Washington Mutual leads downward march; Hutchinson up on buyback; Tragedy could hurt Charming Shoppes

By Evan Weinberger

New York, Feb. 4 - Washington Mutual Inc. took a pounding as financials led the convertibles market lower. CIT Group, Inc., Citigroup Inc., Bank of America Corp., SLM Corp. and iStar Financial Inc. all saw their convertible preferred stock offerings trade lower on the day.

Fannie Mae preferreds were the lone bright spot, if only marginally.

Hutchinson Technology Inc. closed higher on a stock buyback plan the company announced Monday.

Charming Shoppes Inc. convertibles closed lower amid an analyst's downgrade. A trader said there was also the potential for lawsuits in the wake of a shooting at a Lane Bryant outlet outside Chicago over the weekend.

Convertibles trading was light Monday. One analyst said it was "a little slow." "It's really, really quiet," a trader at a different desk said. "There isn't a lot of trading going on."

Concerns in the financial sector helped to bring down stocks Monday as questions about the state of the economy reared their heads again.

The Dow Jones Industrial Average tumbled 108.03 points, or 0.85%, Monday to close at 12,635.16.

The Nasdaq fell 30.51 points, or 1.26%, for a 2,382.85 close.

And the Standard & Poor's 500 dropped 14.60 points, or 1.05%, to 1,380.82.

Two new deals announced

AAR Corp. launched $175 million in convertible senior notes in two tranches Monday after the market close.

The first tranche of $87.5 million in convertible senior notes will be due in 2014. The first tranche is talked at a 1.25% to 1.75% coupon and a 27.5% to 32.5% initial conversion premium.

The second tranche of $87.5 million in convertible senior notes will mature in 2016. The second tranche is talked at a 1.75% to 2.25% coupon with a 27.5% to 32.5% initial conversion premium.

There is a $25 million over-allotment option on the Rule 144A transaction.

The deal is expected to price Tuesday after the market close.

Both tranches have call protection through maturity, and there are no puts.

The convertibles carry a call spread overlay. They have full dividend and takeover protection and a net-share settlement.

There is a contingent conversion subject to a 130% hurdle.

AAR will enter into a series of hedge and warrant transactions with an affiliate of one of the bookrunners of the deal. The transactions are intended to lower any potential dilution of AAR common stock upon conversion of the notes. AAR expects that the transactions will raise the conversion price of the convertibles.

AAR is a Wood Dale, Ill.-based aerospace and defense contractor. The company plans to use the proceeds to repay short-term debt on its existing credit facility.

And GMX Resources Inc. launched $100 million in convertible senior notes due 2013. There is a $15 million greenshoe on the Rule 144A transaction.

No other details were available as of press time.

GMX Resources is an Oklahoma City-based oil driller. The company plans to use the proceeds to repay debt under its bank credit facility.

A sellside analyst saw at least one red flag before the talk became available. "I haven't checked but the stock borrow may be an issue with only 10mm shares float," the analyst said. "We'll see. It's a small company."

Washington Mutual falls hard

Washington Mutual, the largest savings and loan in the United States, fell hard Monday as fears of further credit problems drove down financials.

A trader pointed out that Seattle-based Washington Mutual had seen an equally rapid rise in recent days. "It went up fast too," the trader said. "Nothing special there today."

Washington Mutual's 7.75% series R non-cumulative perpetual convertible preferred stock closed Monday at 1,138.20 versus a closing stock price of $19.16. They closed Friday at 1,230 versus a stock price of $21.82.

Washington Mutual stock (NYSE: WM) plummeted $2.66, or 12.19%, on the day.

Other financials roiled

Several analysts warned on financials Monday, which contributed to the day's market sell-off.

A trader said that negativity at the home office could have affected the downbeat views of financial stock analysts Monday. "I think some of these analysts just feel the negativity at their firms - low bonuses - and are portraying it in their view of stocks," the second trader said.

Among the losers on the day, New York-based CIT's 7.75% mandatory convertible units due Nov. 15, 2015 closed Monday at 21 versus a closing stock price of $27.65. They closed Friday at 22.41 versus a stock price of $30.68.

