National City, REITS lower; Ford, Best Buy drop; but PHH gains in strong debut

By Rebecca Melvin

New York, March 28 - The upsized new issue from PHH Corp. was a home run Friday, gaining in active trading after it hit the secondary market and forming the day's centerpiece in convertibles, market participants said.

There was a lot of trading around the issue in the morning, and then things settled down for a mostly quiet day, players said. It marked a contrast from last week when four new issues hit the secondary market on the week's last trading day with barely any activity.

"That's kind of typical: a lot of activity around a new deal, and inactivity late on a Friday after the deal is done," a New York-based sellside trader said.

PHH's 4% convertibles due 2012 traded up to 102 early in the session, and late in the day were quoted at 102.25 bid, 102.75 offered, syndicate sources said.

The issue's success was something of a mystery to some, but some combination of a good stock borrow, a credit that people could live with, good volatility, and a decent coupon made it a winner, they said.

A second new issue released for secondary trading, Entertainment Properties Trust's $75 million of perpetual convertible preferred shares didn't attract much attention despite pricing at the cheap end of talk, and with a dividend of 9% and an initial conversion premium of 15%.

Financials, REITs weak

Financials in general, and real estate investment trusts in particular, were under pressure on Friday, as had been true for much of the week; and the sector seemed to set the tone for a mostly weaker convertibles market.

"Things were softer on light volume. There was selling pressure, if you wanted to buy something you could," one trader said.

Another trader suggested there was some "nibbling" or "reaching" for wider credit spread names, in hopes that the "wider can tighten." ON Semiconductor Corp. and Advanced Micro Devices Inc. were examples of this, he said.

Citigroup Inc.'s 6.5% convertible preferreds shares were down much of the week, closing Friday at about 47, compared to nearly 50 seen on Tuesday.

National City Corp. was also down as its shares tumbled 13% on Friday. The National City 4% convertibles traded at a decent level early in the day: 87.5 versus a stock price of $11, according to a New York-based sellside analyst. Another trader put the issue at 86 versus 11 this compared to a trade Thursday at 84 versus $10.75. But the regional bank's convertibles closed down Friday at 83.4 versus a stock price of $10.15, according to a pricing source.

In the REIT sector, National Retail Properties Inc. and Alexandria Real Estate Equities Inc. were also lower despite flattish stocks.

Retail isn't a significant sector for convertibles, but players took note of the news that J.C. Penney Co. Inc. cut its outlook, pulling down the sector in equities, and leading to lower Best Buy Co. Inc. convertibles, which are callable and in the money, so not actively traded.

The convertible bonds and preferred shares of Ford Motor Co. were also down.

PHH was a focus

PHH was expected to price $150 million of four-year convertibles to yield 3.75% to 4.25%, up 17.5% to 22.5%; but the deal was well oversubscribed and $220 million of the convertibles priced at the midpoint of talk, making a coupon of 4% and a 20.59% initial conversion premium.

"It was attractive. I didn't buy it, but it modeled cheap," a New York-based buyside outright player said, citing one source that put it 102 on the rich end of talk and 106 on the cheap end.

"It's investment grade, but not investment grade. It's a small cap, and the implied spreads are very wide," he said.

It originates mortgages and securitizes them with loans on its balance sheet," the buysider said of the Mt. Laurel, N.J. mortgage-services company. "For me it was not worth looking at from an outright perspective, but as an arbitrage play it was well received."

Others concurred that good stock borrow was a key to the issue's success.

The Rule 144A deal was sold via J.P. Morgan, Citigroup and Wachovia as joint bookrunners.

The senior unsecured notes are non-callable for life. They will have contingent conversion subject to a 130% price trigger and 98% parity. They offer standard takeover and dividend protection, but no contingent interest.

A portion of the net proceeds will be used to pay the cost of convertible note hedge and warrant transactions intended to offset potential dilution of shares, with the balance used to repay debt under revolving credit debt. The hedging raises the effective conversion premium from the company's perspective to 60%.

Citigroup, National City lower

The Citigroup 6.5% preferreds closed down nearly a point at 47 Friday, versus a stock price of $20.83. On Tuesday, the 6.5s were 49.79, versus a closing stock price of $23.42.

New York-based Citigroup (NYSE: C) shares closed down 4.4% Friday.

Meanwhile, National City, a regional bank based in Cleveland, remained in trade as players weighed the value of the paper's change of control protection.

"I don't have tremendous confidence in the company. It's not a great a great franchise, with construction loans in Florida, which isn't a good thing. But there was the potential of a merger and it has a 12% yield to put," a New York-based buysider said.

"So on the negative side there is concern about further write offs in its portfolio but on the positive side perhaps the company will get taken out," he said.

The shares have trended down in choppy trade since late February, and the convertibles have followed suit. On Tuesday, the 4% notes due 2011 traded at $89 versus $12, on Wednesday they traded at 85.5 versus 11 and on Thursday they traded at 84 versus $10.75.

The shares (NYSE: NCC) closed Friday down $1.50, or 13%, at $10.15.

REITs weaken

Meanwhile new issuance in REITS in the United States and Canada has flourished recently. But that paper was down on Friday. The one-week old Alexandria Real Estate Equities 7% convertibles closed at about 26 versus a stock price of $91.96, compared to 26.4, versus a stock price of $92 on Thursday.

Shares of the Pasadena, Calif., REIT ended down just four cents for the day.

Meanwhile the 3.95% convertibles of National Retail shed about 1.5 points to 102 compared to a 0.5% drop in its shares to $22.35. National Retail priced those convertibles on Feb. 27.

On Thursday the National Retail convertibles were put at 103.6 versus a share price of $22.50.

Entertainment Properties, which priced its $75 million of 9% convertibles late Thursday, is also in the REIT sector.

The preferreds, offered at par of $25, were talked at a dividend between 8.5% to 9% and an initial conversion premium between 15% and 20%.

Concurrent with the offering, the Kansas City, Mo.-based REIT priced 1.5 million new common shares.

J.P. Morgan Securities Inc. and Morgan Stanley & Co. Inc. were joint bookrunners.

Best Buy drops on sector slump

"There's not a good retail play out there," a New York-based sellside trader said of the convertibles market after the retail sector was weighed down by J.C. Penney's cut of first-quarter sales and earnings guidance due to weak consumer spending.

Best Buy has a convertible; but because the issue is callable and there is potential loss of its value over par there is little activity in the name. Its 2.25% convertibles due 2022 started the day at 108.413 and ended at 106.3.

"Best Buy is the only name really getting hit today. I think J.C. Penney lowering guidance just reiterates what we've known for a while: that we're in a very shaky economy, if not a recession," a sellside analyst said via email.

"We have a spread in the mid-200s and with where we see vol, the bonds model rich at current levels. Credit looks fine to me. Cash/Debt improved [quarter over quarter] and no debt coming due until 2012. The stock should remain in the $40-$44 range until the second half of the year and then maybe we'll start seeing more upside."

Best Buy is a Richfield, Minn.-based electronics retailer. Best Buy stock (NYSE: BBY) fell $1.71, or 4.1%, to $40.56.

Ford also lower

Ford Motor securities were also weighed down on Friday. Ford's 4.25% convertibles due 2036 dropped to a close of 83.8, versus a stock price of $5.59 on Friday, compared to 87.1, versus a stock price of $5.83 on Thursday.

Both the common and convertible preferred shares of the Dearborn, Mich.-based automaker fell by about 4%. The 6.5% convertible trust preferred shares due 2032 were down $1.24, or 4.1% at $28.95. Ford shares (NYSE: F) shed 24 cents to $5.59.

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