Agilent, UniCredit, American Movil, Wells Fargo, JP Morgan price issues; Merrill news sets tone for day

By Andrea Heisinger and Paul Deckelman

Omaha, Oct. 24 - Despite a rocky start to Wednesday with Merrill Lynch & Co. announcing a hefty third-quarter loss, issues priced from Agilent Technologies, Inc., UniCredit Luxembourg Finance SA, American Movil SAB and Wells Fargo & Co.

The $7.9 billion loss from Merrill was larger than the $3 billion anticipated and affected potential issuers.

"It kind of set the tone for the day," one market source said.

"There was a lot of upheaval this morning coming in after that third quarter loss was announced," another source said.

"We can't say we didn't see it coming."

There will likely be more bad news coming from other investment banks that haven't announced third quarter numbers.

"Bank of America and Lehman haven't announced theirs yet, so I think we're going to see more of this coming," a source said.

Still, in the secondary market, a generally firm tone was seen, with advancing issues outpacing decliners by about an eight-to-five margin, although overall market volume slid by some 31% from Tuesday's busy levels.

While the overall tone was better, that was generally not the case in the important financials sector, where Merrill Lynch's bonds were seen mixed-to-mostly lower after the big investment bank reported a considerably wider-than anticipated third-quarter loss due to a much wider-than-expected write-down due to bad debt tied to risky mortgages and structured paper.

The costs of insuring its debt against a possible default via credit default swaps contracts gyrated around but also eventually widened, as did CDS spreads for other major investment banks such as Lehman Brothers and Morgan Stanley, apparently on the market belief that they may still have other shoes to drop.

Outside of the financial names, activity was seen as quiet, although there was some activity and a fair amount of spread-tightening seen in the bonds of telecom providers Vodafone Group PLC and Sprint Nextel Corp.

Agilent brings split deal

Some issuers braved the market despite the news from Merrill Lynch.

Agilent priced an upsized split-rated issue of $600 million in 6.5% 10-year senior notes at 99.60 to yield 6.555%, or a spread of Treasuries plus 222 basis points.

The issue was upsized from $500 million and was drawing a pretty good mix of accounts from investment grade and high yield, a source close to the deal said.

Bookrunners were Citi and J.P. Morgan.

Wells Fargo priced $100 million in three-month Libor plus 30 bps five-year medium-term floaters at par. Sole bookrunner was Bear Stearns & Co.

America Movil's $1 billion

American Movil sold $1 billion of global bonds in two tranches.

The $600 million tranche of 5.625% 10-year bonds priced at 99.633 to yield 5.673%. The $400 million tranche of 6.125% 30-year bonds priced at 99.047 to yield 6.195%.

Bookrunners were Credit Suisse and Goldman Sachs.

The Rule 144A issue from UniCredit Luxembourg was $750 million in subordinated notes priced at 99.962 to yield 6.01% at a spread of Treasuries plus 170 bps. Bookrunners were Citigroup, Goldman Sachs and HvB.

JP Morgan reopened its 5.375% five-year global notes to add $750 million. They were added to an issue of $1.25 billion from Sept. 24, bringing the total to $2 billion. J.P. Morgan acted as bookrunner.

No calendar

The uncertainty in the market has led to few issues being announced prior to the day they price, one source said, commenting there's nothing on the calendar for the rest of the week.

"Everything is kind of day to day now," he said. "We kind of decide in the morning if we're going to go with something or not."

Merrill short issues down

Merrill Lynch's bonds were all over the map, with the shorter-term issues initially posting gains, only to end the day lower while longer duration paper was mixed.

For instance, the company's actively traded 6.05% notes due 2012 were seen around midday trading at a spread of 144 basis points over comparable Treasuries, a 6 bps tightening from late Tuesday, but by the end of the day, had widened to 161 bps over, 11 bps wider on the session.

While a market source saw its 6.40% notes due 2017 having had widened out by 14 bps to some 177 bps over in fairly busy trading, at another desk, those bonds were seen having rallied strongly in late dealings, with the spread accordingly cascading downward to end about 12 bps tighter, at around 150 bps over.

Everyone agreed, though, that the company's 6.11% bonds due 2037, another fairly busily traded issue, had ballooned out by some 38 bps at the close to 205 bps over.

A market source saw Merrill's 2026 bonds down nearly 2 points on a dollar-price basis, which translated to around a 20 to 30 bps widening, he said, "obviously not good."

Merrill Lynch reported a net loss following preferred dividend payments of $2.31 billion, or $2.82 per share - a sharp deterioration from its year-earlier profit of $3 billion, or $3.50 per share. Revenues slid by 94% to just $577 million versus $9.83 billion a year ago. The bad numbers shocked Wall Street, which had only been expecting a net loss of under 50 cents per share - the figure that Merrill itself had projected several weeks earlier, when it warned that it would finish in the red due to the continuing fallout from the mid-year credit crunch. Analysts had also anticipated that revenues would come in at a less terrible $3.25 billion.

