus 95 bps bid, 110 bps offered earlier, and 87 bps bid, 94 bps offered late Thursday.

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