EDP Finance prices notes to end week of about $12 billion issuance; Countrywide sharply better

By Andrea Heisinger and Paul Deckelman

Omaha, Oct. 26 - An issue from EDP Finance BV Friday capped a week of about $12 billion in new issues.

The company priced $2 billion of notes in two tranches.

The $1 billion of 5.375% five-year notes priced at 99.779 to yield 5.426% at a spread of Treasuries plus 140 basis points.

The $1 billion of 6% notes due 2018 priced at 99.854 to yield 6.015% at a spread of Treasuries plus 163 bps.

Bookrunners were Barclays, Citigroup and Morgan Stanley for the Rule 144A issue.

The markets overall were helped by Countrywide's earnings release Friday, a source said.

"In the new issue perspective, it's not like we saw anyone jump in because of it," he said.

"They could still jump in the early part of next week if things look good."

A source close to the EDP deal said the Countrywide news didn't affect its pricing.

"It was pretty far from the mortgage market, so that news didn't affect it at all," the source said.

Issuers for the week included Bank of New York Mellon Corp., Union Pacific Corp., Washington Mutual, Inc., Panhandle Eastern Pipe Line Co., L.P., J.P. Morgan Chase & Co., Fifth Third Bank Capital Trust VI, UniCredit Luxembourg Finance SA, Wells Fargo & Co., Diageo Capital plc, America Movil SAB de CV and JSC VTB Bank.

Traders looking at the week ahead said most issuers will likely wait until the latter half of the week after the Fed meeting wraps up on Wednesday.

"We'll have to wait until the open on Monday to see what's going to happen," a market source said.

"The default approach is to wait until after the Fed," one source said.

A 25 bps cut to interest rates is anticipated, the source said, although not guaranteed.

One source predicted a busy week ahead, but another wasn't so sure.

"It could go either way," the source said.

In the secondary market, which had a fairly neutral tone to it on Friday, with advancing issues roughly even with decliners, things were much quieter than they had been on Thursday, with overall market volume sliding by some 38%.

In the important financial sector, Countrywide Financial Corp.'s bonds were the big winners, their spreads tightening markedly in very active trading as investors looked beyond the large loss the company reported, encouraged by its more optimistic outlook for 2008.

Merrill Lynch's bonds, on the other hand, were mixed, even as its stock rose solidly on takeover talk - as well as reports that embattled chief executive Stanley O'Neal could be on the way out for allegedly initiating merger discussions with a potential buyer while not getting permission of his board.

Outside of the financials, Home Depot's bonds, and United States Steel Corp.'s, were both seen markedly lower

Countrywide tightens despite big loss

In trading, the name of the day seemed to be Countrywide, which reported a $1.2 billion loss for the third quarter - but which said that it will be black in the fourth quarter and in 2008.

A trader noted that its 6¼% subordinated notes due 2016 - split-rated at Ba2/BBB+/BBB and still traded off the investment-grade desks at many shops, even though its price levels are more like those of distressed junk bonds (for that reason, some crossover, and even junk desks also trade it) - were up a good 4 to 5 points on the session to the 81-82 area from prior levels in the upper 70s.

On a spread-versus-Treasuries basis, those bonds tightened to around the 490 basis points level on Friday - an astonishing 87 bps narrower than the bloated 578 bps spread at which they were quoted going home on Thursday.

The trader said that Countrywide's 3¼% notes due 2008 were up 2 points at 95.5 bid, 97 offered and its 4¼% notes slated to come due on Dec. 15 were 1½ points up on the day at 98.75 bid, 99.75 offered.

Another market source saw Countrywide's 5.80% notes due 2012 among the most actively traded bonds on the session, and firming handsomely, up more than 3½ points on the day to a mid-88 level; on a spread basis, those bonds tightened to 481 bps versus the previous days' swollen spread in the 590 bps region.

Such eye-popping spread tightening was by no mean limited to the company's cash bonds; the cost of a credit default swaps contract bought to hedge against a possible default on the Calabasas, Calif.-based mortgage lending giant's paper came in at one point during the session by as much as 140 bps from Thursday's levels before widening back out a little later on, ending at about 360 bps over - still a pickup of more than 100 bps over the close a day earlier.

The investor confidence in Countrywide was replicated in the equity market, where its New York Stock Exchange-traded shares zoomed 32.36%, or $4.23, to end at $17.30, on volume of 123 million, triple the norm.

All of this came against the backdrop of the company reporting a third-quarter loss of $1.2 billion, or $2.12, or $2.85 including effects of new convertible preferred stock, versus its year-earlier profit of $647.6 million, or $1.03 per share. The loss came in around the middle of the wide range Wall Street was looking for, with some analysts having expected as little as $700 million of red ink, while others thought it might be twice that amount, or even more.

