Financials lower to unchanged ahead of 'stress test' data; D.R. Horton adds; US Airways eyed

By Rebecca Melvin

New York, May 7 - Convertibles players were juggling new issues, which were mostly higher, although some names have come off their highs, and pondering the impact that the weaker demand for Thursday's Treasuries auction might have on their market.

There was also some selling among financial convertibles ahead of the U.S. government's long-awaited "stress test" results, which were released after the close.

KeyCorp came down, and there was some profit taking in the Bank of America Corp. and Wells Fargo & Co. convertible preferreds. But otherwise the financial convertibles were largely unchanged, a New York-based sellside trader said.

Wells Fargo filed that it is going to offer $6 billion of common stock, which is positive for the preferreds, the sellsider said.

D.R. Horton Inc.'s newly priced 2% convertibles charged out of the gate quoted at 106 bid, 107 offered. But the notes later came off that level, in tandem with the company's underlying shares, to about 101 bid, 102 offered by lunchtime, according to a syndicate source.

US Airways Group Inc. was not heard by many in the gray market, although one selllside analyst said he heard it at 102. But the big coupon, small issue size deal was seen slightly cheap and was expected to find plenty of takers.

Players observed that names were coming to the primary market that are considered riskier than the names in previous weeks. That, combined with the recent binge in new issuance, with prices ramping up almost uniformly in the aftermarket, and the poor demand at the U.S. Treasuries auction left many uncertain of direction going forward.

"The auction wasn't that good," a New York-based sellsider said, adding, "there was one inherent flaw in this rally: if it was anything more than a bear market rally, then improving economic activity would lead to higher rates. Higher rates would/will prove extremely unkind to higher equity valuations."

International Game Technology Inc.'s newly priced 3.25% convertibles came off to trade at 106.75 versus a share price of $15.30 on Thursday, compared to 109 versus a stock price of $16.00 on its debut on Wednesday.

Key drops, B of A, Wells weaker

KeyCorp's 7.75% perpetual convertible preferred was seen around 69.25 near the close.

"I told customers to take profits in BAC L preferred, WFC L preferred, Key and FITB," a sellsider said via e-mail.

After the close, KeyCorp said that it was directed to increase its tangible common equity by $1.8 billion, which will further strengthen the Cleveland bank holding company's tangible common to tangible assets ratio, which was 6.06% at the end of March.

Still the bank said it "has sufficient overall capital (tier 1 and total capital) to meet the 'more adverse than expected' economic scenario that the government created as part of its 'stress tests' of the nation's 19 largest financial institutions," the release said.

Key said it has six months to determine which of a range of alternatives it will use to raise the common equity from non-governmental sources. Key also said it wanted to repay TARP funds as soon as possible. It currently has $2.5 billion of TARP/Capital Purchase Program Preferred Stock.

In all, the government said that 10 of the nation's 19 largest banks need a total of about $75 billion in new capital to withstand losses if the recession worsened. The banks that need more capital will have until June 8 to develop a plan and have it approved by regulators.

In addition to B of A, Wells Fargo, GMAC Financial, Citigroup and Morgan Stanley, five regional banks need to raise a combined $8.2 billion of capital.

Wells Fargo said it would undertake a public offering of $6 billion worth of stock just prior to the government's stress test results showing that the bank needed $13.7 billion in capital.

The Wells 7.5% preferreds were seen near the close at 700, which was slightly off from previous levels, and versus a price for the San Francisco-based bank's common stock of $24.76, which was down nearly 8% on the day.

Bank of America was told to raise $33.9 billion in capital. The Charlotte, N.C.-based banking giant said that it planned to sell assets, like its Columbia asset management unit, and issue more common stock to cover the shortfall.

Bank of America's 7.25% preferred stood at 603 near the close, compared to a share price of $13.51, which was up 6.5% for the day.

Also weakening equities on Thursday were jitters about weak demand at a government debt auction. Bond prices fell following an auction of 30-year Treasury bills in which the government had to pay a higher-than-expected interest rate. That signaled to some traders and investors that funding the Obama administration's economic recovery plans could prove difficult.

The yield on the 30-year long bond moved up to 4.27% from 4.11% Wednesday. The yield on the benchmark 10-year Treasury note moved up to 3.28% from 3.16%.

US Airways looks slightly cheap

US Airways was one of several riskier names that have come to the primary market in recent days. But from a valuation perspective it looked pretty cheap, according to two sellside analysts.

A New York-based sellsider said it "looked OK" and was cheap by a couple points, and a second sellsider had the spread a little tighter and the valuation a little cheaper at about 105.

"These are the riskier names, and it shows that even more risky names are able to issue bonds," the New York-based sellsider said.

CreditSights, an independent credit research firm, said of US Airways in a note published Thursday, "That is exactly what more airlines should do: strengthen their balance in the face of demand uncertainty and rising crude oil."

Recent April load factor strength might just be Easter timing, or it might signal that capacity rationalization is working, CreditSights said.

"Either way, no airline has provided any positive visibility into summer season bookings. LCC [which stands for low cost carrier] overcame significant operational and financial hurdles to get where it is now. And successfully restructured its debt in 2008 to avert a liquidity covenant problem," CreditSights said.

The firm added that an unfounded rumor had been circulating in equity circles about a major airline going bankrupt this year. "Now along comes the whispered suspect with an equity offering," CreditSights said.

Mentioned in this article:

Bank of America Corp. NYSE: BAC

D.R. Horton Inc. NYSE: DHI

International Game Technology Inc. NYSE: IGT

KeyCorp NYSE: KEY

US Airways Group Inc. NYSE: LCC

Wells Fargo & Co. NYSE: WFC

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