Rough conditions still halt new issues, Procter & Gamble plans 50-year floaters; financials head lower

By Andrea Heisinger and Paul Deckelman

Omaha, Nov. 5 - It was another sloppy day for potential bond issuers, with news of Citigroup's larger than expected write down and other market conditions scaring them away.

"It was a really soft open, and Citi dictated so much of the day," a source said.

It was one of several consecutive volatile days leading investment grade issuers to hold off. The unsavory conditions have to get better at some point, one source said.

"This was the third or fourth consecutive day of flagging down," he said. "This can't continue forever."

An upcoming issue was announced from Procter & Gamble Co. The company plans to issue 50-year floaters via sole bookrunner UBS Investment Bank.

A source close to the deal said it is unknown when the issue will come to the market.

Traders were blunt in their assessment of how market conditions continue to stay negative.

"It's awful," one source said. "It's pretty bad out there. Everything's feeling pretty rough right now."

The continued negativity hasn't widened spreads much, the source said.

One effect conditions did have was that some issuers pushed back deals expected to price Monday.

One source said this was the case with a couple of issuers that were supposed to go.

"It's just soft day after day, and it adds up after a while."

Citi was the latest in a string of investment banks announcing large writedowns for the third quarter. It was also the second to have its CEO resign in the wake of the writedown.

There is speculation that there will be further writedowns coming this week, sources said, with particular attention focused on American International Group due in the middle of the week.

Things could pick up in the next couple of days, said one source who was optimistic, based on the number of days of volatility.

"I think if we have one good day then we're going to see quite a few issuers putting out their best stuff," the source said. "It's hard to tell when that will happen."

Predictions at the beginning of the month were that there would be about the same amount of issuance as October, which came in at about $80 billion. Continued volatility could knock it down to around $70 billion, sources said.

Financials drag down secondary

In the secondary market Monday, more bad news from the key financial sector cast a pall over the high-grade market, which saw declining issues outnumber advancers by about a six-to-five ratio, with little change from Friday's lackluster volume.

Citigroup's bonds widened out, as did the cost of hedging against a potential default in its paper via credit default swaps, in response to the weekend news that the New York-based banking giant may have to take as much as $11 billion of writedowns when it reports numbers for the current fourth quarter, as well as the accompanying announcement of embattled chairman and chief executive officer Charles Prince's resignation, effective immediately. There was also a credit downgrade from Fitch Ratings, while Standard & Poor's put Citi's debt ratings under review for its own possible downgrade.

Reacting to the latest negative developments surrounding the U.S. banking industry leader, other financial issues were also seen wider, such as General Electric Capital Corp., as were CDS spreads for other banks and brokerage companies such as Bear Stearns and Lehman Brothers, although the latter were observed having tightened from their initial peak levels and actually came in under where they had finished on Friday in most cases.

Among the non-financial names, Home Depot, Inc.'s bonds seemed to shrug off bad news in the form of a downgrade of the company's shares by a major bank.

Citi bonds, CDS widen on writedown news

Citigroup's bonds were seen having widened out, with its 6% notes due 2017 quoted at mid-afternoon trading at about 154 basis points over comparable Treasuries, a 7 bps widening from their close late Friday. Trading was busy, with a number of very large trades in the $5 million-plus range, according to a market source.

Another source saw those bonds trading at a 5.89% yield, translating to about 156 bps over.

The source saw the company's 5.30% notes due 2012 trading around a 5.33% yield, estimating that as a spread in the 137-140 bps neighborhood, depending where Treasuries were at any given time. That contrasts with yields around 5.17% on Friday, or a spread of about 123 bps, "so those are out a bit. I'm surprised they weren't bounced around more, all things considered." The source said there were "some decent-sized trades" in that issue.

Citigroup's CDS meantime initially jumped out to a record high 80 bps, although it came back in from that peak level later in the morning to stand at around 72 bps bid, 77 bps offered, a trader said - still about 7 bps wider on the session. The spread continued to come in another 2 bps or so as the day wore on, to around 70 bps bid, 75 bps offered. Back in June, that CDS spread figure got as low as 10 bps, reflecting high investor confidence at the time that the giant banking concern was extremely unlikely to ever default on its bonds.

Fitch cuts Citi, S&P may also

Such a default is still considered fairly unlikely - but confidence is not as high. Fitch Ratings on Monday dropped Citi's long-term issuer default rating one notch to AA from AA+ previously, and also lowered its rating on Citi's senior unsecured notes to that same level.

In downgrading Citigroup, Fitch said that its action "primarily reflects severe pressure in Citi's capital markets business. In particular, sizable charges are likely for Citi's exposure to U.S. subprime-related assets, including collateralized debt obligations (CDOs) and other exposures."

