B of A, Citigroup lower; PNC recoups intraday losses; Advanced Medical Optics, Nortel Networks add

By Rebecca Melvin

New York, Jan. 16 - The convertible bond market, led by financials, was weaker on Friday, but most names ended off their lows as stocks bounced higher.

Financials were "pretty weak, "a Connecticut-based buysider said.

Bank of America Corp. perpetual convertible preferreds were lower Friday, as were the underlying common shares, which settled off their lows but were still down 14%.

The Charlotte, N.C.-based banking giant reported its first loss in 17 years on Friday and also sealed a deal with the U.S. government for another aid package spurred by its inability to digest its acquisition of Merrill Lynch & Co., which closed Jan. 1.

Citigroup Inc.'s perpetual convertible preferreds were also lower, extending a slide that has persisted the entire week.

On Friday, Citigroup reported a dismal fourth-quarter loss and said it was splitting itself in two, as a way to isolate its commercial and retail banking businesses from its riskier businesses and pool of toxic assets.

"Today shook some people out because the [pricing] turn was so abrupt...It's beyond fundamentals, and one could go as far as to describe it as capitulation," the buysider focused on convertible arbitrage said.

Interest in financial names, including the preferred shares, had revived only in recent weeks after last autumn's meltdown. But now "given changes in the convertible market, the buyers are not there to take people out; and it's generally accepted that a preferred stake isn't worth much," the buysider said.

PNC Financial Services Group Inc.'s 4% convertible bonds slumped midsession but ended higher on the day.

Advanced Medical Optics Inc., which announced on Monday that Abbott Laboratories offered to buy out the Santa Ana, Calif.-based eye-care products company, was strong on Friday.

Nortel Networks Corp., which saw its convertibles hold mostly steady after announcing a bankruptcy filing on Wednesday, had gained a point by Friday to trade at 17.

B of A loss worries investors

Bank of America's recent developments were blamed for the weakness that hit the financial sector overall, a buysider said.

Previously it was believed that the bank was going to emerge from the current crisis a strong survivor, but now this may not be true; and what we're looking at may be more like a Citigroup, the Connecticut-based buysider said.

On Friday, it was announced that the U.S. government was injecting $20 billion into Bank of America - via a preferred stock carrying an 8% dividend - and also backstopping future losses on a $118 billion portfolio of toxic investments, 75% of which were inherited from Merrill Lynch.

Under the agreement, Bank of America would cover the first $10 billion in losses and the government would cover 90% of subsequent losses. Bank of America would pay a premium of 3.4% of those assets for this program.

On a pro forma basis, this additional capital would boost the company's Tier 1 capital ratio to about 10.7%.

Bank of America's 7.25% series L preferreds were seen at about 540 Friday.

Bank of America chief executive Ken Lewis said that the size of the losses at Merrill, which by and large precipitated the need for the government assistance, hadn't been anticipated.

He said neither Bank of America's nor Merrill's forecasts of losses contemplated the "significant deterioration" that occurred in mid to late December.

Merrill Lynch's preliminary results indicate a lost of $15.31 billion for the fourth quarter. But its results weren't included in Bank of America's fourth-quarter report, although those of Countrywide Financial, which Bank of America acquired in July, were.

For its part, Bank of America lost $1.79 billion in the fourth quarter, compared to a year earlier when it reported earnings of $268 million.

For the year, Bank of America earned $4.01 billion, compared to $14.98 billion a year earlier.

In addition, the bank said that it extended $115 billion in new credit in the fourth quarter, including about $49 billion in commercial non-real estate; $45 billion in mortgages; and nearly $8 billion in U.S. card and unsecured consumer loans.

The company's quarterly dividend was cut to $0.01.

Fourth-quarter results were driven lower by escalating credit losses, including additions to reserves, and significant write downs and trading losses in the capital markets businesses, the company's release said.

Citigroup extends slide

Citigroup's 6.5% perpetual convertible preferreds were 17.5 bid, 19 offered on Friday, compared to a price of about 29 on Monday.

Citigroup is splitting itself into two entities, to be known as Citicorp and Citi Holdings. Citicorp will include its global banking business, including consumer and corporate lending and transaction services business. The holding company will include noncore assets, brokerages, asset management and toxic assets accumulated during the mortgage bubble and made up of bad home loans and various derivatives.

Citigroup reported its fifth straight quarterly loss Friday and it has lost $29 billion over the last five quarters.

The weakness seen in the financials over the last couple of days continued to get worse on Friday.

"It's beginning to look like a longer timeframe [for recovery]. People are looking for it to rebound around 2010 - that's the view for now," a buysider said.

Worst-case scenario fears are being revisited, sources said, with concern that holdings could be diluted or nationalized down to nothing, or diluted further down the capital structure.

"It's a revisit to the logic that took them down before," a buysider said of the financials.

There isn't the fear of systemic collapse or of a short sale ban, but "you don't have the same kind of buying demand from convertible players that you had before," he said.

"They haven't worked out terribly well except for short-term trade situations; it's difficult to get decent treatment from prime brokers ... it's a pariah asset class, with interest limited to a few brave souls," he said.

Wells Fargo lower, PNC recoups

Wells Fargo & Co.'s 7.5% preferreds, which were formerly Wachovia paper, traded at 610 on Friday, compared to 735 on Monday. On Thursday, the Wells Fargo preferreds ended at about 660, compared to 705 on Wednesday.

Wells Fargo is a San Francisco-based bank holding company. It completed its merger with Wachovia on Dec. 31.

The PNC 4% convertibles due 2011, formerly National City Corp. paper, ended the day at about 95, after dipping down to 92 Friday, compared to 94.625 on Thursday.

PNC is a Pittsburgh-based financial services company that completed its acquisition of National City on Dec. 31.

Advanced Medical Optics higher

Advanced Medical's 3.25% convertible due 2026 traded at 96.25 compared to 95.8 on Thursday and 95.375 on Monday. This paper had plummeted into the 40 area at the end of last year.

The company agreed to a $22-per-share tender offer by Abbott. Including debt, the deal is valued at about $2.8 billion. The deal is expected to close in the first quarter.

Nortel gains 1 point

The Nortel 1.75% convertibles due 2012 and Nortel 2.125% convertibles due 2014 traded at about 16 on Wednesday. They crept up to 16.75 on Thursday, and were seen trading at 17 on Friday.

The Nortel bankruptcy came as no great surprise. The bonds eased slightly on Wednesday after news of the company's filing, but then firmed up.

"It's really early in the process. They have plenty of paper out there, and something like 100 creditors. These cases can take quite awhile or not too long at all," a sellsider said.

On Wednesday when announcing its Chapter 11 bankruptcy protection filing, the company said it had about $4.175 billion of debt securities that will be accelerated because of the bankruptcy. Nortel has $575 million outstanding in each series of the convertibles.

Mentioned in this article:

Advanced Medical Optics Inc. NYSE: EYE

Bank of America Corp. NYSE: BAC

Citigroup Inc. NYSE: C

Nortel Networks Inc. NYSE: NT

Wells Fargo & Co. NYSE:WFC

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