HSBC, New Century plunge; First Horizon steady; Lear said to be quoted higher; Level 3 falls

By Ronda Fears

Memphis, Feb. 8 - Heavy shorting as well as outright selling in banking and mortgage stocks, a general trend for the sector in recent months, gathered steam Thursday with international banking giant HSBC Holdings plc and U.S.-based subprime lender New Century Financial Corp. sending new shockwaves throughout the markets.

Other big losses in the subprime mortgage lending group were Countrywide Financial Corp., which had big bounces two weeks ago from speculation that Bank of America Corp. was scoping it out for an acquisition, and Novastar Financial Inc.

In addition, MGIC Investment Corp. and Radian Group Inc., which agreed to a $5.5 billion all-stock merger on Tuesday, both were hit hard with Radian shares (NYSE: RDN) plunging by $2.10, or 3.23%, to $62.95 and MGIC (NYSE: MTG) recording a loss of $1.83, or 2.67%, to $66.76.

The only gainers in the mortgage group mentioned by traders were Security National Financial Corp., Hanover Capital Mortgage Holdings Inc., Vestin Realty Mortgage Inc. and New York Mortgage Trust Inc.

Traders also said there was a huge selloff in home-equity collateralized debt obligations Thursday and, outside of short selling in bank stocks, the best trade was opined to be some insurance with credit default swaps, if you could get it.

One trader noted that among regional bank indexes only the Southwest region was better Thursday with a mere 0.15% uptick.

By contrast, he said the mortgage index fell 2.84%.

Still, one market source said there are some regional banks to consider that fared surprisingly well Thursday given the routing that virtually the entire banking sector took as a result of mortgage exposure jitters, such as Memphis-based First Horizon National Corp. First Horizon shares (NYSE: FHN) closed off Thursday by 13 cents, or 0.29%, at $44.49.

Another market source pointed to Milwaukee-based Tri City National Bank on speculation that it was looking to sell out "while they are peaking" with nice earnings. Tri City National when contacted Thursday by Prospect News said its media spokesperson was not available to comment.

Elsewhere, Lear Corp. was halted around 10:42 a.m. ET for "news pending," but the stock never resumed trade in the regular session or after-hours market. Still, one trader said the stock was being quoted verbally in the $45 area, much higher than the $40.08 level where it was when halted, as many players expect the news to be a better bid for the Southfield, Mich., automotive parts and components maker. No news had hit the tape by press time, either.

In another troubled auto-related name, traders noted that bankrupt Allied Holdings Inc., a Decatur, Ga.-based vehicle hauler, was unchanged on its warning late Wednesday that a Teamsters strike could shut down its operations altogether. The stock was described as "dead" by one trader, who noted that it traded slightly higher Wednesday before the news. The shares (Pink Sheets: AHIZQ) settled unchanged at $1.05 with just 525 shares traded Thursday.

Bankrupt airline stocks also extended descents into what one trader referred to as "more realistic" territory, with Northwest Airlines Corp. (Pink Sheets: NWACQ) losing 33 cents, or 10.41%, to $2.84 and Delta Air Lines Inc. (Pink Sheets: DALRQ) off a nickel, or 4.07%, to $1.18. US Airways Group Inc., which lost out in a bid for Delta, said Thursday it would not pursue a linkup with Northwest; rumors of a Northwest merger have flown around for months.

On a wider fourth-quarter loss and refinance activity, traders said there was heavy profit taking in Level 3 Communications Inc., noting the stock has "made a nice run" recently.

Lear news still looming

Lear shares didn't have much of a chance to trade Thursday with the stock being halted, but one trader said the stock was being quoted verbally at much higher levels as market chatter largely consisted of speculation that a higher bid for the company was forthcoming. Nothing hit the tape by press time, however.

The stock (NYSE: LEA) was lower by 9 cents at $40.07 when halted at 10:42 a.m. ET; only 248,100 shares had traded by that time, versus the norm of 1.85 million shares.

The shares were being quoted verbally at $45, according to one trader.

"It doesn't have much of a correlation [to the actual market when the stock resumes trade] but probably is because of rumors of a higher private equity bid," the trader remarked.

"Longs hope for a higher bid; shorts hope for support of the current offer."

Another trader said he thinks Lear has received a higher offer and is waiting to see if Icahn wants to immediately make a counteroffer. His "guess" was for a new bid of $39.25 with Icahn expected to up its offer to $40. But he does not think Icahn will go to $40, as he already "has gotten the profits he came for."

Icahn's bid, which emerged Monday, was a disappointment to Lear players at $36 per share in cash and drew an immediate protest from Lear stockholder Pzena Investment Management LLC. Wide anticipation of another bid coming in for the company has sent the stock well ahead of that level.

Finance players run for cover

Even though credit default swap premiums in the finance sector have widened from around 200 basis points over Libor six to nine months ago to the current 500 to 600 bps area now, it's worth considering because many expect they could widen to 750 or 1,000 bps soon, said John Heppe, vice president of equity sales and trading, at Cohen & Co.

"This is nothing people should not have seen coming six months ago. It's just coming to roost," Heppe said.

Traders said there is focus right now on buying protection among holders of mortgage-backed securities covering the 2006 vintage of mortgages, many of which are adjustable-rate mortgages, or ARMs, as those are more vulnerable to delinquencies because interest rates are higher now.

