Fifth Third, Huntington gain as financials rally; Sallie Mae, Amgen, Hologic decline on budget details

By Kenneth Lim

Boston, Feb. 26 - Financial convertibles remained active on Thursday as investors expressed optimism about the government's efforts to prop up the industry.

But student lender SLM Corp. and biotechs slipped with their stocks after details of U.S. president Barack Obama's proposed budget suggested less support for those sectors.

Overall market volume continued to recover from a slow start to the week, but pricing remained largely in line, market sources said.

"It's relatively active," a sellside convertible trader said. "Things were bad at the start of the week, then they got a bit better on Tuesday, now the market wants to go up but it can't.

"Things are generally better in the mornings, but in the afternoon there's no more steam left in the engine. Prices haven't changed much, and most of them are just following the equity...On a dollar-neural basis things haven't moved much."

Fifth Third, Huntington gain more

Banks continued to rally as the government unveiled plans to step up support for the industry.

Fifth Third Bancorp's 8.5% convertible preferred stock gained about 2.5 points to trade at 30 against a common stock price of $2.25. The common stock surged 18.04% or $0.35 to close at $2.29 on Thursday.

Fifth Third is a Cincinnati-based bank holding company.

Huntington Bancshares Inc.'s 8.5% convertible preferreds rose 4.375 points outright at 270 versus a $2 common stock price. The Columbus, Ohio-based bank holding company's common stock closed at $1.98, up by 19.28% or $0.32.

Bank common stocks improved Thursday on news that the president's proposed budget could include up to $750 billion more than the already approved $700 billion for rescuing the financial industry. Analysts were also generally positive on details about the U.S. Treasury's current "stress-testing" for banks to determine which ones will require further aid.

In a research note, Citi analyst Keith Horowitz wrote that Fifth Third could be one of the biggest beneficiaries following the stress test. The bank is unlikely to need more equity capital, but if it does, the conversion price of the convertible preferreds that will be offered in that case will be well above current prices, the analyst wrote.

A sellside convertible analyst said Thursday's news was a positive development for financials, but the convertibles remain under tremendous pressure.

"Most of these are preferreds, so they don't really have much of a bond floor," the analyst said. "The only things giving them any kind of a premium are the dividends and maybe a little bit of liquidation preference. The conversion prices don't matter anymore because they're out of the money.

"The only thing you're doing is hoping you can keep getting the dividend, the banks don't go bankrupt or become nationalized, or the common goes back up. But good luck on that last one."

"So yes, it's important that the government gets it right," the analyst added. "If the banks can recover, they won't go bankrupt, they can pay the dividends and maybe one day the common will go back up."

Sallie Mae falls on budget details

SLM's 7.25% convertible preferred fell 10 points outright after the White House proposed cutting out private players from the federal college loan program.

The Sallie Mae convertible traded at 303 against a common stock price of $5.30, while the common stock fell 30.87% or $2.59 to close at $5.80.

Reston, Va.-based Sallie Mae is a provider of student loans.

In his proposed budget, president Barack Obama is seeking to end subsidies to private lenders of student loans. Private lenders like Sallie Mae would still be contracted to service student loans from the government.

"That's the last thing they need right now," a convertible analyst said. "If they stop doing student loans and all they do is service those loans for the government, they'll lose a very lucrative part of their business. Obviously they're not going to be making as much money as they used to.

"But I haven't seen any details about how the government's going to work with the private guys like Sallie Mae, and we don't know if this part of the budget's going to get passed, so maybe it's still early. But it's not encouraging."

Biotechs take budget hit

The proposed budget was also negative for biotech giant Amgen Inc., which saw its convertibles slip on Thursday amid concerns about proposals to control healthcare spending and boost generics.

Amgen's 0.125% convertible due 2011 fell about 1 point on Thursday to 94, while its 0.375% convertible due 2013 traded at 91, both versus a common stock price of $53.50. The company's common stock fell 9.42% or $5.33 to close at $51.23.

Amgen is a Thousand Oaks, Calif.-based drugmaker.

Hologic, Inc.'s 2% convertible due 2037 was ½ point lower at 68 against a stock price of $12.15. Its common stock finished at $11.69 on Thursday, down by 3.63% or $0.44.

Hologic is a Bedford, Mass.-based maker of medical imaging systems and diagnostic and surgical products focused on healthcare for women.

In his proposed 2010 budget, Obama sought to curb healthcare costs through a variety of measures, including improving access to generic drugs. Generic drugs are generally seen to eat into the revenues of original drugmakers like Amgen.

But the news did not faze convertible holders much, a sellsider said.

"It really depends on how much weight they put behind generics, but generics have been around for a long time, it's not like these big biotechs haven't faced them before," the sellsider said.

"Guys like Amgen, their credit's not going to be affected by this. Maybe they have a little less time to make money from their new products, but it's not going to be a big deal, I don't think so. Maybe they make a $100 million less a year. That's nothing for them."

Mentioned in this article:

Amgen Inc. Nasdaq: AMGN

Fifth Third Bancorp Nasdaq: FITB

Hologic, Inc. Nasdaq: HOLX

Huntington Bancshares Inc. Nasdaq: HBAN

SLM Corp. NYSE: SLM

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