National City soars on financing; financials active, mixed as Bank of America reports; CIT raises $1 billion

By Kenneth Lim

Boston, April 21 - Financial names hogged most of the attention on an otherwise slow Monday in the convertible market after National City Corp. announced a $7 billion financing deal.

National City gave convertible holders something to cheer about after it announced the deal and cut its dividend, boosting the company's credit but tripping up the common stock.

Bank of America Corp. was mostly a non-issue despite the bank reporting a larger-than-expected drop in earnings and dismissing talk of a dividend cut.

After the market closed, CIT Group Inc. announced and priced a $1 billion offering of perpetual convertible preferred stock and common stock.

Beyond the financial names, Wyeth's floaters appeared shaky with the stock taking a hit a day before it was due to report earnings.

Investors who were out of the major financial names were twiddling their thumbs on a largely quiet Monday.

"Unless you're looking at financials you're not doing anything," a sellside convertible trader said.

Some of the sluggishness that ended the previous week may have lingered even after the weekend.

"It's kind of a slow day today," a convertible trader on the West Coast said. "It seems like we've fallen back to that...groove where Mondays and Fridays are really slow, and it's practically a three-day week."

One desk analyst said the dull markets were a result of uncertainty in the credit markets.

"It's really quiet, probably going to be until they figure out what's going on," the analyst said. "The market isn't as active, but I think people are putting money to work, especially in financials. A lot of these deals are being priced attractively...I think that's a positive."

National props up credit

National City's 4% convertible senior note due 2011 stood its ground despite a sharp drop in the common on Monday after the company announced a dilutive stock sale and a dividend reduction.

The convertible traded at 84.25 against a stock price of $6 on Monday, down about 3 points outright. National City common stock (NYSE: NCC) closed at $6.03, lower by $2.30 or 27.61%.

"I saw them trade, they were 8 points better on the news, dollar neutral," a sellside convertible desk analyst said. "It's a great trade for the convert."

"The volume on National City on Trace was $324 million, which is understated," a convertible trader said. "It just means one thing, which is that some people think things there look like they're all hunky dory."

National City said it raised $7 billion through issuance of 126.2 million shares of common stock priced at $5 per share. Private equity firm Corsair Capital was the main investor, taking $985 million from the deal.

The Cleveland-based bank also announced a first-quarter loss of 27 cents per share, or $171 million and said it was cutting its common dividend to 1 cent per share from 21 cents.

"National City was great for us," an outright buysider said. "We were short the stock and long the bond on the arb side, so obviously that worked out. In the outright funds here we had a bit of National City too, and it was not so good, but the stock was down 25% and we were only down 1%."

Bondholders came out better, the buysider said.

"The deal dilutes the hell out of the equity," the buysider said. "It's an awful deal for the current shareholder. But it's great for the credit because they've got more capital and your put is more certain."

The buysider said the markets were only half expecting the news that came out of National City.

"They could have played out in different ways," the buysider said. "I think it was pretty obvious that they were going to cut their dividend, but the fact that they were going to raise this money and in such a dilutive way was not expected."

There may also have been some disappointment for those hoping that National City would be taken over, the buysider said.

"If it was the Bank of Nova Scotia, for example, that had bought it, maybe there was a chance that it would get taken over and the credit would get even better," the buysider said. "Now they have Corsair and I don't think it makes a takeover of National City any more possible."

A sellside convertible trader said the pricing of the National City deal could also be a cause for concern that the worst is yet to come.

"They just did a nice bit of financing off of these converts back in January," the trader said. "This is a little like the Ambac pricing, the deep discount and everything. It's not necessarily a good sign...When you sell so cheap it looks like a desperation move."

The trader said financials are a tough market to be in at the moment.

"I've been trying to stay away from them," the trader said. "There's way too much going on in those things."

Financials active

But financial names were the most active sector of the market on Monday.

Bank stocks were moving after Bank of America reported worse-than-expected first-quarter earnings, but convertibles of the Charlotte, N.C.-based bank were essentially unchanged.

Bank of America's 7.25% perpetual preferreds were marked at 1060 against a stock price of $38.50 in the premarket, lower by a sliver. Bank of America stock (NYSE: BAC) slipped 2.46% or $0.95 to close at $37.61.

Bank of America also said it was not planning to cut its dividends, as had been speculated over the past week.

"I think the whole Bank of America thing, if you look, the stock's down 2.5% today, but they missed earlier today, it was trading down only a little bit," a sellside convertible analyst said. "I don't think it was as big of a deal as the other announcements, like National City. It's just a slight negative for Bank of America, not too much news. They didn't cut their dividend, which was expected. Nobody expected them to cut it."

Countrywide, Lehman steady

Countrywide Financial Corp.'s two floating-rate convertibles were flat. The Libor minus 350 basis points convertibles due April 2037 traded at 92.5 while the Libor minus 225 bps convertibles due May 2037 were 89.5 with the stock around $5.50.

Calabasas, Calif.-based Countrywide, a mortgage lender that will be taken over by Bank of America, saw its common stock (NYSE: CFC) ease 2.46% or $0.14 to close at $5.54.

Lehman Brothers Holdings Inc.'s 7.25% perpetual convertible preferreds held steady at 121 against a stock price of $45.50. Lehman Brothers common stock (NYSE: LEH) closed at $45.10, lower by 0.88% or $0.40.

The mood on the Street was mostly upbeat about the beaten down financials.

"I think that financials credits have been doing better," a buysider said. "They keep raising capital. A good example will be National City today. They did a favor to the credit holders. I would say that the results reported by the financial institutions are generally a little lower than people's expectations."

The buysider said the financials could now be hovering in the middle of a period of certainty.

"I have a certain view of the financials," the buysider said. "I think they're kind of range-traders and we're somewhere in the middle of the range right now."

Convertibles are a good way to play the sector, the outright buysider said.

"Dividends can be cut, for one thing, and the convertible is unlikely to see its coupon cut," the buysider said. "And it's a lower delta, so it protects your risk. The Lehman one I think is the most interesting, because you've got a bigger increment jump on that one than the rest."

CIT raises $1 billion

CIT Group priced a series of perpetual convertible preferred stock to yield a dividend of 8.75% with an initial conversion premium of 15%.

The terms were fixed before any price talk was released, market sources said.

The preferreds were sold at par of $50.

JPMorgan Securities, Morgan Stanley & Co. Inc., Lehman Brothers Inc. and Citigroup Global Markets Inc. were the bookrunners of the registered shelf offering.

There is a concurrent common stock offering priced at $11 per share. CIT common stock (NYSE: CIT) closed at $12.74, down by 5.63% or $0.76 before the deals were announced. The stock fell further to $10.96 in after-hours trading.

The total amount of the common and preferred stock offerings is $1 billion.

CIT Group, a New York-based commercial finance company, said it will use the proceeds for general corporate purposes. The proceeds from the common stock offering will pay for about $8 million in dividends on the company's outstanding preferred stock in the second quarter of 2008 and about $23 million in interest due on its outstanding junior subordinated notes in the third quarter of 2008.

Wyeth lower on speculation

Wyeth's Libor minus 50 bps convertibles due 2024 were ½ point lower outright after the company's stock slipped in anticipation of the company's earnings, a sellside trader said.

"They're beating that up ahead of the earnings," the trader said.

Wyeth's convertible was marked at 101.875 bid, 102.25 offered against a stock price of $44.20 on Monday. Wyeth common stock (NYSE: WYE) ended at $44.21 on Monday, a decline of 1.6% or $0.72.

Wyeth is a Madison, N.J.-based drug company.

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