Fifth-Third deal looks pretty good; Financials mostly lower, KeyCorp down, but BofA better

By Rebecca Melvin

New York, June 18 - Fifth Third Bancorp's planned $1 billion of perpetual convertible preferred stock was looking pretty good to convertible bond players on Wednesday. The deal was announced ahead of the market open and was seen pricing after the close.

"It looks reasonably good relative to KEY," a Boston-based buyside trader said. His firm was going to play in some of Fifth Third, but not in MF Global Ltd., which planned to price late Thursday a deal announced late Wednesday.

KeyCorp.'s 7.75% perpetual convertible preferred stock that priced last Friday were called down a point on Wednesday, with trades seen at 96 versus a stock price of $11.00 and at 97 versus a stock price of $11.00.

MF Global's stock was torpedoed, losing 41% on the day, but the deal was still going ahead, according to syndicate sources.

The overall financial sector was mostly lower amid more credit issue worries plaguing the sector, and Goldman Sachs' Tuesday earnings report seemed to spook the market, as its release predicted banks would still need to raise more capital.

"There are no signs of let up in the beating these names are taking," a New York-based sellside trader said. Dollar neutral some were holding up or even doing better, the trader said, citing Merrill Lynch's convertible bonds and Bank of America Corp.'s convertible preferreds. But names like National City Corp. and Washington Mutual were "coming in," or weaker, again.

"It's not pretty out there in that space," he said.

Lehman Brothers Holdings Inc. traded back down to low levels seen last Thursday.

Elsewhere, energy was mixed, with Penn Virginia Corp. gaining a sizable 5 points to 6 points along with a similar jump in its underlying shares. Several health care names were mentioned as higher, in line with their underlying shares, including Advanced Medical Optics Inc., Teva Pharmaceutical Industries Inc. and Mylan Inc.

The sector looked to be providing a port in the storm. "There was good flow in Teva. Teva, EYE, and Mylan were in line. Mylans have been weak lately, but found a bottom," the trader said.

Fifth Third mulled ahead of pricing

Fifth Third planned to price $1 billion of perpetual convertible preferred stock after the market close Wednesday. The offering was talked with a dividend of 8% to 8.5% and with an initial conversion premium of 22.5% to 27.5%.

"They look to be priced cheap enough, and people can set it up and trade it on swap, or if people liked it at $20 or $30 it would make sense to add it down here," the trader said. "When I saw it, it wasn't surprising: it's the last of the midsize, regional banks to raise capital."

The convertibles are pretty attractive, the trader said, given the upside down profile. It gives better yields and better downside protection. But overall the tone is cautious, he said.

"If you went in long natural gas, short financials, you would be having a banner year," he said.

Fifth Third has a greenshoe of up to an additional $150 million of preferreds. Goldman, Sachs, Credit Suisse and Merrill Lynch are joint bookrunners, with Fifth Third Securities Inc. acting is co-manager.

The offering is being made in the form of depositary shares, each of which represent a 1/250th interest in shares of convertible preferred stock. The convertible stock will have a liquidation preference of $25,000 per share (equivalent to $100 per depositary share).

The issue is non-callable for five years, with no puts.

Net proceeds will be used for general corporate purposes.

Fifth Third is a regional bank based in Cincinnati.

Its shares (Nasdaq: FITB) fell $3.47, or 27.3%, to $9.26.

The bank also cut its dividend and said that it planned to sell $1 billion or more of certain non-core businesses.

MF Global deal questioned

The 41% slaughter of MF Global stock left some wondering if pricing of the $150 million of perpetual convertible preference shares and $150 million of convertible bonds would get done on Thursday. But syndicate sources said it was moving ahead.

"These things are scary. The stock got destroyed and they already have the deal. The filings said that Flowers would be backstopping $300 million, and if I were him I wouldn't be very happy. Given the terms that they have with him and a $12.5 conversion price, they aren't going to get anywhere close to a $12.5 conversion price. The stock is basically cut in half," a Boston-based buysider said.

