Citigroup, financials move lower; market mulls Cheniere; RadioShack, China Medical look cheap

By Rebecca Melvin

New York, Aug. 12 - Financials dragged lower Tuesday, with Citigroup Inc. a notable loser among the group, as sentiment turned negative again after JPMorgan Chase & Co. said it may post more credit losses and a couple of analysts cut profit estimates on Goldman Sachs Group Inc., Wall Street's biggest investment firm.

Financials were lower by 0.25 point to 0.50 point generally after "negative comments out about specific brokers," a New York-based sellside analyst said. But they've had a great run for three or four weeks, he added regarding the financial sector.

Traders said Tuesday was not an incredibly active session but that flows weren't too bad, with "better sellers of lower credit and better buyers of vol," a New York-based sellsider said.

Market participants were wondering about Cheniere Energy Inc.'s news that it accepted a commitment for $250 million in convertible security financing to replace its 18-month credit facility with Credit Suisse and provide additional funds.

"It was a rather cryptic release, and nobody's heard any talk on it or who is doing it," a New York-based sellside trader said.

Cheniere's existing convertibles were offered higher, but nothing was trading, sources said. The paper had dropped in recent weeks and was seen on Tuesday at about 28.

Chesapeake Energy Corp. convertibles were a little better on a 3.4% rise in its underlying shares. The Oklahoma City-based natural gas company said that it closed the sale of its Arkoma Basin Woodford Shale assets to BP for about $1.7 billion in cash. Meanwhile, natural gas prices ended little changed as oil ticked lower.

In the primary arena, two new deals were seen pricing after the close and were deemed "cheap" by market players.

RadioShack Corp.'s planned $300 million of convertible senior notes, talked to yield 2.5% to 3%, were seen about 5% cheap, and there were bids in the gray market reported at between 100.5 to 102.

China Medical Technologies Inc.'s planned $150 million of five-year convertible senior notes, talked to yield 3.75% to 4.25%, were seen anywhere between 3% cheap to 10% cheap, depending on the volatility and credit values assigned in analysis.

Citigroup slips a point, dollar neutral

Citigroup's 6.5% convertible preferreds were lower by a point, dollar neutral, at about 42.5 bid, 43.5 offered versus a share price of $18.54 Tuesday, compared to about 45 versus a share price of $19.82 on Monday.

Shares of the New York bank giant (NYSE: C) dropped $1.28, or 6.7%, on the day.

"There were better sellers," a New York-based sellsider said of the name.

Other financial paper was also in play and under pressure, including Merrill Lynch's 0% convertibles of 2032, according to one trader.

Wachovia Corp. was indicated much lower at 845.57 versus a share price of $16.00 on Tuesday, compared to 910.64 versus a share price of $18.21 on Monday.

Shares of the Charlotte, N.C.-based commercial bank fell $2.21, or 12%.

Late Monday Wachovia revised downward its second-quarter loss by $500 million to reflect an increase in its legal reserves related to auction-rate securities investigations.

The bank also said that it will have to cut 600 more jobs than previously expected for a total of 11,350 in cuts. Wachovia reported a second-quarter loss of $8.86 billion last month.

Earlier Monday, New York attorney general Andrew Cuomo said he was expanding his investigation into the auction-rate securities market collapse to include Wachovia, JPMorgan Chase & Co. and Morgan Stanley.

Subsequently Oppenheimer & Co. analyst Meredith Whitney reiterated an "underperform" rating on Wachovia's shares and cut her full-year estimate to a loss of $5 per share from a loss of $4.94 per share.

Questions unanswered on Cheniere

Cheniere's 2.25% convertibles due August 2012 were quoted a little higher but were not really trading, according to market sources. The bonds were quoted on Trace at 28 late Tuesday.

The liquefied natural gas storage company said Monday that it planned to do an offering of $250 million of convertibles, which market participants viewed as an effort to stave off bankruptcy.

