NatCity convertibles move up on strong volume; Prudential Financial firm; National Retail improves

By Rebecca Melvin

New York, Dec. 22 - National City Corp. bonds were better in active trade during what was an otherwise pretty quiet session on Monday. Sources surmised that the bonds were improving because its deal to be taken over by PNC Financial Services Group Inc. was expected to close shortly.

Overall market liquidity was sapped the day after Hanukah began and three days ahead of Christmas, but that didn't mean the bid had dimmed, convertibles players said.

Prudential Financial Inc.'s floating-rate convertibles due 2037 were getting some play - although in less hefty volumes than of late - with pricing firm at 95.375 bid, 95.50, according to a New York-based sellsider.

National Retail Properties Inc. was among a number of real-estate-investment trusts that have seen improvement recently as investors look to be shifting some money from those stocks into the convertibles.

"People are saying REIT convertibles are the best place to be versus REIT stock, and they're shifting a little bit of money," a New York-based buysider said.

Pricing strength has been evident in investment-grade names for about a month, and the broader spectrum of corporate debt has gotten a boost since the Federal Reserve cut interest rates last week, the buysider said.

"Investment-grade bonds keep getting better," the buysider said, noting no sellers, and lots of buyers. "I think many hedge funds are not selling and more crossover buyers and outright guys have new money to put to work."

In addition, the value of convertibles is being highlighted in the media, and people are taking a bit more credit risk, he said.

Hedge funds aren't selling right now, and the convertible market isn't so large that in the absence of sellers, price will appreciate, he said.

Nevertheless, the majority of players are sitting on their positions, and daily liquidity in the market is lower, especially given the typically quiet holiday period.

The size of the convertible market has shrunk dramatically this year as redemptions and issuer buybacks combined with a lack of new issuance in the fourth quarter to reduce market size to about $176 billion, compared to more than $300 billion at the beginning of 2008, according to Merrill Lynch data.

But while supply is being taken out - Yellow, Merrill and Grey Wolf are on the cusp of takeouts and CIT just did an exchange, for example - money is being recycled into the market in some cases like that of Prudential.

Convertibles were not influenced in general by stocks, which drifted lower on light volume Monday, with the Dow Jones Industrial Average closing down 59.42 points, or 0.7%, at 8,519.69. The Nasdaq stock market ended down 32 points, or 2%, at 1,532.35; and the Standard & Poor's 500 index closed down 16 points, or 1.8%, at 871.63.

NatCity finds bid

National City's 4% convertibles due 2011 traded at 90.25 bid, 90.75 offered Monday, compared to recent trading levels around 88.

Shares of National City closed lower by 7 cents, or 4%, at $1.61.

"I heard it is because PNC is buying NCC and will be assuming the converts, and therefore improving their credit," a New York-based sellsider said regarding the higher price.

Another sellsider said the bid that had been strong much of the day was to be expected. "It was eligible to gap up. A name like that, which has had so much stigma attached to it for such a long period of time, was likely to rebound," he said, noting that due to the fact that it is rather long dated, it probably wouldn't run up much further.

"It still has optionality," he said, but it will be worth fewer shares when it becomes PNC paper.

On Oct. 24, Cleveland-based regional bank National City and PNC announced that they had signed a definitive agreement for PNC to acquire National City for $2.23 a share, or about $5.2 billion in PNC stock.

An additional $384 million of cash is payable to certain warrant holders. Total consideration approximated National City's market capitalization as of the close of business on Oct. 23, when National City stock was at $2.75. National City shareholders will be entitled to 0.0392 of a share of PNC for each share of National City.

PNC is a Pittsburgh-based diversified financial services company.

National City will extend PNC's footprint into the Midwest, including Kentucky, Ohio and Indiana, and boost PNC's core deposits by $180 billion, increasing the size of PNC to the fifth-largest U.S. bank.

The volume of National City convertibles that traded Monday was disproportionately high compared to the rest of the market, with about 77 million bonds of National City traded versus 258 million overall, a sellsider said at around 2 p.m. ET.

Prudential remains firm

Prudential's floating-rate convertibles due 2037 traded better than 95 on Monday, which was unchanged from Friday.

"Prudential has appreciated to a level that is still attractive," a buysider said.

There's probably "not much juice left in it, though. But when it matures, it will likely be recycled to something else," the buysider said.

Volume in the name has tailed off in recent weeks. On Dec. 16, Prudential said holders put back $1.88 billion, or 94%, of its $2 billion floating-rate convertible senior notes due 2036. In addition, it repurchased $853 million of its $3 billion floating-rate convertible senior notes due 2037 at a discount between Dec. 5 and Dec. 12.

The repurchases were made through individually negotiated transactions and totaled $810 million.

Following the repurchases, $4 million of the 2036 convertibles and $2.15 billion of the 2037 convertibles remain outstanding.

It makes sense for Prudential, a Newark, N.J.-based provider of financial products and services, to take out the debt now at 95 or 96 compared to 100 in June.

Short-dated paper like Prudential is in the most favor right now, but probably the best opportunities are in the three-year to four-year timeframe. "As people get more comfortable with spreads the best opportunities will be three- to four-year opportunities," a buysider said.

Short-dated paper is safe and you get a pretty good return while the market sorts itself out, but no one is stepping out for the longer horizon, the buysider said.

National Retail strengthens

National Retail Properties saw its 5.125% convertibles trade at 77 versus a stock price of $16.00, compared to 78 versus a stock price of $15.25 on Nov. 6.

The 3.95% paper traded at 80 versus the $16.00 share price, according to a New York-based sellsider.

Shares of the Orlando, Fla.-based retail REIT closed a little higher than that level but still down 33 cents, or 2%, on the day at $16.24.

Mentioned in this article:

National City Corp. NYSE: NCC

National Retail Properties Inc. NYSE: NNN

Prudential Financial Inc. NYSE: PRU

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