RBS prices extendible floaters; Lehman bonds widen despite 'strategic initiatives'

By Andrea Heisinger and Paul Deckelman

New York, Sept. 10 - Negative headlines continued to damp activity in the investment-grade primary Wednesday, on a day that had been expected to be busy but instead produced only a single issue, from Royal Bank of Scotland.

There were no other new issues to speak of, due to wary companies and investors scared away by the news of Lehman Brothers Holdings Inc.'s nearly $4 billion quarterly loss, and of continued woes at Washington Mutual.

"It was pretty dull out there today," a source said. "We can't say it was uneventful, but it wasn't very exciting."

In the investment-grade secondary market Wednesday, advancing issues trailed decliners by a ratio of seven-to-six, while overall market activity, reflected in dollar volumes was about even with Tuesday's pace.

Spreads in general were seen tighter, in line with higher Treasury yields; for instance, the yield on the benchmark 10-year issue rose 6 basis points to 3.63%.

For a second consecutive session Lehman Brothers Holdings Inc.'s bonds were the disaster of the day, widening out markedly in response to a bigger-than-expected multi-billion-dollar quarterly loss reported by the embattled investment bank - considered the weakest of Wall Street's major institutions and seen by many as the one most likely to follow in Bear Stearns' ill-fated footsteps. There was also a sense of market skepticism about the "strategic initiatives" that Lehman announced that it would undertake to try to shed risk and improve its financials.

Apart from the Lehman losses, Aetna Inc.'s new 10-year issue was seen continuing to firm from the spread over Treasuries at which the insurance company's bonds priced on Tuesday.

RBS prices extendible floaters

Royal Bank of Scotland priced about the only new issue of the day, with $2 billion in extendible floating-rate notes.

They have an initial maturity of 2009, with the option to extend to 2014. The initial coupon is three-month Libor plus 40 basis points, with a step up after.

Bookrunner was RBS Greenwich Capital.

Lehman unsettles primary

The announcement Wednesday that Lehman Brothers was going to have a $3.9 billion loss for the third quarter led to a quiet day in the primary market.

Any companies that may have been thinking of issuing, of which there were at least a couple, were left sitting on the sidelines.

"Obviously with any big headline name they would like to see some resolution," a source said of the companies considering issuing, in relation to the Lehman news.

"The market would like to see some resolution."

Until there is some news of what is to become of the investment bank, it's likely there will be very light volume.

Talk of Korea Development Bank buying Lehman is potentially still on, although some analysts have viewed it as a move of desperation.

Also hurting the market tone Wednesday was the news that Washington Mutual's credit-default swaps were more expensive, and the bank's stock shares down. This came after the bank replaced its chief executive and had its credit ratings cut as it has been hammered by the subprime mortgage meltdown and other economic troubles.

Until there are some positive headlines or a company that has a successful issue, there will not be much pricing.

"I don't think it's responsible advice to put anyone out ahead of it [Lehman] right now," a source said.

"People are waiting to see what happens."

It's not about whether a company needs money, but whether they see enough positive data points as encouragement to enter the market, he said.

"Until they get those positive data points, they're not going to come in.," he said.

A successful issue from Aetna Inc. Tuesday led some to believe that other companies would be encouraged by it pricing at the tight end of price talk.

"Aetna was more reflective of the name rather than the data points," a source said.

He was referring to the company's name recognition and credit ratings of A3/A-/A-.

Lower-rated issuers could still come into the market, but they too are going to need some encouraging headlines to look at and a need for capital.

"We're in a situation when no one's going to issue unless they really need to," a source said. "They have to pay enough that everyone's being kind of cautious."

The issue from RBS amid rocky market conditions wasn't too surprising, a source said.

"It's really not that surprising that we're seeing some flow, since it's not really connected to the regular credit," he said.

Unless some "dramatic news" comes out, and a defensive name comes to the market with a successful, and preferably sizable, issue, it's likely to stay quiet for the near future.

"Right now it's pretty name-specific out there," a market source said. "To varying degrees, an issuer's [credit] rating ties in. It comes down to unless they absolutely have to, no one's going to touch the market right now."

Lehman losses continue on poor numbers

For the second straight session, all eyes were focused on Lehman Brothers, which again was the market's biggest debacle following its poor quarterly performance.

"It was all about Lehman, again" a trader specializing in financial issues opined. "They were the bulk of the transactions that I've been seeing. Everything else was taking a back seat."

A market source saw the spread on its actively traded 6 7/8% notes due 2018 having shot up to 511 bps in the early going, a 33 bps widening out, before tightening modestly back to around the 501 bps level later in the day. Not too many trades were seen in it - but those transactions were for the most part very big, easily topping the $1 million threshold.

Another even more actively moving Lehman issue was the 6½% notes due 2017, whose gyrations were considerably more pronounced. A market source saw those bonds go home Tuesday at a greatly reduced dollar price level of 80, then open Wednesday a little off that low, just below 84 - but then collapse down into the mid-60s by the close. Accordingly, the bonds' spread, after improving, relatively speaking, to as tight as 566 bps over the 10-year Treasury, ballooned back out to some 989 bps in the afternoon - a yawning 350 bps deterioration on the day

However, another market source, who eliminated all of the smallish-outlier trades that made up the bulk of the activity in the 61/2s and just focused on changes in the bonds' round-lot levels, saw a less-pronounced deterioration of about 5½ points on a dollar-price basis to around 81, while seeing the spread widen to around 610 bps - still about a 100 bps change.