The trader was referring to an offering of perpetual convertible preferred shares for $300 million with investor J.C. Flowers & Co. LLC acting as backstop for the transaction, which was announced at the end of May.

Flowers agreed to buy a minimum of $150 million of the securities and backstop the entire $300 million offering. The remainder was to be sold in either a public or private offering after MF filed its 10-K report with the Securities and Exchange Commission this month.

The heavy selling of the stock was surprising.

"I'm clearly missing something; this capital raise shouldn't be news," the trader said.

Banc of America Securities LLC is the left bookrunner on the issue, with Citigroup,J.P. Morgan Securities Inc. and Morgan Stanley as joint bookrunners.

Shares of the Hamilton, Bermuda-based broker of exchange-listed futures and options (NYSE: MF) slid $5.43, or 41%, to $7.83.

KeyCorp down a point, BofA better

Financial convertibles did their job in some instances Wednesday. The Bank of America 7.75% series L perpetual preferred shares were said to be a little stronger versus a 2.4% decline in the underlying shares (NYSE: BAC) of the Charlotte, N.C.-based financial services company.

The preferreds closed at 955 Wednesday versus a close of 970.5 versus a stock price of $38.37 on Tuesday.

Meanwhile the KeyCorp 7.75% convertible preferreds closed at about 97 on Wednesday versus a stock price of $11.13. That compared to 99 versus a stock price of $11.40 on Tuesday.

Shares of the Cleveland-based regional bank (NYSE: KEY) shed 27 cents, or 2.4%.

Energy Conversion to price

The other deal expected to price after the close was the cheap-looking $225 million of five-year convertibles of Energy Conversion Devices Inc.

The notes were talked at a coupon of 3% to 3.5% and with an initial conversion premium of 27.5% to 32.5%. Net proceeds from the notes will be used to expand the company's solar laminate production and for general corporate purposes.

Rochester Hills, Mich.-based Energy Conversion is a maker of thin-film flexible solar laminate products for the building integrated and commercial rooftop markets.

"It's a good credit, and it should generate cash flow next year, but it will redeploy it into the business," a Connecticut-based sellside analyst said.

The company has an interesting technology that sets it apart from the pack in that it doesn't use polysilicon to make its products.

"Polysilicon has been in short supply, so this is a real advantage for them," the analyst said.

They have only one specific application, it's flexible, peel and stick solar film, not glass and it's cheaper and there's a huge demand, the analyst said.

But it's only for roof top applications and low power usage, like a library or a school or a Costco, not for hospitals and other high usage.

They are raising funds to do capital expenditure as all their current capacity is sold, the analyst said.

But political winds also play a role in the fortunes of solar companies. Sixty-five percent of Energy Conversion's products are currently sold in Europe, as that continent is farther along in terms of providing tax incentives and rebates for solar power. Only 25% of its products are sold in the United States.

"Right now [solar] is more expensive, but with energy costs you are seeing a convergence, and by 2012 there should be grid parity in terms of regular electricity and solar power," the analyst said.

"We are further behind. We need states like California with renewable mandates, the Connecticut-based sellside analyst said.

And the path ahead isn't clear. On Tuesday, Senate Republicans blocked for a second time a tax measure to renew dozens of tax breaks, including a business research credit and incentives to develop wind, solar and other renewable energy sources.

Republicans objected that the legislation, which would raise $54 billion in revenue, would boost other taxes to avoid increasing the federal deficit. The measure would extend a sales tax deduction for individuals and bar hedge fund managers from deferring U.S. taxes by stashing their income in offshore tax havens.

The vote was a repeat of one taken June 10 and continues the debate over whether Congress should approve the popular business tax cuts even if they add to the deficit.

As far as valuing the Energy Conversion convertible, analysts mulled spreads with no guides in terms of straight debt. None of the solar companies have any straight debt, an analyst said.

Using a credit spread of 800 basis points to 900 bps over Libor, as two analysts did, seemed a little wide, according to one New York-based sellside analyst.

He preferred to use Libor plus 650 bps on the credit, which at 45% vol yielded a 2% cheap issue.

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