Financial preferreds pare some losses: B of A, Citi, Wells Fargo weaker; SandRidge taps primary

By Rebecca Melvin

New York, Jan. 15 - The convertible bond market saw its first new deal in four months on Thursday - two weeks into the New Year and a lot sooner than many had predicted - but whether SandRidge Energy Inc.'s convertible offering qualified as a bona fide reopening of the primary market was doubtful.

SandRidge priced more than $200 million of perpetual convertible preferreds late Wednesday, marking the first new convertibles issuance since mid-September when credit markets seized up in reaction to the heightened financial crisis.

It was a "super private deal," pre-placed directly with equity holders mostly, and didn't really count as the first guy jumping into the pool, sources said.

"They can count it as whatever they want to. We're not here to speculate, we're here to make investments," said a New York-based sellsider, who did not like the paper.

"New issuance for the true convertible community is going to have to come with a much smaller premium, like 5%, for one," he said.

The SandRidge preferreds have an initial conversion premium of 25%, which is not unusual for the market.

Deutsche Bank Securities Inc., which placed the deal, couldn't be reached for comment by press time.

Meanwhile, financial preferreds - many of which also included crossover buyers in 2008 - were pummeled early Thursday. But near the end of the day, the preferreds had retraced about half of their losses, according to an East Coast-based buysider.

"The market turned around with all the talk of the government backstop for the B of A and Merrill deal," the buysider said. "It looks similar to what they did for Citi, and it seems more positive than the other outcomes, which would have put the preferred dividends at risk, but this doesn't."

Bank of America Corp.'s convertible preferreds ended down about 20%, Citigroup Inc. lost about 5% and Wells Fargo & Co. lost a few percentage points.

Elsewhere, activity in the secondary market was muted as investors hesitated in the face of fresh concerns relating to the financial system and banking shares.

Intel Corp., which reported a huge drop in fourth-quarter profit but which met expectations, traded intraday at 85.5 versus a share price of $13.00.

Shares of Intel closed up 1.6% at $13.29 but lost ground in after-hours trading.

SandRidge prices at a discount

While some were cheered by news of a new deal, most characterized the Rule 144A private offering from SandRidge as "super private" and likely to be of interest only to investors who liked the stock.

But many were hopeful that the deal would be followed by others soon. "We're close," one sellsider said.

SandRidge, an Oklahoma City-based oil and gas company, priced $213.8 million of perpetual convertible preferreds late Wednesday with a dividend of 8.5% and an initial conversion premium of 25%, according to a syndicate source.

The 2.25 million shares came at a discount of $94.04 per share. The liquidation price is $100 per share.

No dividends will accrue prior to Aug. 15, which was a big strike against the deal from many convertibles players' perspective.

And then the annual dividends are payable in arrears on Feb. 15 and Aug. 15, starting on Feb. 15, 2010.

The preferred shares are non-callable for five years and provisionally callable thereafter subject to a price hurdle of 130%.

Holders can convert the shares on April 15, 2009. There is also contingent conversion subject to a 130% price hurdle.

"They were automatically deferring the dividend," a sellsider said. "Convert guys would have paid only 89 or 90 for these things."

Shares of SandRidge closed virtually flat at $6.43, which was up 2 cents. Deutsche Bank capital markets personnel weren't available by press time to say where the preferreds went out.

B of A ends off its lows

Bank of America's 7.25% perpetual convertible preferreds settled at about 500 versus a share price $8.32 on Thursday, compared to 608 versus a share price of $10.20 on Wednesday.

Bank of America shares hit a 52-week low on Thursday, as did those of US Bancorp, another convertible name, but one which isn't really heard in the market.

Investors were rattled by Bank of America's need for additional capital to allow its acquisition of Merrill Lynch & Co. to close. But they were somewhat relieved that a potential infusion from the U.S. government would allow it to happen.

According to press reports, discussions over these funds began in mid-December when Bank of America approached the Treasury Department, which had already doled out $25 billion to Bank of America, because of Merrill's larger-than-expected losses in the fourth quarter.

"People were more confident when they expected a government backstop," a buysider said.

There was a huge seller of financial preferreds, but it got cleaned up, the buysider said, adding that Bank of America was down about 10 points dollar neutral before it turned around somewhat to end down about 6 points.

Citigroup, Wells Fargo weaker

Citigroup's 6.5% convertible preferreds fell 5% to about 18 on Thursday from 20 bid, 21 offered on Wednesday. On Monday the preferreds were at about 29.

Wells Fargo's 7.5% perpetual convertible preferreds ended at about 660 Thursday compared to 705 on Wednesday.

Wells Fargo was down multiple points and Citigroup dropped, but they all came back in from their lows.

One sellsider wasn't overly concerned.

"With marquee names like BAC and Citigroup getting dragged down once again, it kind of gives you pause. But really what is the convertible market's exposure? They're all preferreds. The question is 'are they going to pay their dividend?'" the sellsider said.

He opined that perhaps the market this week is setting up for a rally next week on the occasion of president-elect Barak Obama's inauguration.

"Maybe we'll get a bounce for the new president," he said.

Mentioned in this article:

Bank of America Corp. NYSE: BAC

Citigroup Inc. NYSE: C

Intel Corp. Nasdaq: INTC

SandRidge Energy Inc. NYSE: SD

Wells Fargo & Co. NYSE: WFC

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