Bank of America, Huntington gain on exchange hopes, Citi offering; Nabors, Transocean steady

By Kenneth Lim

Boston, May 15 - Select financial names improved Friday on an otherwise lackluster session as buyers hoped to take advantage of any future exchange offers, market sources said.

Bank of America Corp. and Huntington Bancshares Inc. appeared to benefit from the speculation, with their convertible preferreds gaining despite declines in the common.

The rest of the convertible market appeared to take its cue from what was going on in equities.

"Things were better in the morning, then I guess there wasn't any steam left," a sellside convertible trader said. "Guys are taking a step back, taking a breather, looking for the next catalyst. We've basically been riding some optimism the past few weeks, now we want to see if the data backs that up."

Another trader noted that the market was also going through a typical Friday lull.

"It started getting slow about two, three weeks ago," the trader said. "But I guess it's Friday."

Oil and gas names were among the more active amid a drop in the price of crude.

Nabors Industries Ltd.'s 0.94% convertible due 2011 held firm at 91.375 against a common stock price of $17. The Hamilton, Bermuda-based land drilling contractor's common stock closed at $16.06, down by 5.81% or $0.99.

Transocean Ltd.'s convertibles improved slightly. The 1.625% convertible due December 2037, which may be put in December 2010, was up a point at 93.25 versus a $70 stock price. Its 1.5% series B convertible due December 2037 was flat at 89.375 against the same stock price.

Transocean common stock closed lower by 3.51% or $2.49 to settle at $68.36.

The company is a Switzerland-based offshore drilling contractor.

New issues stay quiet

Some of the recent new issues were mostly quiet, with trading mostly done with the banks that brought them, a trader said. One sellsider said some of the newer issues from earlier in the year have come down substantially from their initial highs.

"I think it's good," the sellsider said. "What's important is how they traded in the aftermarket. Some of them are down substantially from what they have been...It's not positive for the guy that bought it and was hoping for 8 or 10 points right from the start, but it's certainly good for the rest of us. It means they're getting priced tighter."

Less stellar issuers have also started to come to the market after the initial offerings by stronger companies proved that there was demand from investors, the trader said.

"The Alcoas, Ingersoll-Rands, Johnson Controls are very well-known companies, very different from the Wyndhams or Cash Americas," the trader said.

Financials gain on exchange hopes

Financials got closer looks on Friday despite declines in their common stocks because of optimistic investors who were hoping that some of the banks would make exchange offers on their preferreds, a convertible trader said.

"Many buyers looking for the next likely exchanged issue into extra common - a winning trade for both sides," the trader said. "Makes folks in Washington happy."

Bank of America's 7.25% convertible preferred closed at 675 on Friday, up by about 19 points, while the common stock fell 5.66% or $0.64 to close at $10.67.

Bank of America is a Charlotte, N.C.-based bank holding company.

Huntington Bancshares' 8.5% convertible preferred was also up about 4 points at 625, strengthening against a common stock that slipped 1.91% or $0.09 to finish at $4.63.

Huntington is a Columbus, Ohio-based bank holding company.

A sellside convertible analyst said part of the strength in the financials also came from reportedly strong interest in Citigroup Inc.'s planned $2 billion offering of 10-year senior unsecured notes at a spread of 562.5 basis points over Treasuries. As has been the case with several bank offerings recently, the deal was done without backing by the FDIC.

"If they're so successful with this deal, it's a positive sign for the sector and for the market in general," the analyst said. "Of course no two banks are the same, but keep in mind it wasn't too long ago people were talking about Citi being the next to go, so it's not like they're the strongest bank in America trying to raise capital."

But the Citigroup offering is not necessarily better for its 6.5% convertible preferreds, which eased slightly on the back of the deal. The convertibles, which are included in Citigroup's ongoing $3.25 per share exchange offer into common stock, closed at 36.25 on Friday, down by 0.75.

"From a credit perspective it pushes the preferred down in the rankings, now you'll have another $2 billion ahead of you, so obviously that's not ideal," the analyst said. "But if they can raise this money, they'll be better capitalized, they might be able to pay back some of their TARP money, it's going to be a sign that they're a stronger company."

Mentioned in this article:

Bank of America Corp. NYSE: BAC

Citigroup Inc. NYSE: C

Huntington Bancshares Nasdaq: HBAN

Nabors Industries Ltd. NYSE: NBR

Transocean Ltd. NYSE: RIG

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