Citi upsizes; WaMu moves lower ahead of earnings; Theravance opens quietly higher

By Evan Weinberger

New York, Jan. 17 - Citigroup upsized to $2.9 billion its eagerly awaited convertible perpetual preferred stock, which priced Thursday after the close. There were reports of high pre-market bids and expectations that the deal would come in upsized.

Washington Mutual Inc. preferreds traded lower ahead of the savings and loan's earnings report after the market close.

Theravance Inc. priced $150 million in convertible subordinated notes due 2015 Thursday, and though they didn't trade much, they did trade higher.

Doubts were raised in one corner about the likelihood that Ambac Financial Group Inc. would bring the convertibles the struggling bond insurer teased when announcing plans to raise emergency capital Wednesday.

Much like Washington Mutual, Advanced Micro Devices Inc. traded lower ahead of its earnings announcement set for Thursday after the close.

SunPower Corp. convertibles crumbled on an analysts downgrade.

Electronics for Imaging Inc. convertibles were flat, but a trader said that the short put investors see is drawing a lot of interest as the markets tumble.

Tumbled is definitely a word to describe the markets Thursday; tanked is another, as a raft of bad economic news sent investors scurrying. Dreadful regional manufacturing numbers - a loss of 20.9% in December revised down from a loss of 1.6% - and housing starts dropping to the lowest level since 1993 came in. Merrill Lynch announced a $9.8 billion fourth-quarter loss. Moody's Investors Service put Ambac on watch.

Even Federal Reserve chairman Ben Bernanke opening the door to a possible half-a-point interest rate cut at the next Fed meeting couldn't stop the fall.

The Dow Jones Industrial Average fell 306.95 points, or 2.46%, to 12,159.21.

The Nasdaq dived 47.69 points, or 1.99%, to close at 2,346.90.

The Standard & Poor's 500 dug the deepest hole, losing 39.95 points, or 2.91%, for a 1,333.25 close.

Eager anticipation for Citigroup

Citigroup upsized its offering of convertible perpetual preferred stock to $2.9 billion Thursday after the close. The deal was originally announced at $2 billion.

The preferreds came in with a 6.5% dividend. That was the cheap end of talk, which was 6.5% to 6.75%. The conversion premium was 35%. Talk was for a conversion premium of 24%.

The New York-based bank is using the preferreds as part of its massive capital raising strategy following a disastrous fourth quarter. Citigroup lost nearly $10 billion in the last three months of 2007.

Interest appears to be high in the lead-up. A trader said that the pre-market bids for the preferreds had moved up to 103.25 Thursday from 103.125 Wednesday.

Another trader said opening bids could be up to around 108, considering the preferreds are being offered in $50 units.

"You know, I think people want to have an investment in Citi at these dollar prices in a superior structure," the trader said. "It could be upsized seriously."

The clamor over the coming Citigroup preferreds reminded the trader of the pre-pricing talk of Washington Mutual's 7.75% series R non-cumulative perpetual convertible preferred stock in December. There was a huge amount of interest and soaring pre-pricing bids. The deal was upsized by around $500 million.

And then the preferreds closed their first day on the market just below par, the trader said.

He added that there is a lot more confidence in Citigroup than Washington Mutual, however. "That was a stock that is still going to go down further," he said of WaMu. The worst may be over for Citigroup, he said.

Citigroup stock (NYSE: C) has been tumbling since it announced its fourth-quarter loss Monday. The stock lost a further $1.28, or 4.88%, to close at $24.96 Thursday.

WaMu posts big loss

Investors were expecting a bad fourth-quarter earnings report from Seattle-based Washington Mutual. The savings and loan's stocks and preferreds both traded lower Thursday leading up to its earnings announcement after the close. Washington Mutual, the country's largest savings and loan, had already said that the declining value of its mortgage portfolio would hurt earnings.

WaMu lived up to its word, posting a $1.87 billion fourth-quarter loss, the company announced. That translated to a loss of $2.19 per share for the last three months of 2007.

The savings and loan's mortgage portfolio was written down by $1.6 billion.

In 2006's fourth quarter, Washington Mutual saw a $1.06 billion, or $1.10 per share, profit.

Washington Mutual's 7.75% series R non-cumulative perpetual convertible preferred stock closed Thursday at 843.75 versus a closing stock price of $12.46. They closed Wednesday at 870 versus a stock price of $13.39.

WaMu stock (NYSE: WM) fell 93 cents, or 6.95%, on the day.

