Financials slip, but not badly, on Wachovia ouster, S&P downgrade; Coal names higher; ImClone quiet

By Rebecca Melvin

New York, June 2 - Financial convertibles slipped, but not badly, on a hedged basis after Wachovia Corp.'s ouster of chief executive Ken Thompson and after Standard & Poor downgraded several financial names, market players said Monday.

"From what I can tell they aren't doing that badly. The major banks aren't really coming in on the downgrade news," a Boston-based hedge fund trader said.

Wachovia's convertible preferred shares were called down 0.25 point after news that Thompson - demoted from chairman a month ago - was also losing his chief executive position.

Later in the session, S&P cut the rating of Morgan Stanley, Merrill Lynch & Co. and Lehman Brothers Inc. It also said it may downgrade Wachovia, and the agency revised its outlook to negative on Bank of America Corp. and JPMorgan Chase.

Lehman's convertible preferred shares were down 0.50 point or more, and the convertible preferreds of Bank of America and Citigroup was seen down only fractionally; while Merrill Lynch's floating-rate bonds more or less held in, sources said.

Elsewhere, Alpha Natural Resources Inc. and Peabody Energy Corp. extended recent gains as investors continue to eye ongoing strong global demand for coal and tight supply.

ImClone Systems Inc. was quiet but steady despite a 6% drop in its underlying shares after data presented at the American Society of Clinical Oncology annual meeting over the weekend showed its cancer-fighting drug Erbitux had some encouraging results but wasn't expected to threaten Avastin, a rival treatment.

Wachovia slips

Financial names were a little weaker after the S&P bombshell around lunchtime, but their stocks and convertibles "sort of" bounced back later, a Connecticut-based hedge fund financials player said.

"On a hedged basis, the group is fractionally weaker," he said, adding that pressure on Wachovia might be a little heavier than with other names like Bank of America and Citigroup, for example.

"With Wachovia, you've got the potential takeout target factor, with the chairman given the boot, and because of the action in the stock, and because the takeout protection no longer applies," he said.

"Doing a deal at such a depressed stock level and given the amount of premium points being paid makes the takeout table more or less irrelevant," he said.

Ahead of the open, Wachovia announced that Thompson was retiring at the request of the board and being succeeded on an interim basis by current chairman Lantry Smith.

His resignation marks another in a string of departures of chief executives from financial institutions amid massive write-offs linked to the U.S. home mortgage and credit crises. Charles Prince of Citigroup, Stan O'Neil of Merrill Lynch and James Cayne of Bear Stearns were others that have been forced out.

In a press release, Smith called the conditions in the financial services industry "unprecedented" but said Wachovia was a strong institution and well-positioned to face the challenges.

No single event precipitated the board's decision to oust Thompson. Instead a series of previously disclosed "disappointments and setbacks cumulatively have negatively impacted the company and its performance," Smith said.

Market watchers called one of Thompson's more grievous missteps the 2006, $25 billion purchase of Golden West, a savings and loan based in Oakland, Calif., that was heavily involved in the adjustable-rate mortgage business.

Other problems facing Wachovia is a lawsuit stemming from its participation in auction-rate securities and an investigation into possible violations in the Bank Secrecy Act. Its shares have lost 50% in the last six months.

Wachovia 7.5% series L convertible perpetual preferred stock traded at 1,040 versus a share price of $23.25 intraday Monday.

At the close, the preferreds were seen at 1,045.77 versus a share price of $23.41, compared with 1,058 versus a stock price of $23.80 on Friday. On Thursday, the Wachovia preferreds were at 1,069.

Shares of the Charlotte, N.C.-based diversified financial services company (NYSE: WB) ended down 40 cents, or 1.7%, at $23.40.

Washington Mutual lower

Washington Mutual's 7.75% series R non-cumulative perpetual convertible preferred stock closed at 760 versus a stock price of $9.00. They closed Friday at 767 versus a stock price of $9.02.

Washington Mutual stock (NYSE: WM) slipped just 2 cents, or 0.22%, to $9.00.

"Washington Mutual has been pretty active," a buysider said.

The Seattle-based thrift also announced an executive shake-up, replacing chief executive Kerry Killinger as chairman of the board and taking other steps to "improve corporate governance."

Independent director Stephen E. Frank will assume the role of board chair while Killinger will continue as chief executive and serve as a director.

The board also adopted a majority voting standard and made several changes to the composition and leadership of some board committees.

"These steps are just a few among many we are taking this year to make this a positive turning point for WaMu. In addition to these actions, we are, of course, aggressively implementing our plans for operational and financial recovery - including maintaining ample capital and a high level of liquidity, significantly reducing our operating expenses, and continuing to grow our profitable, core retail bank," Killinger said in a company release.

Washington Mutual has been hit hard by rising mortgage delinquencies and defaults. During the first quarter, it lost more than $1.1 billion and set aside $3.5 billion to cover defaulted loans.

Bank of America, Merrill little changed

The Bank of America 7.25% series L perpetual preferred shares traded Monday at 1,015 versus a share price of $33.25, compared with 1,017 versus a share price of $34.01 on Friday. Shares of the Charlotte, N.C.-based financial services company closed down 43 cents, or 1.3%, at $33.58.

"Bank of America is marginally cheaper, [which] makes them attractive," a buysider said. "There is good potential that they are going to cut their dividend. Couple that with the fact that even though they have the same problem [as Wachovia] with their takeover table, they aren't considered a takeover target, and certainly not a cash takeover target. Hedgies like the Citigroup preferreds also because of a possible dividend cut."

Merrill Lynch's floating-rate convertible bonds were also holding up better, he said.

Meanwhile, Lehman Brothers' 7.25% series P convertible preferred shares traded at 1,065 versus a share price of $35.75 on Monday, which was lower outright by about 3 points compared with Friday.

Shares of the New York investment bank (NYSE: LEH) closed down $2.98, or 8%, at $33.83.

Alpha Natural, Peabody Energy higher

Along with lots of financials, there were some coal names trading on Monday, too. Alpha Natural's 2.375% convertibles due 2015 traded intraday Monday at 174 versus a share price of $80.00. Recently, the convertibles traded at 165 versus a share price of $80.00. The rising price was called "amazing," by one source.

Shares of the Abingdon, Va.-based coal company (NYSE: ANR) jumped $4.91, or 6%, to $86.59 on Monday.

Peabody Energy's 4.75% convertibles due 2066 were seen at 150.58 versus a share price of $77.52. That compared with 145.71 versus a share price of $73.92 on Friday. Shares of the St. Louis-based coal producer (NYSE: BTU) gained 5%.

ImClone steady amid 6% stock slide

ImClone's 1.375% convertible senior notes due May 15, 2024 were seen little traded at around 96.25, according to a New York-based sellside analyst.

That price was flat compared with previous levels, but its shares (Nasdaq: IMCL) fell $2.64, or 6.1%, to $40.94.

New York-based ImClone was weaker after presentations at the ASCO annual meeting in Chicago. Analysts said that the ASCO updates strengthened the competitive profile of Avastin.

Avastin is approved for treating colorectal, lung and breast cancer, while Erbitux is approved for colorectal and head and neck cancer.

Most attention at ASCO was focused on a new study of Erbitux in lung cancer, which found patients taking it with chemotherapy lived about five weeks longer than patients treated with chemotherapy alone.

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