Convertibles softer; Citi flat to down ahead of brokerage deal; Newmont mixed, Advanced Medical eases

By Rebecca Melvin

New York, Jan. 13 - The convertible bond market felt softer Tuesday and equities traded in choppy fashion, as the winds of change continued to blow through the financial system and the U.S. economy in general, sources said.

Players were watching Citigroup Inc., which announced the merger of its Smith Barney retail brokerage unit with Morgan Stanley after the close.

"It's obviously not great for the people working there; but what it means for the market is unclear," a New York-based convertibles trader said of the Citigroup changes afoot.

Citigroup's perpetual convertible preferred shares were flat to slightly lower during the session as its shares regained some ground following a steep sell-off on Monday.

Investors were also digesting comments by Federal Reserve chairman Ben Bernanke, who said that stimulus funding from the government alone was unlikely to be enough to put the stumbling economy back on its feet.

Instead, the U.S. government needs to go back to the Troubled Asset Relief Program's original mandate to buy the troubled assets, or toxic debt on the balance sheets, of financial institutions.

Restoring normal flows of credit is the oxygen the economy needs, Bernanke said while speaking at the London School of Economics.

Newmont Mining Corp.'s A series convertibles were in trade at slightly lower levels, but its B convertibles looked slightly higher. Transocean Inc. was softer, sources said.

Apex Silver Mines Ltd., another mining name in converts, filed for Chapter 11 bankruptcy Tuesday, as expected. An agreement with its Apex Silver 4% convert holders had been worked out ahead of the filing as part of a prepackaged reorganization plan.

Advanced Medical Optics Devices, Inc., which zoomed up Monday on news that Abbott Laboratories agreed to take over the medical device maker, came off slightly.

Citigroup flat to slightly lower

Citigroup's 6.5% convertible perpetual preferred were seen closing at 26 Tuesday, versus a share price of $5.90, compared to 26.49, versus a share price of $5.60 on Monday.

Its shares rose 5.4% after falling 17% on Monday.

Under the agreement, widely reported during the session and then officially announced after the close Tuesday, Morgan Stanley's Global Wealth Management Group will be combined with Citi's Smith Barney, Quilter in the UK, and Smith Barney Australia.

The new joint venture will be called Morgan Stanley Smith Barney and will have $1.7 trillion in client assets, $14.9 billion in pro-forma combined revenue, and $2.8 billion in pro-forma combined pre-tax profit.

Under the terms of the agreement, Citi will exchange 100% of its Smith Barney, Smith Barney Australia and Quilter units for a 49% stake in the joint venture, plus an upfront cash payment of $2.7 billion.

Morgan Stanley will exchange 100% of its Global Wealth Management business for a 51% stake in the joint venture. After year three, Morgan Stanley and Citi will have various purchase and sale rights for the joint venture, but Citi will continue to own a significant stake in the joint venture at least through year five.

In recent months, Citigroup has received from the U.S. government $45 billion in capital injections and a guarantee on most of a $306 billion pool of troubled assets if losses exceed $29 billion. Now the New York-based banking conglomerate is reportedly under some pressure from the government to reduce its size, and it is expected to turn away from being a so-called financial "supermarket" to a leaner, more focused banking institution.

Also among financial names in trade, National Retail Properties Inc.'s 5.15% convertibles traded at 76 versus $15.50; Fifth Third Bancorp was at 76 versus $6.75, and Huntington Bancshares traded at 67 versus $6, according to sellside sources.

Newmont mixed

Newmont Mining's 1.25% series A convertibles due 2014 were bought for 104.75 Tuesday, compared to 105 on Monday, as its shares remained essentially flat.

The Newmont Mining 1.625% B convertibles due 2017 were traded at 102.38 and were bid at 102.5, compared to 102 on Monday.

Shares of the Denver-based gold mining concern settled out at $36 on Tuesday.

Apex Silver Mines, a Caymans Islands-based mining company developing silver properties in Latin America, filed a preplanned bankruptcy Tuesday.

Sixty-five percent of the holders of its convertibles, including the likes of Highbridge and Citigroup, agreed to a subordinated pro rata share of $45 million in cash plus stock in exchange for the notes.

Transocean a little softer

Transocean's 1.5% series C convertibles traded at 80.75, a little softer, compared to 82.5 earlier in the day.

There were no readily apparent trends among oil services and exploration companies on Tuesday, a sellside analyst said. But overall things were softer among convertibles.

Advanced Medical eases after huge surge

Advanced Medical Optics' 3.25% due 2026 eased to about 95.5 from about 96 on Monday. Shares of the Santa Ana, Calif.-based medical device maker managed to eke out another small gain after surging more than 100% on Monday.

Abbott Laboratories said it will pay $2.8 billion in cash for Advanced Medical Optics, tender for all of Advanced Medical's 62 million shares for $1.36 billion and assume $57.1 million in debt. Advanced Medical shareholders will get $22 a share, representing 150% premium to its Friday closing price of $8.85.

The Advanced Medical convertibles' takeover protection, which is standard, doesn't matter sources said, because it was set for much higher stock prices.

Nevertheless the 2.5% paper, which jumped to the mid-90s from about 82-83 in early December still makes a good return and the 3.5s jumped to 94 from 37-39.

"You probably wanted to sell and take profits at that point," a Connecticut-based sellside trader said.

Advanced Medical is one of the nation's leading makers of contact lends solution and is also the largest maker of devices used in Lasik eye surgery. Advanced Medical's stock was trading around the mid $20s for much of 2008 until the market turned in September. In October the company lowered its earning outlook, sending its stock down below $10 a share.

The company, which has bought back debt and slashed its workforce to weather the storm, made headlines in 2007 when it was forced to recall some of its contact lens cleaning solutions that were linked to potentially blinding eye infections.

Abbott expects the transaction to be neutral to ongoing earnings per share in 2009, and accretive beginning in 2010.

Mentioned in this article:

Advanced Medical Optics Inc. NYSE: EYE

Citigroup Inc. NYSE: C

Newmont Mining Corp. NYSE: NEM

Silver Apex Mines Ltd. NYSE: SIL

Transocean Inc. NYSE: RIG

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