WaMu, Union Pacific, Bank of NY, JP Morgan price issues; Merrill active, Countrywide, AIG lower

By Andrea Heisinger and Paul Deckelman

Omaha, Oct. 25 - On a somewhat shaky day in investment-grade, several deals priced including those from Union Pacific Corp., Washington Mutual, Inc., Bank of New York Mellon Corp. and J.P. Morgan Chase & Co.

In the secondary market, which had a mildly positive tone to it, advancers holding a narrow six-to-five edge over decliners, activity was fairly restrained, perhaps by investor fears for further big losses expected among names in the important financial sector. Overall market volume was up slightly less than 5% from Wednesday's relatively inactive session.

A market source put it this way: "I don't think we've seen any more secondary spread widening today," adding that "secondary trading is pretty quiet today."

While the new Bank of New York deal did alright when it was freed for secondary activity, traders saw unchanged to just slightly tighter levels in the new paper issued Thursday by Union Pacific, Washington Mutual and Wednesday's reopened J.P. Morgan issue.

Among the more established names, even with the generally quiet market, there was still some fairly energetic dealings going on in Merrill Lynch & Co.'s bonds, with players still trying to digest the enormity of the giant-sized loss posted Wednesday by the giant investment bank.

American International Group Inc.'s bonds were seen lower and its debt-protection costs higher after analysts speculated that the world's biggest insurance company may have to take some big write-downs to reflect big losses related to mortgage-backed securities. Countrywide Financial Corp.'s bonds - still nominally investment-grade rated, although they trade like distressed junk - also widened out and its debt-protection costs spiked upward on investor unease about Friday's scheduled report of third-quarter results by the Calabasas, Calif.-based mortgage lender, the nation's largest. It is expected to post a sizable loss, of perhaps $1 billion, or even more.

WaMu prices amid volatility

"There was some volatility today," one market source said.

The Washington Mutual issue may have fallen victim to this volatility.

The company priced $500 million of 7.25% 10-year subordinated notes at 99.377 to yield 7.339%, at a spread of Treasuries plus 300 bps.

Bookrunners were Barclays, Credit Suisse, Lehman Brothers and Morgan Stanley.

"The big shock today was WaMu," a source said. "The spread I'm coming at is very wide from what I thought it would be. I thought it would be closer to 250 basis points."

Another source said the wide spread may have been a result of the company's stock being down Thursday.

Union Pacific, BoNY bring deals

Others fared better.

Union Pacific priced $500 million in 5.75% 10-year notes at 99.928 to yield 5.759%, at a spread of Treasuries plus 142 bps.

The company paid about a 10 bps new issue premium, which a market source said "seemed about right because despite their rating, transport tends to do very well."

Bank of NY priced an upsized $1 billion of 4.95% five-year senior medium-term notes at 99.899 to yield 4.973% with a spread of Treasuries plus 100 bps.

The issue was upsized from $750 million. Bookrunners were Deutsche Bank and Goldman Sachs.

J.P. Morgan priced $100 million of three-month Libor plus 32 bps three-year floaters at par.

Another issue came from emerging markets issuer JSC VTB Bank, pricing $2 billion in two tranches.

The $1.2 billion of five-year notes priced at par with a spread of Treasuries plus 262 bps. The $800 million of two-year floaters priced at par to yield Libor plus 170 bps.

An upcoming issue was announced for the Development Bank of Kazakhstan. The bank launched a benchmark size issue of 10-year bonds (A2/BBB-/BBB). There will be a roadshow the week of Oct. 29.

The 10-year benchmark Treasury was looking stronger Thursday, a source said, sitting at 4.33%. This is about 100 bps better than in mid-June.

There weren't an abundance of issuers Thursday, but those that priced knew what they were doing.

"One thing about the deals that came today was they all got in and out pretty quickly," a source said.

It should be another quiet Friday, sources said.

"It's hard to tell what's going to happen with Countrywide releasing their earnings," a market source said.

BoNY paper better, WaMu hurts market

When the new Bank of New York 4.95% notes due 2012 were freed for secondary dealings, a trader quoted the bonds at a spread of 98 bps bid, 96 bps offered over comparable Treasuries, versus their 100 bps issue price. "That was kind of the focus" in the financial sector, he said.

The trader saw the new Washington Mutual 7¼% subordinated notes due 2017 trading at 298 bps locked. Earlier, another trader had quoted them offered at 290 bps in the gray market, but had not seen a bid.

The first trader said that the deal "kind of put a spook in the rest of the market." He noted that WaMu, the largest U.S. savings bank operator, had just tapped the capital markets with its $1 billion Oct. 18 issue of 9¾% hybrid perpetual securities.

"They just came with a deal last week, so everyone is trying to figure out why they're coming with more," he said.

He noted that the supply overhang "widened out the other ones [the 93/4s] so they're trading below par," the level at which they had been issued. He quoted them Thursday as having been knocked down to a wide 94-99 context.

The trader also said that the newly re-opened J.P. Morgan 5 3/8% five-year notes, which priced Wednesday at 115 bps over, "got to be as tight as a 107 lock - but I'm sure it gave back ground, after this new Washington Mutual and everything like that. That seemed to put a little weight on the market."

Union Pacific steady

Elsewhere in the new-deal arena, a trader saw the freshly issued Union Pacific 5¾% notes due 2017 at a spread of 142 bps bid, 140 bps offered, right around the 142 bps spread at which the bonds had priced.

