Popular prices preferred stock; market sags as spreads widen, recent issues underperform

By Andrea Heisinger and Paul Deckelman

Omaha, May 22 - A week that started off with a flood of new issues slowed to a trickle Thursday with Popular, Inc. pricing one of the only issues of the day.

The issue of non-cumulative preferred stock was announced more than two weeks ago, on May 6, at $350 million.

The size was increased to $400 million, or 16 million shares, prior to pricing Thursday. The 8.25% perpetual preferreds were priced at $25 per share and are non-callable for five years.

UBS Financial Services of Puerto Rico and Popular Securities were bookrunners.

In the investment-grade secondary market Thursday, advancing issues trailed decliners by a better-than eight-to-five margin, while overall market activity, reflected in dollar volumes, fell about 21% from Wednesday's pace.

Spreads in general declined as Treasury yields rose, with the yield on the benchmark 10-year issue, for instance, widening by 9 basis points to 3.91%.

A trader characterized the session - the final full trading day ahead of the upcoming Memorial Day holiday break - as "early quiet," with financial names particularly seen generally weaker "across the board," particularly after a Ladenburg, Thalmann & Co. equity analyst downgraded the shares of such sector players as Lehman Brothers Holdings, Merrill Lynch & Co. and Goldman Sachs Group, and cut his 2008 outlook for Morgan Stanley.

Some new deals weak

Back in the primary, one source said that after a couple of Wednesday's issues didn't perform well, notably International Lease Finance Co., issuers were likely hesitant to get into the market.

The issue widened considerably between talk and pricing - by his estimates 40 basis points - and could have impacted anyone thinking of getting in before the long weekend.

"People are backing off right now," a source said. "The market needs to take a breather."

The new issue market was slightly weaker Thursday.

"Things are marginally softer right now and people are definitely wary," a source said.

The CDS market and spreads were both wider after the Dow Jones Industrial Average was down two days in a row and oil prices rose, he said.

Terms were given Thursday for two of the previous day's issues.

Veolia Environnement priced a $1.8 billion, three-tranche issue late Wednesday.

The issue consisted of $700 million 5.25% five-year notes priced at Treasuries plus 225 bps, $700 million 6% 10-year notes priced at 225 bps and $400 million 6.75% 30-year notes priced at 230 bps.

Banc of America Securities LLC, Credit Suisse Securities, Deutsche Bank Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Inc. were bookrunners.

PartnerRe Finance A LLC priced its $250 million issue of 6.875% 10-year senior notes that was announced Monday after marketing was finished.

The notes priced to yield 7% via Credit Suisse and Wachovia Capital Markets.

Brazil's Bndes is about the only issuer with an upcoming offering on the table.

The development bank intends to do a benchmark-sized issue of 10-year senior unsecured bonds via Morgan Stanley & Co. Inc. and Citigroup Global Markets Inc.

Friday is seen as being quieter than Thursday, with no issues expected before the early market close.

Many are waiting to see if conditions rebound Tuesday or Wednesday next week, sources said.

"Tomorrow is definitely what you would call a non-event," one source said. "We're done for the week."

Liberty Mutual better

A trader saw the new Liberty Mutual 10¾% hybrid bonds due 2088 trading around 99 bid, 99.5 offered, versus the 97.805 issue price at which the $1.25 billion of bonds had priced on Wednesday.

Apart from that, he said that "it was a pretty quiet day, across the board. There was no new issuance to speak of."

For instance, he saw no activity in the new Wells Fargo Corp. notes due 2011, which priced Wednesday at a spread of 146 bps over comparable Treasuries. The company reopened the deal Thursday, to add $250 million onto the original $600 million.

Financial mostly weaker

Other than the strength showed by Liberty Mutual's new paper, "banks and financials were a little weaker across the board. Once they hit a bottom, they kind of held steady after that, and maybe even traded up a bit - but they're definitely at [or near] their lows."

He said he had not seen much of other recent bank and financial debt.

However, some of it was seen moving around.

J.P. Morgan Chase & Co.'s 6.40% bonds due 2038 were seen by a market source trading at 178 bps over on Thursday - well in from the 195 bps level at which the $2.5 billion of bonds had priced just a week ago.

It's 4.75% notes due 2013 traded at 170 bps over, in from 185 bps when the $2.5 billion of bonds priced on April 23.

The banking giant's 7.90% perpetual securities traded at 102 Thursday - well down from the 103.5 bid level they'd held on Wednesday.

In the credit-default swaps market, a trader saw bank debt-protection costs 4 bps to 12 bps wider, while brokers were 5 bps to 15 bps wider. In particular, he saw the cost of protecting Merrill Lynch's bonds against a possible default 15 bps out, at 185 bps bid, 195 bps offered, while Lehman Brothers Holdings' CDS costs pushed out to 182 bps bid, 188 bps offered.

The companies' CDS costs ballooned outward after Ladenburg Thalmann analyst Richard Bove warned that those banks' economic performance may suffer this coming summer. He changed his rating on the stock of Lehman , Merrill and Goldman Sachs to "sell" from "neutral," and also cut his 2008 outlook for them and for Morgan Stanley. Goldman's CDS cost meantime pushed out by 15 bps to 105 bps bid.

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