C.M.O. 5.15.2009

Credit Market Overview
May 15, 2009

. . . Slowly they turned, step by step, inch by inch. . .

No, it’s not an episode of I Love Lucy or The Three Stooges; it’s the banks and in another step towards normalcy(?) J.P. Morgan and American Express issued debt yesterday that was NOT backed by the FDIC. Besides, while I haven’t spent the time to count there are a lot more than 3 stooges in this caper.

JPM sold $2.5BN of 5 paper and American Express brought $3BN to the market successfully split between 5 and 10 year maturities. The JPM 5-year paper is a bullet with a 4.65% coupon and came at 275bps over the current 5-year TSY. The benchmark CDS on JPM was quoted at 120bps yesterday which puts the premium for balance sheet space at 155bps. Relatively speaking, not that onerous given some of the spreads seen earlier in the year. JPM is rated Aa3 by Moody’s, A+ by S&P and AA by Fitch.

AXP sold $1.25BN of 5 year notes with a 7¼ coupon at 530bps over the current TSY of the same maturity and $1.75BN 8 1/8’s maturing in 2019 at 505bps off the curve. The CDS levels in the 5 and 10 year area were 302bps and 234bps respectively. Notice here that as we discussed with GS the other day the CDS curve is still inverted with near term protection selling at a premium to the longer tenors. AXP is rated A3 and BBB+ by Moody’s and S&P in that order.

Whether it was patriotism shown by these two firms working so hard to get themselves to a point where they can repay the taxpayers their hard earned wages or the specter of having Uncle Sam’s nose in their business that, like a coyote caught in a trap willing to chew their own leg off, picked the lesser of two evils is for you to decide. I just think it’s worth mentioning that the credit markets are becoming amenable to taking on a little risk. Although, and this is just me speaking, buying AXP paper at 500+bps off the curve doesn’t seem that risky and is probably a pretty good deal.

Besides these debt issues GS, BK and MS have all sold bonds to investors this year with GS being the first to sell non-FDIC backed paper. Additionally there has been $19BN in stock issued since the Stress Tests results were announced on May 8th and another $14BN in equity related offerings in 1Q09.

All of this adds up to roughly $670MM in fees as estimated by the WSJ, which has mostly been paid amongst the banks themselves. But, as they say; “charity begins at home”. I don’t know how this compares to the trillions of dollars in write offs but given how bleak the outlook was just a few short months ago it has to be a welcomed sign

Enjoy the weekend.

Jim Delaney