By Kenneth Lim
Boston, Nov. 20 - Convertibles had another lackluster session on Thursday as weakness in the stock markets continued to take its toll.
Financials suffered a tough session, with Citigroup Inc. leading the slide as its stock fell on worries about the bank's health. Prudential Financial Inc.'s early-putable preferreds continued to hold steady amid the turmoil.
Autos saw a slight outright rebound after a brutal Wednesday, but the Detroit names were not out of the woods as a credit agency cut its ratings on Ford Motor Co.
PharmaNet Development Group, Inc. received some bid interest after the company said it will offer to exchange its 2.25% convertible notes due 2024 for 8% convertible notes due 2014 and cash.
Quiet session
Trading slowed to a trickle on Thursday as renewed concerns about the capital markets drove equities lower.
"Things are better for sale, obviously," a sellside convertible trader said. "The stock market was down pretty big. But you know, converts aren't puking or anything like they were in September or October. It just seems like they're better for sale.'
Drops in the underlying stocks used to be better for convertibles, but these days problems with equities are hitting convertibles as well, the trader said.
"I think if you replay today a couple of years ago, I'm sure converts would be very well bid with the declines in the stock market," a sellside convertible trader said. "But delevering is still going on, the credit markets are still very weak."
Citigroup drops on fears
Citigroup's 6.5% convertible preferred lost more than a quarter of its value outright as the bank's common stock dropped Thursday.
The convertible traded at 16 against a common stock price of $5.45, down by about 6.625 points. Citigroup common stock fell 26.41% or $1.69 to close at $4.71.
Citigroup is a New York-based bank holding company.
"I heard it got slammed," a convertible trader said. "The stock just fell through the bottom, people are worried they might be in trouble."
Saudi investor prince Alwaleed Bin Talal Bin Abdulaziz Alsaud said Thursday that he was raising his stake in Citigroup to 5%, but the vote of confidence failed to rally the company's stock. Citigroup, which said Wednesday that it was taking over the remaining $17.4 billion of off-balance sheet structured investment vehicle assets, issued a statement saying that the company has a "very strong capital and liquidity position."
Speculation on Thursday raised the possibility that Citigroup could report another quarterly loss in the fourth quarter and may have to seek more capital.
"Investors who are already nervous have been spooked," the trader said. "First the company had to lay off a large number of workers, and then they say they're taking on billions of dollars of risky assets. In other times this investment by this prince could be positive, but I think now people are worried. It's now, 'Oh no, they need to raise more money!' And the economy's not doing well, so there's even more concern that they're not going to be able to recover."
The trader said further capital raises were possible scenarios.
"They're losing money every quarter, and it's like a vicious cycle," the trader said. "The riskier your credit gets, the more capital you need to have to make sure creditors and counterparties and customers don't get spooked and run away, but it also costs more to raise capital. You're either paying too much interest on debt or diluting your stock. The more you raise, the deeper the hole."
But the trader thought that a default was unlikely.
"I don't think you're going to see another Lehman," the trader said. "That would send us back to October. I think in the worst case scenario Citigroup gets sold, which could be good or bad. But that's the worst that could happen. I saw a report someone was still recommending buy on the stock. It's hard to know these days. Everything gets magnified."
Prudential holds firm
Prudential's floating-rate convertible due 2037 continued to be relatively stable compared to the rest of the financials.
The convertible was flattish at 88 versus a stock price of $16.75. Prudential common stock closed at $13.73, down by 16.43% or $2.70.
Prudential is a Newark, N.J.-based insurance company.
"It's still down, but it's getting support from the put in June of '09," a sellside trader said.
Ford, GM recover
Ford's 4.25% convertible due 2036 and the General Motors Corp. convertibles improved slightly on Thursday as the underlying stocks recovered slightly.
Ford's notes were seen at 20.5 against a stock price of $1.75, up by about 2.5 points. Ford common stock rose 10.32% or $0.13 to close at $1.39.
General Motors' 5.25% convertible due 2032 gained by up to a point outright at 4.10, while the 6.25% convertible due 2033 also moved up a point at 4.25, all versus a common stock price of $2.50. General Motors common stock settled at $2.88 on Thursday, up by 3.23% or $0.09.
Dearborn, Mich.-based Ford and Detroit-based General Motors are automakers.
Standard & Poor's on Thursday lowered Ford's credit rating to CCC+ from B- with a negative outlook, citing the company's cash burn and the business outlook.
"We expect Ford's cash outflows to further reduce its cash balances during the next few quarters, which will test the company's ability to maintain sufficient liquidity throughout 2009," S&P said in a statement.
PharmaNet to exchange notes
PharmaNet's 2.25% convertible senior notes due 2024 were seen bid at 66.5 outright on Thursday after the company announced plans for an exchange offer.
The company will offer to exchange its $143.75 million of 2.25% notes for $115 million of 8% convertible senior notes due 2014 and cash.
The offer was to begin Thursday and expire at the end of Dec. 18.
For each $1,000 principal amount of notes accepted, the company will issue $800 principal amount of new notes and $250 in cash.
The new notes will have an initial conversion price of $6.05 per share, instead of $41.08, and physical settlement instead of net share settlement. There will also be a call and a put on Aug. 15, 2012. The old convertibles are callable and putable on Aug. 15, 2009.
PharmaNet common stock (Nasdaq: PDGI) closed at $1.90 on Thursday, lower by 7.32% or $0.15.
Holders of about 57% of the notes said they plan to participate in the exchange offer, according to the release. A minimum of 56.5% of the notes must be tendered in order to consummate the exchange offer.
PharmaNet is a drug development services company based in Princeton, N.J.
The exchange offer was seen as the company trying to takeout the old notes before the put arrives, market sources said.
"They're clearly trying to get it out of the way before it becomes putable," a sellside convertible analyst said.
Although issuers do not usually address upcoming puts so early, the company could feel that now was the best time to make its move, the analyst said.
"Who knows, the way things are going?" the analyst said. "You'd think the capital markets would be a little more fluid in eight to nine months, but you never know. The company could think it's a good time to get rid of an obligation like that right now."
The offer looks attractive at first glance, the analyst said.
"If you're pulling in 25 points of cash, and they're giving you only 80 points on the note...that means they're saying the new notes are going to be trading at 50," the analyst said. "But with the higher coupon and the cash, I'd take it."
Mentioned in this article:
Citigroup Inc. NYSE: C
Ford Motor Co. NYSE: F
General Motors Corp. NYSE: GM
| PharmaNet Development Group, Inc.: | Nasdaq: PDGI
|
| Prudential Financial Inc. | NYSE: PRU
|
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