Theravance opens quietly higher

Theravance brought its convertible subordinated notes due Jan. 15, 2015 to market with a 3% coupon and an initial conversion premium of 30% Wednesday after the market close.

The coupon came in at the middle of talk, which was 2.75% to 3.25%, and the rich end of conversion premium talk, which was set at 25% to 30%.

Theravance's convertibles opened with a bang, moving up to 102. They stopped there, however. A trader quoted the closing price at 102 versus a closing stock price of $21.32.

Theravance stock (Nasdaq: THRX) gained $1.42, or 7.14%, on the day.

There is a $22.5 million greenshoe on the Securities and Exchange Commission-registered transaction.

The conversion price is set at $25.87, and the conversion ratio is set at 38.6548, subject to adjustment. The conversion ratio cap is 50.512.

The convertibles have call protection for the first four years, and there is a provisional call in years five through seven subject to a 130% hurdle.

Theravance is a South San Francisco, Calif.-based biopharmaceutical company. The company plans to use the proceeds for general corporate purposes, including drug research and development.

Ambac deal doubted

On Wednesday, New York-based bond backer Ambac announced that it would raise at least $1 billion in equity and equity-linked securities to help it overcome steep fourth-quarter losses in its credit derivative portfolio. Most of those losses stem from bad subprime mortgages and the securities derived from them.

Ambac also slashed its dividend and replaced its chief executive.

On Thursday, Moody's said that it will review Ambac's vital Aaa rating, with an eye on a possible downgrade.

"They can't do a convertible," a trader said. "The stock is so shorted, it's impossible."

He added that there would be huge questions on insurance for any Ambac convertible and called Ambac and its competitor, Armonk, N.Y.-based MBIA Inc., "worthless."

Ambac stock (NYSE: ABK) had the Moody's blues Thursday, losing $6.73, or 51.89%, to close at $6.24.

AMD down before earnings

Much like Washington Mutual, AMD stock and convertibles were down prior to the company's earnings report Thursday evening.

AMD lost $1.77 billion, or $3.06 per share, in the last three months of 2007, including a $1.6 billion charge for overspending on its acquisition of graphics chipmaker ATI Technologies Inc. earlier in the year.

Excluding the $1.6 billion charge, AMD lost 17 cents per share. Analysts polled by Thomson Financial expected AMD to lose 36 cents per share, according to the Associated Press.

Strong microprocessor sales accounted for the better-than-expected earnings, AMD said in its earnings statement.

AMD's 5.75% convertible senior notes due Aug. 15, 2012 closed Thursday at 73.87 versus a closing stock price of $6.34. They closed Wednesday at 74.85 versus a stock price of $6.57.

AMD's 6% convertible senior notes due May 1, 2015 closed Thursday at 66.5 versus a stock price of $6.34 after finishing Wednesday at 67.1 versus a stock price of $6.57.

Sunnyvale, Calif.-based AMD's stock (NYSE: AMD) slid 23 cents, or 3.50%, on the day.

SunPower humbled by downgrade

San Jose, Calif.-based solar energy firm SunPower's convertibles and stock sank when a Credit Suisse analyst lowered the stock to "Neutral" from "Outperform."

The Credit Suisse analyst, Satya Kumar, lowered his price target for the company's stock to $77 from $165.

Kumar said questions over demand for SunPower's products and production costs lowered his view of the company.

SunPower's 0.75% convertible senior debentures due Aug. 1, 2027 closed Thursday at 120.032 versus a closing stock price of $80.96. They closed Wednesday at 131.04 versus a stock price of $91.63.

SunPower's 1.25% convertible senior notes due Feb. 15, 2027 closed Thursday at 150.212 versus a stock price of $80.96. They closed Wednesday at 169.09 versus a stock price of $91.63.

SunPower stock (Nasdaq: SPWR) fell $10.67, or 11.64%.

Electronics for Imaging attractive?

Forget that Foster City, Calif.-based printer supply maker Electronics for Imaging has seen its stock crushed in recent weeks.

A trader said that the company's existing convertible is growing more attractive to investors because it has got a put scheduled for June of this year. In this market climate, short-term exposure is the name of the game, the trader said.

"The whole trend has been to the short-term paper, people looking for safety," he said. "It's obsession for some guys."

Electronics for Imaging's 1.5% convertible senior debentures due June 1, 2023 closed Thursday at 98.059 versus a closing stock price of $12.98. They closed Wednesday at 98.2035 versus a stock price of $13.10.

Electronics for Imaging stock (Nasdaq: EFII) slipped 12 cents, or 0.99%, Thursday.

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