He had seen "one trade" at a bid level of 140 bps, 2 bps tighter than issue, but said that "things were a little softer at the end of the day, and spread widened back out to around the issue price."

Merrill bonds remain active

A market source saw Merrill's 6.05% notes due 2012, which on Wednesday had ended the day some 7 bps wider, around 158 bps, as having come back in during Thursday's session, tightening to around a 5.49% yield by mid afternoon, or a spread of around 150 bps over.

The source said that Merrill's 6.40% notes due 2017 were trading around within a range of between 178 bps and 181 bps over, "right in there" and little changed from the levels at which they had traded on Wednesday.

The source saw Merrill's 6.11% notes due 2037 at 199 bps over, at a yield of 6.64%, also "pretty much where they were" versus opening levels around 200 bps over, on "decent size."

"They're hanging in there, or maybe just a smidge better," the source said.

However, later in the day, the 6.04s were seen having retreated, with several large late-session trades seen at a yield of 5.729% , for a spread of about 170 bps over, 20 bps wider than the day's tights and around 10-12 bps out from Wednesday's finish.

The 6.40s did hang in near their earlier levels, at 181 bps over, while the 6.11s actually improved slightly to about 196 bps over. As had been the case Wednesday, when Merrill Lynch reported its wider-than-expected $2.3 billion quarterly loss, all three issues were actively traded Thursday.

Debt-protection costs for Merrill Lynch's paper meantime pushed as high as 93 bps during the session before finishing up around 2 to 3 bps on the day, at 87 bps, a source said.

AIG widens on write-down expectations

The huge $8.4 billion write-down that Merrill Lynch took in compiling its loss has got Wall Streeters casting a wary eye on other financial companies likely to be hurt by the same mortgage-related problems, and on Thursday that caused American International's bonds and shares to fall.

AIG's busily traded 5.60% notes due 2016 were seen having widened out by more than 30 bps in morning dealings, before coming back in to midday levels around 117 bps over - still up a good 21 bps from where they stood late Wednesday. A source at that time said that a more indicative trading level would be around 110 bps over, since that would count only sizable trades, with "just a few odd lots trading up around 115 bps" over. After a flurry of morning dealings, the source said, "they seemed to have quieted down."

During the afternoon, the bonds continued to come in from their wide levels for the day, finishing up around a spread of 105 bps - still about 9 bps wider than their levels on Wednesday.

The cost of insuring AIG's paper via credit-default swaps meantime was seen having climbed as high as 57 bps from levels in the upper 30s on Wednesday, before coming in slightly to around 54 bps.

Dow Jones Industrial Average component AIG's shares meantime fell $2.05, or 3.21%, to $61.79. Earlier in the session, the shares had been down around 8%. Volume of 64 million shares was better than four times the norm.

There was also considerable trading in put options on AIG - a sign of market belief that its shares are likely to continue to fall. Put option volume was six times the usual level, and the price of the contracts surged to a five-year high.

Citi, RBS analysts warn

AIG's slide followed market buzz that the insurance giant may post large - perhaps even giant-sized - write-downs of mortgage-related securities when it reports third-quarter earnings. That speculation was stirred by bearish commentary about the company by analysts at Citi and Royal Bank of Scotland.

At Citi, analyst Joshua Shanker reported that investors are worried about AIG's investment portfolio, which at midyear included some $29 billion of sub-prime mortgage exposure via investments and commitments to finance or guarantee debt repayments, according to company figures.

The analyst projected that AIG's credit-guarantee unit may wind up incurring mortgage-linked losses of some $1.6 billion for the quarter. Shanker drew a parallel between AIG and sector peer Ambac Financial Group Ltd., which showed a $743 million loss on its investment portfolio during the third quarter.

Meanwhile, at RBS, analysts suggested that investors sell AIG's bonds, as well as those of Merrill Lynch, Deutsche Bank and Lehman Brothers, contending that the financial firms are likely to rack up major losses from their collateralized debt obligation positions.

RBS said it was changing its recommendation on AIG's bonds, as well as Merrill's and Lehman's, to "underweight" from "market weight" previously, and was classifying Deutsche Bank debt as a precautionary "underweight."

The analysts took note of Merrill Lynch's admission on Wednesday of third-quarter losses far wider than the giant investment bank's own earlier predictions, due to much larger-than-anticipated write-downs it was forced to take in connection with its holdings of CDOs and other assets impacted by the sub-prime mortgage lending industry debacle. Merrill said that most of the $6.9 billion that it wrote down related to CDOs came from AAA rated super senior portions of CDOs.

The RBS analysts warned that AIG may "take a pasting" when the third-quarter numbers are released.

While allowing that "gross exposure alone doesn't really tell us a lot," the analysts emphasized that "clearly anything with subprime looks more at risk in the near term." the analysts wrote. The added "others may well be hit on headlines but once again we are in thrall to the rumor mill. It feels frighteningly like the start of the first liquidity crunch back in August."

Countrywide widens out

Another financial name taking it on the chin on Thursday was Countrywide Financial, which is scheduled to report third-quarter results on Friday. Analysts are looking for anywhere from $700 million of red ink to two, or even three times that amount.

Investor angst over what is expected to be a bad loss caused Countrywide's 6¼% subordinated notes due 2016 - nominally split-rated at Ba2/BBB+/BBB but trading like distressed junk bonds - to fall sharply ahead of the announcement. They dropped to a 76-77 context from prior levels at 82.5.

The cost of hedging against a default in the paper via CDS contracts meantime widened out to a yawning 489 bps from 417 bps the day before.

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