Cheniere said that upon completion of the financing, it believes it will have sufficient short-term liquidity to conduct its business.

It wasn't clear whether the offering would be a private placement or Rule 144A offering, or something else.

"It looks like they are doing it in one to two weeks. But I don't know how they are doing it. I haven't heard too much beyond the press release," a New York-based sellside analyst said.

A Connecticut-based analyst said that the company "just hit the skids fast."

Houston-based Cheniere built storage facilities for liquefied natural gas, but high prices for LNG outside the United States is discouraging any shipments to this country, according to the analyst.

Cheniere's straight debt was called 3 points better on the day. But convertible players were curious to know what the structure of the new paper would be. "That's going to matter," a sellside trader said, regarding whether the new convertibles are senior or subordinated to the existing paper.

Chesapeake a little better

Meanwhile, Chesapeake, which continues to find new sources of natural gas within the United States, was up Tuesday.

Chesapeake's 2.25% convertibles due 2038 (Cusip: 165167CB1) were quoted at 89.75 bid, 90.25 offered versus a share price of $45.02, according to a sellside trader.

The convertibles looked slightly better on a hedged basis compared to the $1.49, or 3.4%, rise in the shares (NYSE: CHK).

RadioShack offered up in gray

RadioShack's proposed $300 million offering of convertibles were offered higher in the gray amid valuations of the deal which put it about 5% cheap.

Using a credit spread of 250 basis points over Libor and a volatility of 35%, the deal looked 5% cheap at the midpoint of price talk, according to a New York-based sellside analyst.

Another analyst calling himself "a bit more conservative," used a spread of Libor plus 350 bps and 45% vol, which modeled 7.8% cheap.

RadioShack's credit default swaps, which had been trading pretty tight, widened about 30 bps on news of the deal.

"I saw CDS at Libor plus 230 [bps], and went wider based on current macro conditions and the fact that the converts will mature last among RadioShack's existing debt," the analyst said.

A buysider involved in the deal said he suspected that the pricing would come on the rich end of talk, which was for a coupon of 2.5% to 3% and an initial conversion premium of 27.5% to 32.5%.

"I'm sure it will trade well. They had to price it cheap because they were not sure where people were willing to price the credit. I mean who goes to RadioShack? I guess they have all the widgets; it's very high margin," the buysider said.

The Forth Worth, Texas-based electronics retailer plans to use proceeds to pay for the net cost of the convertible note hedge and warrant transactions and to fund a share repurchase. The remaining proceeds will be used for general corporate purposes.

The Rule 144A deal is being sold via joint bookrunners Citigroup and Banc of America Securities LLC, with co-managers Merrill Lynch, Wachovia and Wells Fargo.

China Medical looks 3%-10% cheap

China Medical has to face the big "who knows factor," sources said. The fact that it's based in China means that it's discounted for creditworthiness.

"I thought the credit was more like 500 bps and I took a 200 bps discount," a New York-based sellside analyst said, adding that the discount may be mitigated somewhat by the fact that people are feeling more familiar with China after the start of the Olympic Games underway in Beijing.

But another sellside analyst said his credit spread was 1,000 bps over Libor, and using a 45 vol, that put the deal about 3% cheap.

China Medical planned to price $150 million of five-year convertible senior notes, concurrently with ADS issuance and repurchase agreements being made with affiliates of the underwriters.

Distribution for both offerings is via a shelf registration filed Monday.

The convertible notes are non-callable for life and have dividend and takeover protection.

China Medical has an existing 3.5% convertible that priced in November 2007, and at 166, is deep in the money.

"There may be people who own that that may want to swap into the new issue because it's more balanced," the sellside analyst said. "At this point, the old one is basically equity. There is no reason to own it because it's essentially stock. Now they have another option."

China Medical ADS (Nasdaq: CMED) dropped $5.12, or 9.4%, to $49.66 on Tuesday.

China Medical is a medical device maker based in Beijing.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.