Financials lead convertibles lower: PNC's shorter-dated paper holds in; Linear drops 2.5 points

By Rebecca Melvin

New York, Jan. 20 - The convertible bond market was weaker again Tuesday, led by financials and real estate investment trusts, but trading activity was muted as all eyes focused on Barack Obama's swearing in as president of the United States.

"People were watching the inauguration and then watching equities melt down," a West Coast sellside trader said.

President Obama gave an inspiring speech in Washington, encouraging Americans not to falter or be tempted to turn back during "this the winter of our hardship." Yet investors remained downbeat about the troubles plaguing the financial services industry, and selling in that sector was probably not unwarranted, a Connecticut-based sellsider said.

"The news is not good," he said, referring specifically to headlines on the likes of Bank of America Corp. and Citigroup Inc., which reported multibillion dollar losses on Friday.

Inauguration Day came the day after markets were closed Monday in honor of Martin Luther King Day.

And some market activity marked a continuation of Friday's trading trends. For example, the 4% convertibles of PNC Financial Services Group Inc., formerly the National City Corp. paper, and ProLogis convertibles were both active on Tuesday and Friday.

Elsewhere, Linear Technology Corp. saw its convertibles lower by about 2.5 points, a sellsider said, compared to a nearly 5% drop in their underlying shares.

The Dow Jones Industrial Average ended Tuesday down 332.13 points, or 4%, at 7,949.09; the S&P 500 closed down 49 points, or 5.3%, at 805.22; and the Nasdaq Stock Market fell 88.47 points, or nearly 6%, to 1,440.86.

PNC, ProLogis weaker

The convertible market wasn't as bad as high yield, one sellsider remarked. And the weakness in many financials and REITs wasn't as profound as that of their underlying equities.

"All the people that need to sell haven't sold yet, so that's keeping a lid on things for the time being because they want to wait and see if the market goes higher," a trader said.

PNC Financial's 4% convertibles due 2011 traded mostly in the low 90s from about 95 on Friday, compared to a 41% plunge in their underlying shares to $22.00.

"It's pretty short-dated paper," a trader said by way of explanation.

"PNC was pretty much unscathed by the banking mess so equity holders really reacted today," the trader said. The reaction was to a ratings downgrade by Standard & Poor's equity analysts to "hold" from "buy."

The S&P analysts also trimmed PNC earnings estimates based on the overall climate in the banking sector. "PNC shares are down sharply this month, as investors flee most bank stocks due to general concerns about oversized loan-loss provisions, securities write-downs and possible dividend cuts," the firm wrote in a research note Tuesday.

PNC shares fell $15.54 to $22.00. PNC is a Pittsburgh-based financial services company that completed its acquisition of National City on Dec. 31.

Meanwhile, ProLogis shares sank 20%. And all three of its convertibles issues were down about 2 points, a sellsider said.

The ProLogis 2.25% convertibles due 2037 were 50 bid, 52 offered Tuesday, compared to 54 bid, 55 offered late last week.

The ProLogis 1.875% convertibles due 2037 were about 47 bid, 48 offered Tuesday, compared to 51 bid, 52 offered last week; and the ProLogis 2.625% convertibles due 2038 were called 46 bid, 47 offered, compared to 50 previously.

"There wasn't a ton of volume, but there were more sellers than buyers, and financials and REITs were much weaker across the board," a New York-based sellside trader said.

The sellider also said issuer buybacks were creating some market dislocations.

"Everyone is anticipating that someone is going to announce a buyback, and everyone rushes to be the first to sell back to the company, and everything gets pushed up to ridiculous, or close to ridiculous levels," the trader said. "Then people question why they own it. Just because a company pays a certain amount for it, doesn't mean that they'll pay that price again."

"You have accounts afraid to buy for fear of another leg down, and you have accounts afraid to sell because they think everything is still too cheap," he said.

All the REITs, including names like Vornado and SL Green Realty, are down about 3 or 4 points, off their bounces, he said. But they are still higher than they were at the New Year.

A week ago JPMorgan analyst Anthony Paolone published a cautious outlook on REITs. He said negative returns should be expected this year, though not as bad as the nearly 38% drop in returns in 2008.

Job losses and liquidity challenges are among some of the problems that are facing commercial real estate. "We expect the worst occupancy and rent trends of the cycle to unfold this year," he said.

JPMorgan downgraded ProLogis' ratings to "underweight" from "neutral" but raised its ratings on Macerich Co. to "overweight" from "neutral."

B of A, Citigroup extend slide

"Bank of America didn't want to buy Merrill and they ended up doing it anyway. They were forced to, and the result is that the equity got pummeled," a Connecticut-based sellsider said.

The Bank of America 7.25% convertible preferreds were indicated to close in the 300s compared to 540 on Friday.

Shares of the Charlotte, N.C.-based financial services giant dropped $2.08, or 29%, to $5.10. Since the New Year these shares are down nearly 64%.

Meanwhile, Citigroup, which reported a loss of $8.29 billion, hit a 17-year low Tuesday, dropping to $2.80. The bank also said it will split itself in two.

Citicorp will focus on traditional banking around the world, while Citi Holdings will oversee the company's riskier assets and tougher-to-manage ventures.

Linear Technology drops

The Linear Technology 3.125% (series B) convertibles due 2027 were at 88.375 from 93.5 on Tuesday, while its shares came off $1.19, or nearly 5%, to $22.75.

The Milpitas, Calif.-based analog chip maker reported weak, but better-than-expected, fiscal second-quarter earnings last week.

Mentioned in this article:

Bank of America Corp. NYSE: BAC

Citigroup Inc. NYSE: C

Linear Technology Corp. Nasdaq: LLTC

PNC Financial Services Group Inc. NYSE: PNC

ProLogis NYSE: PLD

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