McGraw-Hill, Morgan Stanley, MassMutual price, others wait for Fed outcome

By Andrea Heisinger and Paul Deckelman

Omaha, Oct. 30 - It was a quiet day in investment grade by most accounts Tuesday as the market generally waited for the announcement Wednesday of the outcome of the two-day Federal Open Market Committee meeting. But issues priced from McGraw-Hill Cos., Morgan Stanley, Commonwealth Bank of Australia and MassMutual Global Funding II.

A rate cut is expected to come out of the Fed meeting, leading many to hold off on issuing until they see what happens.

Sources said the cut is expected to be 25 basis points.

"I think everyone's pretty certain something's going to happen," a market source said. "I think 25 bps is accurate."

Apparently others are not so sure, another source said.

"Some out there think there's going to be nothing," he said. "It would certainly be pretty interesting if they didn't do anything."

Commonwealth Bank of Australia issued $1 billion of 5% five-year notes under Rule 144A. The notes priced at 99.533 to yield 5.107% at a spread of Treasuries plus 106 bps. Bookrunners were Citigroup and HSBC.

Morgan Stanley priced $1 billion of 5.25% five-year global notes for itself at 99.779 and a spread of Treasuries plus 125 bps.

An entity of Massachusetts Mutual Life Insurance Co., MassMutual Global Funding II priced $250 million in three-month Libor plus 17 bps two-year floating-rate bank notes at par. Credit Suisse was sole bookrunner.

McGraw-Hill priced its $1.2 billion, three tranche deal of senior unsecured notes that launched Monday.

The $400 million in five-year notes priced at a spread of Treasuries plus 135 bps and the $400 million in 10-year notes priced at a spread of Treasuries plus 155 bps.

The remaining $400 million of 30-year notes priced at a spread of Treasuries plus 190 bps.

Bookrunners were Deutsche Bank, J.P. Morgan and RBS.

Full terms were not available at press time Tuesday.

The rest of the week hinges on the outcome of the Fed meeting, sources said.

"It's the same story as before the last Fed meeting," one source said. "People are sitting on more than one deal but are just waiting to see what happens tomorrow."

"We had four deals today which was about right. I think most guys who wanted to get in got in already on Monday."

The last Fed rate cut of 50 bps was made during its Sept. 18 meeting. This was larger than the anticipated 25 bps.

Secondary firm

In the secondary market Tuesday, which had a generally positive tone, as advancing issues led decliners by about a seven-to-six margin, activity levels strengthened, with participants squaring positions ahead of what is expected to be an announcement of at least a quarter-point interest rate cut by the Federal Reserve on Wednesday afternoon. Overall market volume was up nearly 50% from Friday and Monday's anemic levels.

The widely expected ouster of Stanley O'Neal as chief executive officer of Merrill Lynch came and went with nary a ripple in the market, where it was viewed as an anticlimax. Merrill's bonds - which weren't at all actively traded - pretty much hung in around recent levels.

However, Countrywide Financial Corp.'s paper - which had soared on Friday, after it reported a big loss but predicted a quick return to profitability - continued to give up those gains.

Apart from the financial names, Motorola Inc.'s newly issued bonds were seen not doing well in secondary dealings.

Merrill Lynch hangs in there

In the secondary market, there was little movement seen in Merrill Lynch's bonds on the word that - as expected - the ax had fallen for CEO Stanley O'Neal, even though the company did not immediately name a successor to the deposed chief. That caused some disappointment among equity investors - shares were down nearly 3% - but that was not reflected in the bond levels.

A market source saw the bonds clinging to the same recently improved levels to which they had moved on the expectations that the company would seek to right the ship after taking a more than $8 billion write-down last week producing a nearly $2.3 billion quarterly loss.

The source said that among widely circulated Merrill issues, the 6.05% notes due 2012 "were probably the busiest" - although that's not saying that much because overall trading in the name was "pretty light." The 6.05s had "some decent volume and a couple of decent-sized trades" with yields not far from the 5.63% level at which they had traded on Monday, translating to a spread over comparable Treasuries of about 159 basis points.

At another desk, a source said that the 6.05s were trading at a spread in the low-to-mid 150s, which he said was in about 8 bps from levels observed at the end of last week.

He also saw the company's 6.40% notes due 2017 about 5 bps tighter than recent levels at 177 bps over.

That's also where the first source had been quoting them on Monday, and as for Tuesday, "there weren't even 20 trades them," nor in its 6.11% bonds due 2037, "and most of them were odd lots", leaving the latter bonds "right in there" at around 200 to 205 bps over.

The source did note that there was some market buzz "about them taking [as much as] another $4 billion" in write-downs down the line, "so I don't know whether that will shake them up [Wednesday] or not."

Countrywide retreat continues

Apart from Merrill, Countrywide Financial's bonds continued to retreat from the big gains seen Friday, as analysts and investors grew more skeptical of the heady, optimistic predictions of a quick return to profitability by the Calabasas, Calif.-based mortgage giant that company executives had given out on Friday, causing Wall Street to essentially overlook the $1.2 billion quarterly loss that the company reported that day.

The company's 6¼% notes due 2016 were seen having widened out to a spread of about 527 bps over - about a 35 bps deterioration versus their late Monday level. In dollar-price terms, the bonds - nominally split rated at Ba1/BBB+/BB but trading among junk investors as well as high-grade accounts - were seen down some 2 points on the session at 80.5 bid.

Several analysts have cautioned that amid the continued uncertainty facing the housing market and the mortgage industry, a company such as Countrywide can't really say with any believability that it will bounce back from its huge third-quarter loss to be back in the black in the current quarter and stay there next year.

Motorola deal struggles in aftermarket

Apart from the financials, a trader said that the new Motorola bonds which priced on Monday were having difficulty getting out of their own way.

He quoted each of the deal's three tranches - the 5 3/8% notes due 2012, the 6% notes due 2017 and the 6 5/8% notes due 2037 - as trading "offered around their issue price," or around 135 bps, 165 bps and 200 bps, respectively.

Waiting for the Fed

Overall, a market source predicted, Wednesday 's session, at least early on, will likely be "another dead watch," since everyone will be waiting for the Fed announcement, scheduled for 2:15 p.m. ET.

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