Financial preferreds bounce a little from big drop; health care, biotech names in trade; Avnet edges higher

By Rebecca Melvin

New York, Jan. 21 - Convertible bond prices were somewhat firmer Wednesday after a massive sell-off among financials, including convertible financial preferred shares, on Tuesday, sources said.

Financials including Citigroup Inc., Bank of America Corp., and Wells Fargo & Co., bounced back a little Wednesday. But "all are still big, big losers thus far this week," an East Coast-based buyside trader said.

At the close, Citigroup's and Bank of America's convertible preferreds were up 31% and 29%, respectively, according to a New York-based convertibles financials analyst.

A handful of health care and biotech issues were also mentioned in trade Wednesday, including generic drug maker Mylan Inc.

Some expect health care companies, especially generic drug makers, to benefit during President Barack Obama's first 100 days in office since one of his campaign platforms was U.S. health care reform.

Tried-and-true convert names biotech giant Amgen Inc. and medical device maker Medtronic Inc. were also in trade.

Elsewhere, Avnet Inc. edged higher. The Phoenix, Ariz.-based supplier of electronics components and systems is expected to report its fiscal second quarter earnings Thursday.

Citigroup, B of A bounce

Citigroup's 6.5% convertible perpetual preferred shares closed at about 13.69, versus a share price of $3.67 on Wednesday, compared to 10.44, versus a share price of $2.80 on Tuesday, according to an analyst.

Both the shares and the convertible preferreds of the ailing New York-based financial services giant closed up about 31%.

Just a little over two weeks ago, however, the Citigroup preferreds were at 30, and on Friday they were 16.58. "So they've been cut in half," an analyst said.

Factors that sparked the meltdown Tuesday included the State Street Corp. situation and the specter of government intervention, the analyst said.

"It makes investors say, 'I don't want to invest if it's a coin toss that the government is going to do something right. No yield is going to entice me to buy this,'" the analyst said.

With State Street, which reported its fourth quarter earnings Tuesday, "people realized that the bank was undercapitalized and there was nothing it could do about it - and they were thinking that Bank of America may be in the same situation," the financials analyst said.

State Street said at on its conference call that if it brought its conduits back on its books, it would reduce its tangible common equity ratio to about 1% and change, from 4% and change, the analyst said.

The amount of capital that it would have to raise to bring them back was tagged at $2.7 billion, and its market cap on Tuesday was $8 billion, so it was an impossibly high number, the analyst said.

The banks have been saying, "pay no attention to tangible common; it's all about tier one ratios." But all of a sudden, people realize that the tangible common equity ratios matter. Meanwhile, B of A's tangible common equity ratio is low - below 3%, the analyst said.

Last week, B of A had time for only two questions on its conference call, "and people were blown off when they asked about ratios. But ratios do matter, and I think that was one of the big realizations that was freaking out the market," the analyst said.

"That together with the specter of government intervention since the government refused to allow B of A to back out of the Merrill Lynch deal, all converged into a huge selling frenzy," the analyst said.

'No pattern or clarity' on government involvement

B of A's 7.25% convertible preferreds were about 460 Wednesday, up 103.85 points, or 29%, from Tuesday, the analyst said. Earlier in the session, a trade was cited at 425. And a third source put the close at 450.

Shares of the Charlotte, N.C.-based banking giant settled up $1.58, or 31%, at $6.68.

"The government thought it would create more stability by forcing B of A to go through with the Merrill deal, but those kind of things just make investors want to pull their money off the table," the analyst said.

Citigroup, on the other hand, needs to sell assets to get as much capital as possible and to shrink its balance sheet.

"They probably perceive that Citi is in trouble, and needs to start selling its assets. It's easier to see some kind of earnings power out of B of A than out of Citi," the analyst suggested.

"Citi is a mess. They now realize that they need as much capital as they can get, and they need to shrink the balance sheet. B of A bought Countrywide and now it may be in a more favorable status with the government," the analyst said.

But it's true there is "no pattern or clarity" yet on government actions, the analyst said.

Some potential good that the government could do is to set up a mechanism to buy troubled assets, which was the original intention of the TARP, which stands for Troubled Asset Relief Program. That may be a cure to stabilize capital, sources said.

To nationalize would mean to wipe out public shareholders and public preferred shareholders, with the government taking full control.

"Nationalizing means there is no room for private investment because the bank is so dysfunctional," the analyst said, and that kind of talk, not surprisingly, rattles investors.

Health care names in trade

Mylan Laboratories' 1.25% convertible due March 2012 traded at 81 on Wednesday, while the Mylan 3.75% convertibles due 2015 changed hands at 98, according to a New York-based sellside desk analyst.

Citigroup initiated coverage on Mylan at "buy" on Wednesday. JP Morgan initiated coverage on the company on Dec. 17 at "overweight."

Shares of the Canonsburg, Pa.-based generic drug maker moved lower intraday, but swung higher after 1 p.m. to end up 44 cents, or 4.3%, at $10.80.

Amgen's series A 0.125% convertibles due 2011 traded at 94 versus a share price of $55, and the Amgen series B convertibles due in 2013 traded at 92 versus $55.

Later the Amgen As were seen 93 bid, 94 offered and the Amgen Bs, with a 0.375% coupon, were seen at 91 bid, 92 offered.

Shares of the Thousand Oaks, Calif.-based company squeaked out a gain of 53 cents, or less than 1%, to close at $55.53.

Minneapolis based Medtronic saw its series A convertibles trade at 93 versus a share price of $31.85, and its B series convertibles traded at 88 versus the same $31.85 share price, according to a sellside desk analyst.

In addition Gilead Sciences Inc. A paper traded at 129 versus $47.25 and the B paper traded at 130 versus $47.25, the sellsider said.

Shares of the Foster City, Calif.-based biotechnology concern closed up $2.250, or 4.7%, at $49.40.

Avnet edges up

Avnet's 2% convertibles due 2034 traded at 99.625 compared to 99.25 on Tuesday.

It's going up because "people underestimated the credit. There's a 4.74% yield to put," a New York-based sellside analyst said. The paper is putable March 15, 2009, and "they'll all be gone," he said.

"In general, there's a little more tolerance for risk, away from financial securities," he added.

Avnet saw its equity open higher and trend higher from there, ending up $.07, or 6.5%, at $17.54.

Mentioned in this article:

Amgen Inc. Nasdaq: AMGN

Avnet Inc. NYSE: AVT

Bank of America Corp. NYSE: BAC

Citigroup Inc. NYSE: C

Gilead Sciences Inc. Nasdaq: GILD

Medtronic Inc. NYSE: MDT

Mylan Inc. NYSE: MYL

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.