The worse-than-expected numbers are chiefly attributable to the much larger than expected $8.4 billion write-down which the company took, with about $7.9 billion of that in connection with bad debt stemming from risky mortgages and structured paper. When it first issued its earnings warning on Sept. 28, Merrill Lynch estimated the size of the write-down it would be forced to take at some $4.6 billion - itself a huge number and the largest hit any Wall Street firm was expected to take.

However, Merrill Lynch chief executive officer Stanley O'Neal said in a news release and later on a conference call that in light of the difficult credit markets, the company wanted to err on the side of caution. It subjected its numbers to additional analysis, and "re-examined our remaining CDO positions with more conservative assumptions. The result is a larger write-down of these assets than initially anticipated."

Merrill Lynch ended up writing down some $6.9 billion connected with its positions in collateralized debt obligations, and another $1 billion connected with its subprime holdings - which still total $15 billion and $6 billion respectively, raising the possibility of future losses and write-downs.

O'Neal said that "we expect market conditions for sub-prime mortgage-related assets to continue to be uncertain and we are working to resolve the remaining impact from our positions."

"It was a tough day for them," market analyst Eric Rasmussen of Boston-based Advantage Data Inc. said, noting that while the loss and write-down numbers reported Wednesday are mind-boggling, "they're being honest, and they're being a little more rational than some of the other [financial names] that came out earlier."

He said that Merrill "is telling it like it is - and I think that traders, investors and analysts are starting to see that this is no one-time deal - this isn't going to just blow over in one quarter. It's going to take a couple of quarters to get through this whole mess."

The giant brokerage, he said "took a big risk. They've done it in the past, the way they did with energy quite a few years ago. They go out and get themselves into something in a big way, and sometimes it works - and sometimes, it doesn't. Obviously, this didn't work. The housing market bubble has popped, and they're paying the price for it. It's going to take a few quarters for all of this to unravel so we can see exactly how much damage was done."

He said even though Merrill "got themselves into this," and did not have strong management of its risk, he said the company nonetheless deserves some credit for now "taking a conservative approach" and opting to report bigger write-down numbers rather than smaller ones.

"Whether this means the losses that will be seen in the next few coming quarters will be smaller than the ones of their competitors" - on the theory that Merrill has gotten the bulk of the bad news out of the way sooner rather than later - Rasmussen does not know. He declared that "it will be interesting to see what kinds of losses now come out in the fourth quarter from the other financial institutions. When these [other] guys - Bear Stearns, Goldman Sachs, the other bulge banks - when they came out [with recent results], were they not giving us the full story?"

However, even with Merrill Lynch having owned up to huge losses and write-downs, he suggested the same thing might still be asked about Merrill. "Was Merrill's estimate right on target - therefore, a lot of the losses were seen in the third quarter? I don't know. We're going to have to see how that goes."

At any rate, he said, there is more pain ahead for the financials sector - certainly for many of the other names which did not report Merrill-sized losses or write-downs, and maybe again for Merrill itself.

"Investors are realizing now that this is not over."

He said that if someone were to ask him his advice on the sector, "I personally would stay away."

Other financials mixed

While Merrill's bonds were for the most part getting clubbed, Rasmussen said that other financial names presented a mixed bag.

He saw Lehman Brothers' 6.20% notes due 2014 having widened out about 20 bps on the day, although spreads on Goldman Sachs' 2017 notes "stayed pretty much" around where they already had been.

Another market source saw those Goldman 6¼% notes perhaps 1 bp wider at 155 bps over. That source also saw Bear's 5.55% notes due 2017 wider by 20 bps at 197 bps over, while J.P. Morgan's 6 1/8% notes due 2017 were also 20 bps wider, at 143 bps over.

CDS widen

The chance that there may other unpleasant surprises down the road meantime caused CDS prices to mostly widen out. While Merrill's debt protection costs were seen having initially come in solidly on the assumption that all the bad news was out there, they widened out later on to about 95 bps, out some 5 bps on the day, a market source said.

Lehman's debt protection costs were seen 10 bps wider out to 105 bps, and Morgan Stanley's some 5 bps higher on the day at 60 bps.

Anheuser, telecoms better

With big news taking place in the financial sector, a trader said, "there was very little focus on the industrials - the news was all in finance.

For instance, he saw Anheuser Busch debt little changed on the session, even as the brewery giant posed third-quarter earnings worth drinking a toast to. Another market source saw Bud's 6.45% notes due 2037 having tightened 6 bps on the day to 113 bps over.

The telecom sector meantime remains active and well bid for. A market source saw Vodafone's 5 5/8% notes due 2017 having tightened almost 20 bps in busy trading to around 131 bps over. And further spread tightening was seen in Sprint Nextel's 7 3/8% notes due 2015, on top of Tuesday's gains.

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