CIT preferred gets crushed, mandatory steady; Janus jumps on debut; Human Genome mostly quiet

By Rebecca Melvin

New York, July 16 - The convertible market remained firm Thursday, with trading gathering steam toward the end of the session, with no particular names dominating the action, market sources said.

Early on, more sellers stepped in - in contrast to Tuesday and Wednesday when everything was to buy, they said.

There were no particular names; it was "more a function of players wanting to put on positions," a New York-based sellside analyst said.

People were also swapping out of one thing into another, he said.

A major market focus, however, was still CIT Group Inc., which saw its convertible preferred stock get crushed after the New York-based commercial lender said it won't receive government support in the near term to solve its liquidity problems and concerns about a potential bankruptcy loomed nearer.

The CIT mandatory convertibles held pretty steady, although both issues were trading in the single digits.

The newly priced Janus Capital Group Inc. 3.25% convertibles due 2014 traded up to 106.75 bid, 107.5 offered early in the session after the company priced $150 million of notes at the aggressive end of tightened talk.

The issue "immediately got better. Right out of the gate, it moved up," a sellsider said.

Human Genome Sciences Inc. convertibles were mostly quiet as its underlying stock surged ahead of late-stage drug trial data expected Monday.

Legg Mason Inc. was also quiet after the asset management firm announced an exchange offer of common stock for its mandatory convertible equity units, by which Legg raised $1.15 billion in May 2008. Rating agency downgrades came on the heels of the offer announcement as the company is expected to face sustained profit headwinds.

The company will give conversion plus $6.50 in the exchange.

CIT slumps

CIT's 8.75% perpetual convertible preferreds, which have a par value of 50, fell to 2.35, which was down about 10 points from previous levels.

"We were 2.75 versus $0.35 this morning. Nothing in unusual volume," a sellsider said of CIT.

CIT's 7.75% mandatory convertibles due 2015, which have a par value of 25, were in trade at 8.875 bid, 9.375 offered.

CIT common stock ended down $1.23, or 75%, at $0.41.

Market watchers tried to determine why federal officials denied CIT further aid after providing more than $2 billion in funding in December.

Some said that they didn't want to throw good money after bad. There were reports that bondholders were holding calls with the company Thursday to discuss whether they would be willing to swap claims for equity to alleviate the company's liquidity crisis, a sellsider said. And another source said that the company was trying to work out financing from private equity. Very late in the day, CIT said it was talking to possible lenders about new financing.

In light of those potential scenarios, some trades occurred with accrued interest, a sellsider said.

The mandatories, which are higher up in the capital structure than the preferred shares, were steady.

"Mandatories do better since you own a portion of a senior unsecured note, and you can get in line with everyone else. With the preferreds, in a default, you get nothing," a sellsider said.

Even convertible players who had not been trading CIT paper have been watching the situation closely from an event standpoint.

Last autumn, everyone was affected when Lehman Brothers Holdings failed, a sellsider noted.

"I'm watching it to make sure I don't get caught," he said.

S&P's downgraded the company's long-term counterparty credit rating to CC from CCC+, saying it believes there is an increased risk it may declare bankruptcy in the near term or take other actions detrimental to debt holders.

Fitch Ratings and Moody's Investors Services also cut CIT's ratings, predicting a default. Fitch cut the long-term issuer default ratings for both CIT and its subsidiaries by eight notches to "C," from "BB-," stating it believes there is "a high probability that the end result of this review will be that CIT will have to file for bankruptcy protection in the very near term."

Moody's Investors Services lowered CIT Group's issuer rating and senior unsecured rating four notches to Ca from B3, and said it also sees a high probability of a bankruptcy filing soon.

Janus jumps on debut

The newly priced Janus Capital 3.25% convertibles due 2014 traded up to 106.75 bid, 107.5 offered. Its underlying shares opened higher and traded up for the session in heavy volume.

At midafternoon, the paper was 107.5 versus $11.50.

Shares of the Denver-based asset management firm settled up $0.76, or nearly 7%, at $12.15.

Using up to 40 implied vol and a credit spread of 800 basis points over Libor, it traded up to 3.5% cheap, a New York-based sellside analyst said.

Human Genome mostly quiet

Human Genome's 2.25% convertible due inside of three years, in October 2011, traded up 3 points to 61.5 on Thursday, but that move didn't keep pace with its underlying stock price, which spiked up to $3.99, or 45%, before settling back to the $3.35 level, which was still up 22% on the day.

Human Genome's 2.25% convertibles due 2012 weren't seen in trade, and were last at 54, according to Trace.

Of the Rockville, Md.-based biopharmaceutical company, a sellside analyst based in Connecticut, said late-stage trial data news was expected soon, and the spike in shares might have occurred because information related to the trial was leaked.

Results of the trial of lupus drug Benlysta are expected Monday.

Mentioned in this article:

CIT Group Inc. NYSE: CIT

Human Genome Sciences inc. Nasdaq: HGSI

Janus Capital Group Inc. NYSE: JNS

Legg Mason Inc. NYSE: LM

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