Leap Wireless expands on debut; Huntington, Wachovia firmer, but other financials, Ford weaker

By Rebecca Melvin

New York, June 20 - Friday's convertibles market may not have been anything to write home about as financials and economic uncertainty continue to weigh heavily on investors, but there were a few positive notes in the session.

Leap Wireless International Inc. priced an upsized $220 million of six-year convertible senior notes that did well and expanded on the day, market sources said.

Huntington Bancshares Inc.'s convertible preferred shares strengthened by about a point, dollar neutral, as its underlying shares zoomed higher on a positive preannouncement.

Wachovia Corp.'s perpetual convertible preferreds were a little better amid reports that JPMorgan Chase & Co. is a possible buyer of the Charlotte, N.C.-based commercial bank.

SunTrust Banks Inc., which is not a convertibles issuer, but had been rumored to become one, said Friday that it does not expect to cut its dividend or to issue stock to raise additional capital.

"We saw a little bit of a silver lining Friday," a New York-based sellside trader said of financials.

On the negative side, however, Merrill Lynch & Co. was rumored to be preannouncing it would miss estimates, and Bank of America Corp., which is aiming to seal its acquisition of Countrywide Financial Corp. on July 1, was among 12 companies that a Merrill Lynch analyst predicted would have lower-than-expected earnings in 2008 and 2009.

Merrill analyst Ed Najarian cut his 2008 earnings estimates on these companies by an average of 22% and 2009 earnings estimates by an average of 19% due to increased credit loss assumptions.

Elsewhere, autos were not faring well, on "continuous news on the tape that points to a negative future," the New York sellsider said.

Ford Motor Co.'s 4.25% convertible bonds were seen down 6 points to 83.875, from nearly 90 on Thursday.

In the primary market, MF Global Ltd. priced a deal that had been in doubt, but with re-pricing of the terms that fattened the yields considerably from talk, it was able to pull though.

MF priced $150 million of 30-year convertible senior notes to yield 9%, and $150 million of non-cumulative convertible preference shares to yield 9.75%, both with initial conversion premiums of 22.22%. Talk had been in the 4% to 5% plus range.

Overall, it was quiet across the board, sources said, as the market was muted by typical summer Friday volume and investor worries.

"It's difficult to find anything interesting in this environment; so it's better to stay at the shorter end," a New York-based sellside trader said.

Leap expands about 0.25 point

The new Leap Wireless 4.5% convertibles were slightly better on the day. They traded up early to about par and a quarter, and then dipped a little, but ended better relative to the underlying shares (Nasdaq: LEAP), which sagged 3.1% to $50.90.

The Rule144A deal priced at the rich end of talk, which was 4.5% to 5% for the coupon and 72.5% to 77.5% for the premium.

Leap Wireless is a San Diego, Calif.-based provider of digital wireless services.

The Fifth Third Bancorp 8.5% perpetual convertible preferreds, which were released for secondary trading on Thursday, were still higher on Friday, quoted at 107.625 versus $10.40 toward the end of the session

"One reason it did better perhaps is that the problem for Fifth Third wasn't that they were raising capital for subprime losses. "It was a different situation," a sellsider said.

Fifth Third's stock (Nasdaq: FITB) extended gains on Friday, closing up 36 cents, or 3.4%, to $10.11.

Huntington, Wachovia a little better

Huntington Bancshares' 8.5% perpetual convertible preferred shares added about 10.5 points outright to 784.775 on Friday, which was up about a point dollar neutral, compared with a 30% climb in their underlying shares.

Shares of the Ohio-based regional bank (Nasdaq: HBAN) closed at $6.67 after reassuring investors that it expects to report second-quarter net charge-offs representing an annualized 0.60% to 0.65% of average total loans and leases.

Wachovia's 7.5% perpetual convertible preferred stock was bid up, making it slightly better on the day relative to its underlying shares.

The 7.5s closed at 928.75 versus a share price of $17.43 on Friday, compared with 933 versus a share price of $17.77 on Thursday.

Shares of Wachovia (NYSE: WB) ended down 34 cents, or 1.0% at $17.43.

Merrill, Bank of America lower

Financials were ugly Friday, according to one source, with the Merrill analyst Edward Najarian talking about bank stocks being in "capitulation mode," and slashing his earnings estimates for 12 of them.

Convert issuers Bank of America, Wachovia, and Merrill Lynch were on the list as companies that may need to raise more capital. Meanwhile Citigroup Inc, Wachovia, Washington Mutual Inc. and National City Corp., all convert issues, have already raised at least $7 billion each this year.

"It's an easy rumor to start. That's like hitting a piņata with your eyes open," a New York-based sellside trader said of recent analysts' reports. "The real question is what stops them from going down?"

"You need something to happen at a price to put a bottom in," he said. That something could be a foreign bank proposing a merger or perhaps just allowing a long period of time to pass, he said.

Merrill Lynch saying that Wells Fargo, SunTrust and Bank of America needed to raise their capital levels hurt those names, a Boston-based sellside trader said.

He called Bank of America's 7.25% series L perpetual convertible preferred shares down about 0.75 point at 944.

Another source closed the Bank of America preferreds at 937.655 versus $27.10 on Friday, compared with 952, versus $28.14 on Thursday.

Shares of the Charlotte, N.C.-based bank (NYSE: BAC) closed down $1.04, or 3.7%.

Ford hurt by further weakening of sales

The Ford 4.25% convertible senior notes due 2036 fell to 83.625, which was down about 0.75 point dollar neutral on the day, a sellside trader said at the close.

The latest drop was caused by an announcement from the Detroit-based automaker Friday that it now plans to cut third quarter production by 25% and fourth quarter production by as much as 14%.

The news comes just one month after Ford first announced production cuts for large vehicles and backed away from its restructuring goal of returning to profitability in 2009.

The car maker said it is being hurt by an accelerating decline in sales of trucks and sports utility vehicles amid higher gasoline prices.

"As gasoline prices average more than $4 a gallon and consumers worry about the weak U.S. economy, we see June industry-wide auto sales slowing further and demand for large trucks and SUVs at one of the lowest levels in decades," Ford chief executive Alan Mulally said in a news release.

"General Motors was also 'in' on this, and we saw a lot of outright action on GM, but no outright action in Ford," the sellsider said.

Shares of Ford (NYSE: F) closed down 51 cents, or 8.1% at $5.81.

MF Global prices but no trades seen

"The stock is not helping that one out," a West Coast-based sellside trader said of the MF Global convertibles offerings. "The stock was 13 when this deal was announced and now it's in the 6s."

Another source said that appetite for such paper isn't coming from inside the convertibles market. "With these kinds of yields - 9% on the senior notes and 9.75% on the preferreds - it's coming from alternative buyers," he said

A Boston-based source said: "The higher coupons and bigger premiums appealed to people who went for the yield. The higher conversion is less dilutive on the common, and with the fatter yield they got what they wanted."

No one queried had seen a quote on the MF Global convertibles.

Its shares (NYSE:MF) fell another $1.69, or nearly 20%, to $6.89 on Friday.

Hamilton, Bermuda-based MF Global is a broker of exchange-listed futures and options.

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