In his downgrade message, Fitch analyst Joseph Scott wrote that Citi's direct exposure to U.S. subprime-related assets in its securities and banking business totals $55 billion, consisting of almost $12 billion of exposure in its lending and structuring business as well as approximately $43 billion of exposure to super senior tranches of CDOs backed by asset-backed securities. While Citi currently estimates pre-tax charges ranging from $8 billion to over $11 billion for these exposures, Scott warned that "charges could exceed these levels depending on the extent of the CDO market slide. Potential write downs will depend on the vintage and asset types underlying the CDO exposures."

He also noted that the exit of Prince and other senior managers, two of whose abrupt departures were announced last month when the company announced third-quarter results, "inject additional uncertainties at a time when Citi faces multiple risk issues as well as integration of recent acquisitions. Any potential change in strategic direction under new leadership layers on more uncertainty."

S&P cited similar concerns in placing its ratings for Citi, also in the AA+ area, under scrutiny for a possible downgrade.

Other financial names trade off

Citi's troubles threw a blanket of gloom over the whole financial sector. A notable loser was GE Capital Corp.'s 5 5/8% notes due 2017 - the most widely traded issue Monday, according to a market source. Those bonds were seen having widened out to around 107 bps by the close, versus 83 bps late Friday. On a dollar-price basis, the bonds were being quoted down nearly 2 points on the session, at just over 101.5.

A market source said the most-actives list was dominated by other financial names, all heading to the downside in the wake of Citi's sour news, including Goldman Sachs, Lehman and Merrill Lynch.

Bank, brokerage CDS widen

A trader saw CDS debt-protection costs for other banking names having widened in sector sympathy with Citigroup, quoting Banc of America at 54 bps bid, 59 bps offered, 3 bps wider, JP Morgan Chase at 53 bps bid, 58 bps offered, 2 bps out, Wachovia Corp. at 65 bps bid, 70 bps offered, 4 bps wider, and Wells Fargo at 45 bps bid, 50 bps offered, a 3 bps widening. Washington Mutual's debt-protection costs rose 10 basis points to 240 bps bid, 255 bps offered.

The trader meantime saw brokerage CDS spreads initially widen out from their late-Friday levels as a knee-jerk response to the Citigroup developments, although he saw those debt-protection prices come in from their early peaks and actually tighten in most cases to below where they had been on Friday, when they had widened a good 15-30 bps across the board.

He saw Bear Stearns' debt-protection costs initially shoot up to 165 bps bid, 180 bps offered, up from 160 bps bid, 175 bps offered bps Friday, but after that initial blip, saw them come back in to 155 bps bid, 170 bps offered.

He saw pretty much the same pattern with Lehman Brothers' CDS, which was around 145 bps bid, 160 bps offered at the opening - although this was the same level at which the contracts were seen Friday - but which then tightened to 135 bps bid, 150 bps offered.

Merrill Lynch's initial CDS price was actually in a little from Friday's at 120 bps bid, 135 bps offered versus 125 bps bid, 140 bps offered, but it too came down a little later on, to 115 bps bid, 130 bps offered.

Morgan Stanley's debt-protection cost initially widened to 110 bps bid, 125 bps offered from 100 bps bid, 115 bps offered Friday, but later came off that peak to stand at 105 bps bid, 120 bps offered.

Time Warner a little wider on exec change

Elsewhere, Time Warner Inc.'s bonds were seen having widened a bit, probably on the news that the media giant's chief executive officer for the past five years, Richard Parsons, will relinquish that post on Jan. 1. He will be succeeded in the CEO's job by Jeffrey Bewkes, currently Time Warner's president and chief operating officer, who has been groomed as Parsons' heir-apparent for some time. Parsons - highly regarded on Wall Street for having restored the company to viability after its ill-fated 2000 merger with AOL - will hang on to his other position as chairman of Time Warner.

The company's 6½% notes due 2036 - which had actually widened out on Friday by the equivalent of a 1 point drop in the bonds' dollar-price, likely amid investor concern over the impact a threatened industrywide writers' strike might have on movie and TV production at Warner Brothers - were seen continuing to soften Monday, to about the 205 bps level from 201 bps Friday.

Home Depot steady despite stock downgrade

A market source saw Home Depot's 5 7/8% bonds due 2036 essentially unchanged at 222 bps over, little affected by the news that a Deutsche Bank analyst had downgraded the shares of the Atlanta-based Number-1 home improvement chain and those of its rival Lowe's Cos.

"There was really nothing going on there," the source said, of the Home Depot bonds "with maybe 10 trades, the biggest of them around 350 [thousand dollars worth of bonds] - less quoted on that than they usually do."

Analyst Mike Baker changed his recommendations on both companies to "hold" from "buy," citing the impact of the continued weakness of the U.S. housing market and noting that a recovery is further off than originally thought.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.