CIT stock (NYSE: CIT) fell $3.03, or 9.88%, on the day.

New York-based Citigroup's 6.5% perpetual non-cumulative convertible preferred stock closed Monday at 55.65 versus a closing stock price of $29.22 after finishing Friday at 55.98 versus a stock price of $29.69.

Citigroup stock (NYSE: C) slid 47 cents, or 1.58%, Monday.

A second trader reported seeing six-figure "chunks" of Citigroup's convertible preferred stock changing hands over the day.

Bank of America's 7.25% non-cumulative perpetual convertible preferred stock, series L, closed Monday at 1,119.61 versus a closing stock price of $44.03. The preferreds closed Friday at 1,125.69 versus a stock price of $45.03.

Charlotte, N.C.-based Bank of America stock (NYSE: BAC) fell $1.00, or 2.22%, on the day.

Reston, Va.-based SLM, the parent company of student loan giant Sallie Mae, saw its 7.25% series C mandatory convertible preferred stock due Dec. 15, 2010 close Monday at 1,110.8 versus a closings stock price of $21.46. They closed Friday at 1,149.45 versus a stock price of $23.00.

Sallie Mae stock (NYSE: SLM) dropped $1.54, or 6.70%, Monday.

Sallie Mae was downgraded by S&P after the close.

Rounding out the downers for Monday, New York-based real estate financier iStar's Libor plus 50 basis point convertible senior floating-rate notes due Oct. 1, 2012 closed Monday at 88.9243 versus a closing stock price of $26.51. They closed Friday at 89.8605 versus a stock price of $27.66.

iStar stock (NYSE: SFI) slumped $1.15, or 4.16%, on the day.

Fannie Mae bucks trend

One company that bucked the downward trend in financials was Washington-based government-secured mortgage backer Fannie Mae.

Fannie announced the sale of $5 billion in corporate paper Monday morning. The auctions will take place Wednesday.

Fannie Mae's 5.375% series 2004-1 convertible perpetual preferred stock closed Monday at 83,109.3 versus a closing stock price of $35.51. They closed Friday at 83,064 versus a stock price of $35.40.

Fannie Mae stock (NYSE: FNM) was marginally higher, gaining 11 cents, or 0.31%, on the day.

Hutchinson up on stock buyback

Hutchinson, Minn.-based hard disk components producer Hutchinson Technology announced Monday a program to buy back up to $130 million in common stock.

That sent the company's stock and convertibles higher.

Hutchinson's 3.25% convertible subordinated notes due Jan. 15, 2026 closed Monday at 81.0333 versus a closing stock price of $15.83. They closed Friday at 79.75 versus a stock price of $15.56.

Hutchinson's 2.25% convertible subordinated notes due March 15, 2010 closed Monday at 91.92 versus a stock price of $15.83 after closing Friday at 91.43 versus a stock price of $15.56.

Hutchinson stock (Nasdaq: HTCH) picked up 27 cents, or 1.74%, on the day.

Charming Shoppes down

Bensalem, Pa.-based women's specialty apparel retail chain Charming Shoppes was downgraded to "Market Weight" from "Overweight" by Thomas Weisel Partners retail analyst Liz Dunn on Monday.

Dunn cited poor January sales and a potentially difficult first half of the year as the economy slows as her major reasons for the downgrade.

Federal Reserve rate cuts and potential tax rebates from the still-in-Congress stimulus package are potential drivers of a better second half for the chain.

That downgrade sent Charming Shoppes stocks and convertibles lower on the day.

One other factor could have been playing in investors' minds, however.

Over the weekend, five women were gunned down in a Lane Bryant store in suburban Chicago. Lane Bryant is one of Charming Shoppes' chains.

The shootings, a trader said, could lead to legal troubles for Charming Shoppes. Five families could claim there was not enough security and other factors. Next thing you know, the trader said, "you're getting sued."

Charming Shoppes 1.125% convertible senior notes due May 1, 2014 closed Monday at 70.4138 versus a closing stock price of $5.85. They closed Friday at 74.6049 versus a stock price of $6.89.

Charming Shoppes stock (Nasdaq: CHRS) fell $1.04, or 15.09%, on the day.

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