National City off slightly; WaMu slides; Cadence falls; Alliance Data trades in line in debut

By Rebecca Melvin

New York, July 24 - Convertibles were weaker but not terribly active Thursday. Traders said most trading surrounded random earnings reports, with financials again at center stage to the downside in the broader markets.

National City Corp.'s convertible bonds dropped early in the session but then retraced much of their losses after the regional bank reported a $1.76 billion loss for the second quarter but provided some guidance that was viewed as positive for the credit.

Washington Mutual Inc. continued to bleed as its shares extended their slide amid persistent concerns about the Seattle-based thrift regarding its mortgage portfolio after reporting a $3 billion quarterly loss on Tuesday.

The convertibles of Cadence Design Systems Inc. fell 1.5 points to 2 points dollar neutral after the electronic design software maker reported that its net income plunged in the second quarter and that it was lowering its earnings outlook for the third quarter.

Ford Motor Co.'s convertible bonds were lower by nearly a point dollar neutral after the Dearborn, Mich., automaker reported a record net loss of $8.7 billion for the second quarter.

Level 3 Communications Inc. bonds were up a bit, however, after the Bloomfield, Colo.-based communications equipment maker reported a narrower net loss of $33 million for the second quarter and raised its free cash flow outlook for 2008 to positive from break-even for the rest of the year.

In the primary market, Alliance Data Systems Corp.'s newly priced $700 million of 1.75% five-year convertibles were wrapped right around par at the end of the session, having traded in line with its shares, which closed lower by nearly 1%.

NatCity holds up better than most

National City's 4% convertible senior notes due 2011 traded lower early in the session to about 72, down 2.5 points, but closed nearer the 74.5 mark after the Cincinnati-based regional bank reported a large quarterly loss but said it has "more than sufficient capital" to ride out the credit market turmoil through 2010, according to a market source.

"Nat City held up better than most of the group, so that could be viewed as a positive," a New York-based sellside trader said.

"Some people viewed it as negative, but I didn't think it was so bad," an East Coast-based sellside trader said of National City's earnings report.

The $1.76 billion second-quarterly loss, compared to a year-earlier profit of $347 million, but analysts believe it has boosted its capital reserves enough to protect against losses.

In January, National City priced an upsized $1.25 billion of 4% convertible senior notes, and in April it arranged a $7 billion private placement of convertible preferreds and common shares.

On Thursday, National City shares (NYSE: NCC) closed off by 4 cents, or 0.86%, to $4.67.

WaMu continues to slide

Washington Mutual's 7.75% series R non-cumulative perpetual convertible preferred shares closed down more than 6 points to $430 on Thursday, compared to a closing share price of $4.03.

The 7.75s have a $1,000 par, one sellside trader pointed out.

"It took a couple of days to see how bad it is," the sellsider suggested, regarding Washington Mutual's earnings posted Tuesday.

The thrift reported a $3.33 billion second-quarter loss, or $6.58 per share. Excluding items, the net loss was about $3.34 per share, worse than analysts' estimates of about $1.05 per share.

But the company said it had more than $40 billion of liquidity available at the end of the quarter, and it improved its capital ratio to 7.79% and does not expect to have to raise more capital.

A spokesman reiterated on Thursday that the bank wouldn't need to rely on funding from outside sources. The comments came after Gimme Credit analyst Kathleen Shanley said unsecured creditors are reducing their exposure to the thrift.

Washington Mutual shares (NYSE: WM) closed off its lows for the day, down 62 cents, or 13%, at $4.03.

Cadence convertibles sink

Cadence Design's 1.375% convertibles due 2011 sank to about 81 in trade versus a share price of $7.40. That compared to 86.5 bid, 87.5 offered versus a share price of $10.27 on Wednesday.

The Cadence 1.5% convertibles due 2013 were seen closing at about 72.

Meanwhile, shares of the San Jose, Calif.-based company (Nasdaq: CDNS) closed down 31%, or $3.16, at $7.11.

Cadence reported late Wednesday that its net income dropped to $5 million in the second quarter, compared to $60 million in the year-earlier quarter. Excluding special items, the company's net income met analysts' expectations.

Free cash flow guidance for 2008 was reduced, however, and "the credit got worse," a New York-based sellside analyst said. In addition, a pending acquisition with Mentor Graphics - if they are able to get the deal done - means it will be coming to the market and will have to raise money," the analyst said.

Ford loses ground

Ford Motor's 4.25% convertible bonds due 2036 closed down about 0.875 point to 73.5 bid, 74 offered on Thursday, compared with a closing share price of $5.11.

Shares of the auto maker were down 92 cents, or 15%.

Its second-quarter net loss of $8.7 billion, including pre-tax special items totaling $8 billion, compares with net profit of $750 million in the second quarter of 2007.

Ford also announced a significant acceleration of its transformation plan with the addition of several new fuel-efficient small vehicles in North America and a realignment of its North American manufacturing in response to "the rapidly changing business environment and said it remains committed to its business transformation plan.

But its credit got worse, according to a New York-based sellside source. Much of the loss was due to a write-down in the value of assets, and losses on falling values of SUVs that are coming off leases back to the Ford Motor Credit arm.

"But not a lot was trading," the trading source said. "It was not a large trading day."

Level 3 doing better

Level 3 stock rallied and then came off after investors looked at the one-time issues in the equity, a sellsider said. "Even if you back out the one-time issues, what they reported is actually good."

But what was good for the credit was that the company turned free cash flow positive, the sellsider said.

"People are still questioning whether they can deliver. But the CDS was 80 basis points tighter in trading this morning," he said.

"There are believers in the name; they've made money in it in the past, and they assume they'll figure out a way to make things work," he said.

Level 3 6% convertibles due 2009 traded around 96.25 and the Level 3 3.5% convertibles due 2012 traded between 95.635 bid, 97 offered versus a stock at $4.10.

Shares of Level 3 (Nasdaq: LVLT) closed down 22 cents, or 6.2%, at $3.34.

Alliance Data slips with shares

The new Alliance Data 1.75% convertibles were trading around midday at 99.875 bid, 100.25 versus a share price of $64.08.

A syndicate source said they closed at nearly the same level, "wrapped around par."

Shares of the Dallas-based marketing services company closed down 61 cents, or nearly 1%, at $63.47.

"Trading was in line and not that active," the syndicate sources said.

The notes priced toward the cheap end of talk for the coupon, which was 1.375% to 1.875%, and at the midpoint of talk for the initial conversion premium, which was 20% to 25%.

There is an over-allotment option for an additional $105 million.

Banc of America Securities LLC, J.P. Morgan Securities Inc. and Wachovia were bookrunners for the Rule 144A offering.

The convertibles are non-callable and may not be put.

The company plans to use proceeds to buy back $300 million of shares, to pay about $105 million for convertible note hedge transactions, to repay two outstanding credit agreements in full and to free up borrowing capacity.

The company has also entered into convertible note hedge transactions in connection with the notes offering and separate warrant transactions with the hedge counterparties, which will result in additional proceeds to Alliance Data.

The warrants have an exercise price that is about 75% higher than the closing price of Alliance Data's common stock on July 23.

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