National City bringing $1 billion; Washington Mutual up, Countrywide down on wild market day

By Evan Weinberger

New York, Jan. 22 - Some financials, including Washington Mutual Inc., rallied on the Federal Reserve's emergency rate cut Tuesday. Others - Countrywide Financial Corp. and Citigroup - did not.

Companhia Vale do Rio Doce convertibles were down on merger talk.

Meanwhile, CSX Corp. convertibles were up on strong earnings.

National City bringing $1 billion

One new deal was announced Tuesday after the close.

National City Corp. launched $1 billion in convertible senior notes due Feb. 1, 2011 with a coupon talked at 3.5% to 4% and an initial conversion premium of 22.5% to 27.5%.

There is a $150 million over-allotment option on the Securities and Exchange Commission-registered transaction.

The deal is set to price Wednesday after the market close.

There are no calls or puts.

National City plans to enter into hedge and warrant transactions upon or shortly after pricing of the convertibles. The company expects the transactions to reduce the dilution of its stock upon conversion of the notes.

The notes carry full dividend protection in the form of a conversion ratio adjustment. There is fundamental change protection but no public acquirer change-of-control waiver.

National City is a Cleveland-based financial holding company with banking networks in Ohio, Florida, Illinois, Indiana, Kentucky, Michigan, Missouri, Pennsylvania and Wisconsin. National City plans to use the proceeds to repay $300 million in outstanding senior notes due April 1, to cover the costs of the hedge and warrant transactions and for general corporate purposes.

Markets in turmoil

Market players walked in Tuesday following a long weekend shell-shocked from watching two straight days of a global market meltdown. Stock futures were pointing toward a 500-point loss for the Dow Jones Industrial Average.

Then the Fed announced an emergency 75 basis point cut in the Federal Funds rate, bringing it to 3.5%. The Discount Rate was cut to 4%.

The Dow dropped more than 450 points right off the bat, then recovered, relatively speaking.

In the end, the Dow lost 128.11 points, or 1.06%, for an 11,971.19 close.

The Nasdaq fell 47.75 points, or 2.04%, for a 2,292.27 close.

The Standard & Poor's 500 fell to 1,310.50, a loss of 14.69 points, or 1.11%.

A trader said he saw the rate cut, which came ahead of the Fed's regularly scheduled meeting next week, as "more of a panic than reassuring." He added that the volatility in stock markets - the VIX was standing at 3.8, he said - around the world wasn't necessarily a reflection of the volatility that is actually out there.

He added that he expected stock markets to be up when 2008 draws to a close. He said he expects to see more foreign sovereign wealth funds coming in to bail out struggling companies, especially financials. "There's still too much liquidity; the dollar's still too cheap" for foreign funds to stay away, he said.

Investors drawn to financials

Another trader said investors were drawn to financials as the markets staged their tepid rallies. "[I] had early large buyers of financial names come in in large sizes," he said "[I] think [it's] short covering."

That was seconded by the first trader. "The biggest amounts of green were financials, REITs, homebuilders," he said.

One example of that was Seattle-based thrift Washington Mutual. The country's largest savings and loan saw its 7.75% series R non-cumulative perpetual convertible preferred stock close Tuesday at 940 versus a closing stock price of $14.77. They closed Friday at 874.63 versus a stock price of $13.55.

Washington Mutual stock (NYSE: WM) gained $1.22, or 9%, on Tuesday.

Well, maybe not all financials

Not every financial convertible was lifted on the day, however.

Calabasas, Calif.-based Countrywide's Libor minus 350 bps series A convertible senior debentures due April 15, 2037 closed Tuesday at 81.8043 versus a closing stock price of $5.32. They closed Friday at 85.1811 versus a stock price of $4.96.

Countrywide's Libor minus 225 bps series B convertible senior debentures due May 15, 2037 closed Tuesday at 82.0217 versus a stock price of $5.32. They closed Monday at 83.0724 versus a stock price of $4.96.

Countrywide stock (NYSE: CFC) picked up 36 cents, or 7.26%, on the day. Could this be an example of the shorting to which a trader referred?

In related news, Bank of America Corp. CEO Kenneth Lewis said on a conference call announcing his company's fourth-quarter losses that he expects BofA's takeover of Countrywide to close in the second half of 2008.

New York-based Citigroup's 6.5% non-cumulative convertible perpetual preferred stock slipped to 49.8875 versus a closing stock price of $24.40 on their second day of trading. They closed Friday at 50.08 versus a stock price of $24.45.

Stock in the New York-based banking giant slipped 5 cents, or 0.20%, on the day.

CVRD down on merger talks

Reports that Brazilian mining giant CVRD was in talks to acquire Swiss miner Xstrata sent CVRD's stocks and convertibles lower Tuesday.

The price of the potential acquisition is being talked at more than $100 billion.

Should the deal go through, CVRD would be the world's top nickel miner. A combined CVRD and Xstrata would be the fourth largest copper miner in the world.

Mining and metals stocks and convertibles have been hammered in recent days.

CVRD's 5.5% mandatory exchangeable notes RIO series due June 15, 2010 closed Tuesday at 53.92 versus a closing stock price of $26.85. They closed Friday at 57.33 versus a stock price of $28.83.

CVRD's 5.5% mandatory exchangeable notes RIO-P series due June 15, 2010 closed Tuesday at 57.99 versus a stock price of $26.85 after finishing Friday at 59.68 versus a stock price of $28.83.

Rio de Janeiro-based CVRD's stock (NYSE: RIO) fell $1.98, or 6.87%, on the day.

CSX up on earnings

Jacksonville, Fla.-based freight rail operator CSX surged Tuesday on 2007 fourth-quarter earnings that beat Wall Street estimates.

CSX announced a 5% profit rise for the fourth quarter and net earnings of $365 million, or 86 cents per share. That is a 15% increase over the previous year. CSX reported net earnings of $347 million, or 75 cents per share, for the last three months of 2006.

The totals beat Wall Street estimates by a healthy margin. CSX cited improved efficiency and other operational gains that overcame rising fuel prices.

CSX's zero-coupon convertible notes due 2021 closed Tuesday at 154.745 versus a closing stock price of $43.31. They closed Friday at 146.76 versus a stock price of $41.18.

CSX stock (NYSE: CSX) was up $2.21, or 5.37%, on the day.

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