In the credit-default swaps market, the cost of protecting Lehman's debt - which on Tuesday had zoomed outward by more than 100 bps to the mid-to-upper 400 bps level - continued to widen out precipitously on Wednesday, pushing as high as 590 bps, a market source said, out another 100 bps on the day.

Lehman's bonds and CDS levels despite an improved performance as the day wore on from Lehman's New York Stock Exchange-traded shares, whose value was chopped nearly in half on Tuesday on more than six times their normal volume. Wednesday also saw the shares trade heavily - but while Lehman stock initially traded lower, they bounced off their morning lows and actually moved back into positive territory for a while. However, by day's end, the shares closed down 54 cents, or 6.93%, at $7.25, on volume of 256 million, or four times the usual activity level.

Lehman was the center of attention after the Number-Four U.S. investment bank - hard hit by the continuing mortgage market originated credit-crunch and the accompanying loss of investor confidence in its prospects - reported that in the fiscal third quarter it lost $3.9 billion, raising its losses this year to $6.5 billion. The red ink stands in stark contrast to its year-earlier profit of $887 million. In the latest period, Lehman logged gross write-downs of $5.3 billion on residential mortgages and $1.7 billion on commercial real estate positions.

With Wall Street in a tizzy over Lehman's prospects, particularly with the apparent failure of Lehman's efforts to line up a big capital infusion from the state-run Korea Development Bank after weeks of intense negotiations, the company unveiled plans for asset sales and other transactions to reduce risk and to raise capital. These measures include the sale of $4 billion in British mortgages to BlackRock Inc, a plan to sell a roughly 55% percent stake in some of its investment management businesses for perhaps as much as $8 billion - a deal which could be announced next month - and the spin off of $25 billion to $30 billion in commercial real estate assets in the coming year's fiscal first quarter into a separate company known as Real Estate Investments Global. Lehman will pump $5 billion to $7.5 billion into REI Global, and lend funds to it as well.

Even so, some observers said there was skepticism in some quarters of the market over whether the troubled Lehman would be able to successfully pull of those measures - or whether they would even help, since the Lehman plan as yet actually contains no firm commitment from anyone to come up with the hard cash the company badly needs after booking billions of dollars of writedowns and losses over the past year. The financial media has noted the fears of some investors that the troubled investment banking house could even follow in the footsteps of Bear Stearns and for all intents and purposes go out of business, at least as an independent company, the way the venerable Bear did when it was snapped up earlier this year at a virtual fire-sale price by banking giant J.P. Morgan Chase & Co. Inc.

Lehman's chief executive officer, Richard Fuld, said Wednesday that although he would prefer to keep the 158-year-old firm independent, he would also entertain any forthcoming offers to sell the entire company.

WaMu fiasco continues

Another troubled financial credit seen trading around was Washington Mutual Inc. - whose nominally investment-grade rated bonds have long since ceased being quoted on a spread-versus Treasuries basis, given that many are out more than 1,000 bps over their respective reference securities.

WaMu's 8¼% notes due 2010 were being quoted at 51 bid, 54 offered. The bonds, a trader said, were "all over the place.

"Towards the end of the day, a lot of sellers and very few buyers were seen, and bonds were offered without [bids]."

He estimated that the bonds were down 8 points on the day, in line with a plunge in the Seattle-based leading U.S. thrift operator's New York Stock Exchange-traded shares to $2.32 - a 17-year low. The shares plummeted 98 cents, or 29.70%, on volume of 214.4 million, about 2½ times the norm; they've already lost 92% of their value since the mortgage and credit-industry meltdown began in July 2007, on investor expectations that WaMu, a major residential lender, will have to write down additional billions of dollars of mortgages in its portfolio as borrower default rates remain high.

Another trader saw WaMu's 4 5/8% notes due 2014 languishing around 32 bid, well down from the 45.25 level at which round-lots were trading several days ago. He said that meantime, there had been a fair amount of smallish odd-lot transactions "that added up," but no really sizable dealings.

"I would have thought there were more active issues" than just those two, he said.

The company's 5 1/8% notes due 2015 were quoted as being actively traded at around the 50.5 level.

New Aetna bonds firm smartly

Apart from those financial disasters, a trader saw the new Aetna 6.50% notes due 2018 as having firmed to a spread of 277 bps over - in from the initial secondary levels of 290 bps bid, 285 bps offered at which the bonds traded on Tuesday, and in still further from the 295 bps level at which the upsized $500 million issue had priced earlier Tuesday.

A market source meantime saw the insurer's 6.75% bonds due 2037 having firmed some 15 bps on the session, to around the 290 level.

Telecom bonds a bell-ringer

Outside of the financials, which dominated investor and trader attention due to the twin Lehman and WaMu train wrecks, some brisk demand was seen in telecommunications bonds. One of the more active issues on the day was Verizon Communications Inc., whose 6.10% notes due 2018 were seen by a market source to have tightened strongly to about the 250 bps level from late-Tuesday levels around 315 bps, on a strictly round-lot basis. In dollar price terms, the bonds rose some 5 points on the session, although no one noted any fresh news about the telecom giant that might explain the tightening.

Another winner from that sector was AT&T Inc., whose 5.50% notes due 2018 were quoted at 210 bps over, a nearly 20 bps tightening on the day.

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