Citigroup jumps on government rescue; B of A, Wachovia rise; Alpharma little changed on merger news

By Rebecca Melvin

New York, Nov. 24 - Citigroup Inc.'s convertibles jumped in tandem with its other securities Monday on news that the U.S. government intervened late Sunday to prop up the foundering banking giant with a $20 billion cash infusion and guarantees of more than $300 billion of potential loan losses.

The government's decisive action also boosted other financials, with the perpetual convertible preferreds of Bank of America Corp. and Wachovia Corp. also trading higher on the day.

Bank of America's convertibles gained 6.75 points, which was a large jump, but the tone Monday remained muted as sellers were still a strong feature of the market.

"I see people still looking to get out of positions," an East Coast-based sellside trader said. "People are still losing assets even though things are incredibly cheap. That tells me they don't have the ability to buy."

Elsewhere, merger news did little to move the convertibles of Alpharma Inc. But King Pharmaceuticals Inc., which confirmed that its increased $1.6 billion cash takeover offer of Alpharma is getting done, was slightly higher outright. The accepted offer ends a drawn-out takeover battle that began last summer.

President-elect Barack Obama held a press conference Monday, as expected, in which he named members of his economic team poised to take the reigns of government when his administration takes office in January.

In addition to New York Federal Reserve president Timothy Geithner as Treasury Secretary, which was reported Friday, the choices include former Harvard president Lawrence Summers as the director of the National Economic Council; economist Christina Romer as director of Obama's Council of Economic Advisors; and Melody Barnes as director of Obama's Domestic Policy Council.

Separately, the solar power sector rallied on Monday, sending the convertibles of JA Solar Holdings Co. Ltd. higher in trade.

Citigroup jumps on rescue

The Citigroup 6.5% convertible preferred shares jumped to 20.5 on Monday versus a share price of $5.95. The preferreds were up 8.5 points from a quote of 12.5 versus a share price of $3.70 on Friday.

That's a current yield of 15.69%, a sellsider pointed out.

Shares of the bank holding company surged 58%, or $2.18, to $5.96 in heavy volume.

The $20 billion cash injection by the Treasury Department will come from the $700 billion financial bailout package, and it follows an earlier $25 billion infusion, in which the government also received an ownership stake in Citigroup.

As part of the plan, the Treasury and the Federal Deposit Insurance Corp. will guarantee against the "possibility of unusually large losses" on up to $306 billion of risky loans and securities backed by commercial and residential mortgages.

The plan also features a unique loss-sharing arrangement in which Citigroup will assume the first $29 billion in losses on the risky pool of assets, but beyond that the government agrees to absorb 90% of the remaining losses, with Citigroup footing the bill for 10%.

Money from the $700 billion bailout, or TARP, program and funds from the FDIC would cover the government's portion of potential losses. The Federal Reserve would finance the remaining assets with a loan to Citigroup.

In exchange for the guarantees, the government will get $7 billion in preferred shares of Citigroup. In addition, Citi said it will issue warrants to the U.S. Treasury and the FDIC for about 254 million shares of the company's common stock at a strike price of $10.61.

As a condition of the rescue, Citigroup is barred from paying quarterly dividends to shareholders of more than 1 cent a share for three years unless the company obtains consent from the three federal agencies. The bank is currently paying a dividend of 16 cents, halved from a 32-cent payout in the previous quarter. The agreement also places restrictions on executive compensation and bonuses.

Furthermore, the agreement calls on Citigroup to take steps to help distressed homeowners.

Not only Citigroup, but stocks in general gained sharply after the bailout, which represents the largest yet of a large financial institution.

The Dow Jones Industrial Average surged 396.97 points, adding 4.9% to 8.443.39.

B of A, Wachovia jump

Bank of America's 7.25% perpetual convertible preferreds added 6.75 points to trade at 590. Shares of the Charlotte, N.C.-based bank surged to $14.59, up 27%.

Wachovia's 7.5% perpetual convertible preferreds traded at 610, which looked higher by nearly 50 points, compared to 565 on Friday.

Wachovia, another Charlotte, N.C.-based bank, is being taken over by Wells Fargo & Co.

Alpharma little changed on King offer

Alpharma 2.125% convertible senior notes due 2027 were seen closing little changed at 119 versus a share price that ended up 8%, at $36.19.

The Bridgewater, N.J.-based pain treatment firm initially rejected the original $1.4 billion King offer. But both companies have unanimously approved it now.

Under the terms of the now supported offer, King will pay $37-a-share for Alpharma's stock.

The offer's deadline, which was to have expired last Friday, will now be extended to Dec. 19. King had threatened a proxy fight anyway if Alpharma did not agree to the takeover.

The merger is expected to start adding to King's earnings per share in the second year of its completion, chiefly by combining research and development and sales forces. It is scheduled to close by the end of the year.

King's 1.25% convertibles due 2026 traded at 64, which was up slightly, versus a share price of $9.30.

Shares of the Bristol, Tenn., pharmaceutical company closed up 68 cents, or 8%.

King develops therapies and technologies primarily in cardiovascular and metabolics, neuroscience and acute-care settings.

JA Solar jumps

JA Solar's 4.5% convertibles due 2013 traded at 30 on Monday, according to a New York-based sellside desk analyst. The solar power company's convertibles were last seen at 24.

Shares of the Shanghai-based company spiked 50% to $3.18 on Monday.

Mentioned in this article:

Alpharma Inc. NYSE: ALO

Bank of America Corp. NYSE: BAC

Citigroup Inc. NYSE: C

JA Solar Holdings Co. Ltd. Nasdaq: JASO

King Pharmaceuticals Inc. NYSE: KG

Wachovia Corp. NYSE: WB

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