Financials, Wells Fargo weak, but in line with stock; Qwest adds 0.25 point; LabCorp finds buyers

By Rebecca Melvin

New York, March 6 - Financials were under pressure in the convertibles market yet again Friday in what amounts to a severe test of their ability to endure.

Wells Fargo & Co. convertible preferreds performed in line, ending up slightly with a bounce in their common shares after the San Francisco-based lender cut its dividend to 5 cents a share from 34 cents a share and offered some hopeful comments.

"It's a sea of red," a New York-based buysider said of financials mid-afternoon Friday.

Citigroup Inc. was at 12, down only 14 cents, which was in line with the common stock that was flattish at near $1.

Real estate investment trusts remained under pressure. But there weren't many sellers as holders are tending to want to preserve those positions, which are tied to credit-default swaps, a New York-based sellsider said.

Investors were tuned in early to Friday's jobs report, which was abysmal as expected. But equities actually opened higher, and although they sank into negative territory for most of the session, they rallied to the close, leaving the Dow Jones Industrial Average up 32.25 points, or 0.5%, at 6,626.94 at the close.

For the week, the DJIA was still down 6.6%, however, which is on top of losses of 4% and 6% in the previous two weeks.

The U.S. economy lost 651,000 jobs in February, raising the unemployment rate to 8.1%. Since December 2007, the economy has lost 4.4 million jobs, more than half of which occurred in the past four months.

In convertibles on Friday, "things were moving down on a dollar basis, but not on a dollar-neutral basis," a New York-based sellside analyst said. "They were moving with wherever the hedge was, and credit widened out a little bit."

But some names saw some positive action. One of those was Qwest Communications Inc., which added about 0.25 point on a dollar neutral basis.

Laboratory Corp. of America Holdings' convertibles found at least one buyer at slightly lower prices as the Burlington, N.C.-based independent lab services company continues to look attractive as a defensive name with strong cash flow.

Wells Fargo slips to mid 300s

Wells Fargo saw its 7.5% convertible preferreds trade at 355, which was in line with its common shares on Friday. The common stock finished up 6%, or 49 cents, at $8.61.

Wells said the dividend cut would save $5 billion a year that the bank would use to reinvest in the company and increase capital.

The bank also made positive comments about its business. Wells bought Wachovia, whose loan portfolio was full of the riskiest kinds of mortgages. Although Wells wrote down the value of many Wachovia loans at the time of the acquisition, investors still worried it had not written them down enough.

Also this week, Moody's Investors Service put Wells Fargo's debt on review for a possible downgrade. The Moody's report said that Wells' tangible common equity ratio was "modest," at 5.1%.

But Wells said on Friday that its Wachovia integration was on track and that its dividend savings would amount to an additional 40 basis points on its tangible common equity ratio.

Other financial convertible preferreds also continued mostly weaker in line with the common stock attached to those names.

Citigroup's 6.5% convertible preferred shares, which will go away in April in association with its exchange offering, were steady at about 12.

The New York bank's common stock settled up a penny, or nearly 1%, to $1.03.

"The absolute stock prices don't matter. It's the number of share. But the market cap is only $5 billion. It's pretty sad," a New York-based convertible buysider said of Citigroup common stock.

"I don't think anyone knows what it's worth. There's a lot of leverage. It's an option on things getting better," the buysider said.

Ford Motor Co. also has debt restructuring going on, and its 4.25% convertibles are likely to go away soon.

To which, the buysider said he wasn't sorry to see them go.

"Personally, I don't want to have to worry about it anymore," the buysider said, referring to the fact that he didn't play the issue but given its size it couldn't be ignored since it was a big part of convertible indexes.

Also among financials, the REITs were under pressure again. But holders were eyeing potential unwinding of CDS and were reticent to sell the paper even though it was pointing lower.

"The REITs are set up against CDS, and people don't want to do anything there. When they have to unwind the CDS, they'll have to sell," a New York-based sellsider said.

Qwest adds 0.25 point

Qwest's 3.5% convertibles due 2025 ended the session at 90.0125 bid, 91.0125 offered versus a share price of $3.19.

The short dated 3.5s are appealing to investors, a buysider said. Paper like Qwest and Lucent "have decent yields for short maturity, assuming those companies are money good; and we'll have new issuance at some point."

"It's hard to find things [in the current market] where they are flourishing. You are just looking for the less bad," the buysider said.

A sellsider said, "They are of fairly short duration, low premium name. So you have the upside if the equity does move, but you have the downside protection too with the bond floor kicking in."

The Denver-based telecom's common stock slumped through the session but bounced off its lows into positive territory near the close in tandem with a broad-based rally.

One observer had expected a positive close, saying that fund managers wouldn't want to be short going into the weekend. "For these fund guys, their job is to invest. I think in the current environment, they are more hesitant to go into the weekend short, than long," a New York-based sellside trader said.

LabCorp looks attractive

LabCorp's 0% convertibles due 2021 closed around 80, which was slightly off the previous level. Shares of the company ended up 31 cents, or 0.5%, at $54.99.

A buysider said health care was still a sector deserving decent weighting.

"I just bought [LabCorp]. They have a positive yield to put, strong cash flow and they are a pretty defensive company," the buysider said.

Mentioned in this article:

Citigroup Inc. NYSE: C

Ford Motor Co. NYSE: F

Laboratory Corp. of America Holdings NYSE: LH

Qwest Communications International Inc. NYSE: Q

Wells Fargo & Co. NYSE: WFC

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