CDS traders at several major investment banks on Thursday said there was not a default swap market for New Century and HSBC default swaps were traded out of London. One remarked, however, that to buy protection in the sector will "cost you right now" and will be rising henceforth.

HSBC, New Century plunge

HSBC sent many bank stocks sharply lower Thursday with its warning that its bad debt charges will exceed forecasts by 20% as higher interest rates hamper mortgage refinancing options amid the slowing U.S. housing market.

HSBC shares (NYSE: HBC) fell $2.44, or 2.65%, to $89.78. Other international banking institutions, such as Deutsche Bank AG and UBS AG, were slightly higher, but the major U.S.-based banks - Citigroup Inc., Merrill Lynch & Co. Inc., Bank of America and JP Morgan Chase & Co. - were hit by the news.

Adding to the angst was New Century Financial Corp.'s warning that it expects 2007 loan production to drop 20% versus its earlier view for a flat year.

New Century shares (NYSE: NEW) plummeted $10.92, or a whopping 36.21%, to close the day at $19.24.

Novastar shares (NYSE: NFI) plunged $2.29, or 11.12%, to $18.31.

Countrywide, which was rumored about two weeks ago to be a takeover target of Bank of America, was another big loser. Several traders shared with Prospect News during Countrywide's climb, however, that it was pure hype considering the state of affairs in the mortgage banking industry.

Countrywide shares (NYSE: CFC) lost $1.15, or 2.57%, to close at $43.59.

Subprime mortgage exposure has rattled the mortgage and banking sectors for some time as delinquencies rise. Flexible-rate mortgages, such as ARMs, due to be reset at higher interest rates are particularly of concern as that could trigger even more delinquencies.

Tri City rumored for sale

Among regional banks mentioned as worth a look was Milwaukee-based Tri City National Bank, although the stock is traded by appointment and very much "under the radar," as the market source put it. It would be a takeover play, he said, with a nice payoff if the market rumor pans out.

Tri City shares (Pink Sheets: TRCY) were unchanged at $20.20 on Thursday with no trades printed.

The market source said it has been speculated that the company could fetch $29 per share in a buyout.

"There are rumors that the bank will sell out while they are peaking," the source said.

"The bank just reported record earnings. The dividend is $1 a share, up from 88 cents last year, and 78 cents, 70 cents and 64 cents from previous years. The bank can pay big dividend increases because about 80% of the shareholders are in the dividend reinvestment plan, so the bank really doesn't have to pay out the money - most dividends remain inside the bank. As another bonus - the dividends reinvested have been based on an inside stock valuation of $19.35 a share and not the market price of about $20. It's like getting a 65 cent a share bonus. This makes the dividend yield over 5%."

An impetus to look for a buyer, he said, could be that about half of the bank's branch offices are located in Pick N Save supermarkets in the Milwaukee area, and Roundys Supermarkets Inc., which owns Pick N Save, is looking to sell that division.

Roundys spokesperson Vivian King declined to comment on the possible Pick N Save sale when contacted by Prospect News. However, she pointed out that Roundys just purchased five new Pick N Saves and has plans to open a new store in March.

Yet, the market source said it is rumored the Pick N Save stores that house the Tri City branches are going on the sale block.

"Pick N Save now has about 60% market share in the Milwaukee metro area, probably the second highest market share concentration for a supermarket chain in a metro area," he said.

"If they [Roundys] sell to a national chain or another investment group, typically it is normal to see a 15% drop in sales. This lower foot traffic would hurt the bank, which does about 50% of their transactions inside supermarkets. Also new major competitors - Wal-Mart Supercenter and Woodmans - are coming to the area, and will further impact Pick N Save.

"Considering the threat to foot traffic at half their [Tri City] branches ... my guess is they will sell before year's end."

Level 3 players take profits

In addition to Level 3's news on the wires, traders in the debt markets said there were renewed takeover rumors regarding the Broomfield, Colo., backbone internet provider, but stock traders shrugged that off as old news and attributed the big slide in the stock to profit taking after a nice run in recent weeks.

Level 3 shares (Nasdaq: LVLT) dropped 48 cents on the day, or 7.31%, to $6.09.

One stock trader said it has been speculated that Google Inc. was looking at buying out Level 3, as well as Qwest Communication International Inc., but he reckoned if a deal were in the works it would have surfaced before the results.

"I would be surprised [by a Level 3 buyout], given what happened to the stock today. It's down 7%. The earnings were not good. They burned some more cash and there had been some concern they would have to come back to the capital markets," the stock trader said.

Indeed, Level 3 announced Thursday it would sell $500 million of floating-rate notes in two tranches in the private placement market next week.

Also Thursday, the company reported its fourth-quarter loss was $237 million, or 20 cents a share, worsened from a loss of $169 million, or 24 cents, a year earlier. Revenue increased to $846 million from $418 million. The per-share loss missed analysts' projections for 14 cents, but revenues surpassed the analyst average of $794 million.

For first quarter, Level 3 forecast revenue of $1.0 billion to $1.045 billion.

In addition to the new debt offering, the proceeds of which will largely be used to take out older debt with higher interest rates, the company said Thursday it would eliminate 1,000 jobs to cuts costs. The stock trader noted that many Level 3 players were disappointed with a higher cash burn rate at the company in the most recent period.

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