To reach that figure, its first quarterly loss in 25 years, Countrywide - the largest U.S. mortgage lender, writing one mortgage out of every five - took write-downs of $1 billion in loans and securities and $1.9 billion from reduced values of its securitized loans, while also upping its provision for loan losses to $934 million, more than triple the level it reported at the end of the second quarter on June 30. The company said that it was taking that step because a rising number of its customers who have home equity and "pay-option" adjustable-rate mortgages are falling behind on making those payments.

But by taking such drastic medicine now, Countrywide hopes to be able to get out of what its president, David Sambol, termed its "earnings trough" as he spoke to investors, analysts and journalists on the company's conference call following the release of the numbers. He projected that by writing down the value of questionable loans sooner rather than later and by tightening its belt - including 10,000 to 12,000 job cuts, possible because the company is writing fewer loans than it used to - Countrywide should be able to earn between 25 cents and 75 cents a share in the fourth quarter and stay profitable next year, although he gave out no profit projections for the latter time period.

Actions seen as 'proactive'

"The loss was clearly a lot bigger than the Street was anticipating, in terms of EPS," said a sell-side analyst, who spoke on the condition of anonymity, "but in our view, the company was actually pretty forthcoming in terms of trying to deal with the fact that they are going to be facing higher losses in their portfolio over the coming four to six quarters. It was more proactive, perhaps, than most of the other companies in our coverage, in trying to get their credit costs and reserves in line with what those future losses are going to be.

"While it was obviously disappointing quarter from an EPS perspective, I think that a lot of what the market was responding to, at least on the debt side, was the fact that they appeared to be coming to grips with the credit-costs issue, and at least sounding more positive than most of us expected them to sound for 2008."

The analyst said that "the comments that the company made on the conference call were pretty key, because just looking at the press release, it was hard to get a sense of exactly what their thought process was behind a number of the credit costs that they took in the quarter, and our sense was the company really was trying to be proactive in terms of reserving, both for the health of the investment portfolio, but also for their residual portfolio and other potential challenges going forward."

He said that what Countrywide is apparently trying to do is "pulling losses forward into the third quarter - their hope is that they won't have to reserve as aggressively going forward." However, he cautioned that "even they offered a pretty sobering view of their thoughts about what home-price appreciation trends would be in 2008 - but I think right now, the market is really focused on the fact that it was not as weak a quarter as many of us expected."

Even before reporting its numbers, Countrywide has been in the news lately, cast in both a positive and negative light - positive in announcing a program several days ago aimed at helping out the borrowers of some $16 billion of ARM mortgages by assisting them in refinancing those once attractive but now suddenly perilous loans into something safer, and negative with the continuing controversy that swirls around company chairman and chief executive officer Angelo Mozilo, who now faces a Securities and Exchange Commission probe into the propriety of his sale of an estimated nearly $300 million of Countrywide shares over the past two years. Mozilo - who insists that he did nothing improper and says he is cooperating with the federal probe - has said that his exercise of stock purchase options and share sales have been triggered automatically as part of his overall pension plan - but critics note the unfortunate timing, with many of those transactions taking place as the sub-prime mortgage industry crisis deepened and rising numbers of borrowers fell behind on their mortgages or were even foreclosed.

The analyst said that the first development - the $16 billion program - represents only 1% of the company's servicing portfolio, "so it's hard to see how this moves the needle in anything other than [public relations] viewpoint." As to Mozilo, he declined to opine whether the stock-sale questions suddenly make makes the veteran CEO too controversial to effectively guide his embattled company - but offered that "from a bondholders' perspective, I don't know that this is an issue bondholders spend a lot of time worrying about."

Merrill bonds seen mixed

Another suddenly controversial financial industry CEO was at the center of speculation of another sort on Friday, as Wall Streeters wondered whether Stanley O'Neal of Merrill Lynch - already on thin ice after his company reported a considerably larger than expected $2.24 billion quarterly loss - might be forced to walk the plank on the pretext that he had allegedly opened merger negotiations with banking giant Wachovia Corp. without informing Merrill's board of directors.

The possibility of some executive blood-letting excited equity investors, who took the Big Bull's shares up more than 8% on three times the usual volume, but bond investors were a little more guarded in their outlook. A market source saw the big investment bank's 6.05% notes due 2012 as having widened to a spread of 160 bps, some 16 bps over where the bonds were trading at mid-week, although its 6.40% notes due 2017 were seen having come in by almost that same amount from their mid-week levels to stand at 172 bps over.

However, another source saw the five-year bonds as having actually narrowed by about 9 or 10 bps from their Thursday close, with the 10-years around 8 bps tighter on the day.

Steel, Home Depot widen

While the financial sector dominated the headlines, among the non-financial industrials, U.S. Steel's 6.05% notes due 2017 were seen having widened some 40 bps on the session - corresponding to a more than 3 point dollar-price loss on the day - to finish out at 205 bps.

Home Depot's 5 7/8% notes due 2036 were quoted about 18 bps wider at 227 bps, as the bonds lost more than 2 points in price.

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