Volatility stalls bond sales; Country Garden, Hyundai detail upcoming deals; financials weak

By Andrea Heisinger and Paul Deckelman

Omaha, Nov. 1 - Investment grade bond sales practically came to a halt Thursday as a result of volatile market conditions that didn't improve throughout the day.

One source called conditions "rough out there" and said other than a private deal not much happened for the day.

"Oh, there was a lot going on in the market today, but just no bond trades," a market source said, alluding to the volatile conditions throughout the day.

Issuers have mostly been deciding day to day whether to price a new issue because of recent volatile conditions.

The Dow took a tumble, and general market weakness branched out and affected Citigroup and others.

All of this came a day after the Federal Open Market Committee cut the federal funds rate 25 basis points in a move meant to prevent further weakening of the economy. This was the second rate cut in as many months, as the Fed cut 50 bps in September.

Details on two upcoming issues were announced.

Chinese real estate developer Country Garden announced it will price $1.5 billion or more of its two tranche bond offering (Ba1/BBB-) which will have five- and 10-year maturities.

Bookrunners are Morgan Stanley and UBS for the Rule 144A/Regulation S deal.

Korea's Hyundai Capital Services announced a road show next week for its benchmark-sized five-year senior unsecured bonds (Baa2/BBB).

Bookrunners are Deutsche Bank, Citigroup, Goldman Sachs, J.P. Morgan and Merrill Lynch.

There likely won't be much action in the bond market Friday, sources said, with nothing expected to price.

Predictions of a busy week ahead were made after the Fed announcement but before Thursday's volatility. Whether issuers still come forward will depend on how things open Monday.

"It's a really tough market out there and everyone's concerned," a source said.

"I think everyone's in wait and hold mode right now," another market source said.

Financials hit

In the secondary market Thursday, financial issues took it on the chin, getting one-two punch from the morning news that an analyst had downgraded Citigroup shares, warning that the banking giant might have to raise as much as $30 billion to cover a capital shortfall, and then in the afternoon from New York Attorney General Andrew Cuomo's accusation that a major appraisal company had given in to pressure from savings-and-loan leader Washington Mutual to use hand-picked appraisers who gave inflated valuations on mortgage applications.

That caused their bonds to widen out, and other financial names as well, such as Lehman Brothers.

The widening was also seen in the new bonds of such companies as Morgan Stanley, and in the credit default swap debt-protection costs of companies like Lehman, Morgan Stanley, Bear Stearns and Merrill Lynch.

Credit risk management and mortgage insurance firm Radian Group Inc.'s bonds widened after the Philadelphia-based company reported a yawning third-quarter loss.

Citi, WaMu lead downside rout

A trader specializing in financial names said that he saw Citigroup's bonds 10 to 20 basis points wider after the bank's prospects were panned by an analyst from CIBC World Markets, and Washington Mutual's about 30 bps wider on market buzz about Cuomo's accusations that WaMu had "colluded" with appraisal company eAppraiseIT, a unit of First American Corp. Cuomo's office is suing First American, although Washington Mutual is not a party to the lawsuit. WaMu said it is suspending its relationship with eAppraiseIT and that it plans to further investigate the situation. It also said that it has "no incentive" to try to produce inflated appraisals.

"WaMu and Citi were down pretty good," the trader said. "And banks in general other than those two were down probably 10 to 20 bps."

A market source at another desk saw Citi's 4 1/8% notes due 2010 having widened by 13 bps to 108 bps over comparable Treasuries, and its 5% notes due 2014 some 9 bps wider, also at 108.

Another source saw Citi's recently priced 5.30% notes due 2012 fairly actively traded, at a yield of about 6.60%, translating into a 12 bps widening.

The Citi bonds moved lower on the news that CIBC World Markets analyst Meredith Whitney wrote in a client note that the banking giant might need to cut its dividend to raise capital, which would surely be a blow to its shareholders, since the only thing keeping Citigroup stockholders' returns from lagging inflation over the past several years has been its dividend.

Whitney said that the big bank might have to raise as much as $30 billion of additional capital to cover shortfalls.

Morgan Stanley and Credit Suisse lowered their Citigroup ratings as well.

Citigroup had no comment on the analysts' actions.

The bad news about Citi translated to widening out in other banks' bonds as well.

J.P. Morgan Chase's 6 1/8% notes due 2017 were 12 bps wider at 142 bps, while Lehman's 6½% notes due 2017 widened by 13 bps to 201 bps over. On a dollar-price basis, the latter bonds were seen down nearly 3 points on the day, at just below par, in very active trading.

The first trader saw the new Morgan Stanley 5¼% notes due 2012, which priced earlier in the week at 125 bps over, having widened out to 140 bps over.

CDS widen

A trader saw the CDS of various brokerage firms also substantially wider - a sign of decreased investor confidence in the financial sector. He pegged Bear Stearns' debt-protection costs at 125 bps bid, 135 bps offered, a 25 bps increase on the day, while Lehman's stood at 118 bps bid, 128 bps offered, 20 bps wider. Morgan Stanley's was 99 bps bid, 106 bps offered, 18 bps wider, while Merrill's was 87 bps bid, 94 bps offered, 13 bps wider.

He also saw Washington Mutual's levels widen by 10 bps, to 165 bps bid, 175 bps offered. Citi's was 6 bps wider at 57 bps bid, 61 bps offered.

The trader called the whole financial sector "very weak. I think the industrials and the utilities held in - they were [just] a little weaker."

Radian dives on loss

Radian's 7¾% notes due 2011 were seen having widened at the close to 560 bps, a stunning 95 bps widening from Wednesday's levels. That translated to a 5 point drop in the bonds' dollar price to 92.5. At their opening, the bonds were as low as 91 bid, or 6.5 points down, with the spread calculated at more than 200 bps over.

The bonds nosedived after the company reported third-quarter losses of $703.9 million, or $8.78 per share, compared with earnings of $112 million, or $1.36 per share, during the same period a year ago. Wall Street had been expecting a loss of no more than $1.94 per share.

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