Washington Mutual credit fails to tighten on HSBC merger buzz; Genworth convert at bat Monday

By Ronda Fears

Nashville, May 21 - Washington Mutual Inc. stock soared, and the convertible preferreds shot up on an outright basis, on Friday in reaction to rumors that it was a takeover target by HSBC Holdings plc. But convertible traders said the credit markets didn't buy the buzz and as a result there was little tightening.

After a slow week in terms of new issues - only two deals totaling $235 million were injected into the market - next week opens with Genworth Financial Inc.'s long-awaited $600 million mandatory. Convertible origination officials said it should be busier throughout the week, too.

A sellside market source said traders were trying to get some traffic in Wyeth again Thursday, with the convertible floater trading right around par.

He also said there was some cruise paper, Carnival Corp. and Royal Caribbean Cruises Ltd., commenting that "the hot weather must have people here thinking about vacation." The Carnival 2s were at 119.375 and the 0s at 72.375. Royal Caribbean's 0% due February 2021 was at 50.875. All were up about a quarter point, a dealer said.

Gap Inc. saw a little bit of activity Friday, with the 5.75% convertible edging up about 0.5 point to 145, on its earnings. On Thursday Gap said its profits rose to $312 million, or 32 cents a share, up from $202 million, or 22 cents a share, a year earlier, while total sales came to $3.66 billion, up from $3.35 billion.

Another retailer, Casual Male Retail Group Inc., also continued to trade off on earnings on Thursday, which were somewhat of a disappointment. The 5% convertible lost another 4.75 points to 86.75 bid, 87.75 offered. Casual Male shares plunged 80 cents, or 10.74%, to $6.65.

Genworth at bat on Monday

After a long marketing period, finally convertible investors will see the Genworth Financial Inc. $600 million mandatory come to market Monday. Buyside sources said the guidance on the issue, which was launched April 30, remains in a range of 5.75% to 6.25% for the dividend and 18% to 22% for the initial conversion premium.

GE Financial Assurance Holdings Inc. is issuer of the three-year non-callable mandatory. It is concurrent with the spin-off initial public offering of Genworth Financial shares by General Electric Co. Genworth is also selling $100 million of series A preferred shares.

GE announced in January that it would spin off a 30% interest in the insurance unit, Genworth, and said it later would consider selling the remaining stake. The IPO of Genworth, which comprises substantially all of GE's life insurance and mortgage insurance businesses, has been anticipated since November.

Morgan Stanley and Goldman Sachs & Co. are lead managers of the offerings.

Proceeds will depend on market conditions, but GE said it plans to use proceeds to invest in growth initiatives and reduce parent-supported debt at GE Capital Corp.

The convertible has a par of $25.

WaMu credit holders skeptical

The stock market reacted strongly to the buzz that Washington Mutual, the largest U.S. savings and loan, might be sold to HSBC Holdings plc, Britain's largest bank, making it one of the largest U.S. mortgage lenders. Heavy options activity also suggested the stock market believed the rumors.

The stock soared by $3.55, or 8.95%, to $43.20, although it was weaker by 8 cents in Friday's after-hours trading.

But the credit markets didn't swallow it, traders said, although the Washington Mutual 5.375% convertible preferred added 2.75 points to 57.75 bid, 58.25 offered on the rise in the underlying stock.

"Obviously, the stock market believed it; the stock rallied 9%," a dealer at one of the big convertible desks in New York said.

"The credit markets didn't; there was not much tightening at all."

The rumors were sparked by comments from Bill Aldinger, chief executive of HSBC North America Holdings Inc., in the Financial Times and the Times of London this week, saying that HSBC plans to make more U.S. acquisitions.

Washington Mutual at March 31 listed $280.8 billion of assets. The Seattle-based firm focuses on middle-income customers and forecasts the addition of 250 retail branches in the United States in 2004, boosting the year-end 2003 total of 1,776.

Lucent offer gives mixed signal

While few, if any, holders of the 8% convertible preferred of Lucent Technologies Inc. will be exercising the upcoming put, news Friday in which the company said it plans to use cash to repurchase any submitted for redemption produced mixed reactions.

Lucent's most active convertibles - the two bonds with 2.75% coupons - each lost 1 to 2 points with the 2023 issue quoted at 127.75 and the 2025 issue at 127.75. Lucent shares also were lower, down by 9 cents, or 2.77%, to close at $3.16.

It's good news that the company has enough money to satisfy the $817 million obligation, a buyside trader said, but the potential cash drain would be a negative.

In any event, traders said it's not likely that any holders of the 8% convertibles will exercise the put.

"The headline was almost misleading. The news does not make much difference when it comes to the 8% preferred because no body will exercise the put," a dealer said.

Hospital paper dumped

A buyside market source on the West Coast noted Friday some activity in several hospital convertibles that might be related to California Public Employees' Retirement System news earlier this month, or perhaps just some short covering by hedge funds.

Particularly mentioned were Province Healthcare Co., Manor Care Inc. and Universal Health Services Inc.

"There has been some selling [in hospital convertibles] over the past two weeks, during the downdraft, and a lot of it probably is related to the Calpers headlines," one dealer in New York said.

"All of these issues [Province, Manor Care and Universal Health] are down 10 to 15 points, pretty much in line with what happened in the broader market."

On May 19, Calpers, the biggest U.S. pension fund and the third-largest U.S. buyer of health care, said its board voted to drop 38 hospitals from the fund's health-care plan to protest rising medical costs. The California Healthcare Association challenged the decision.

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