Wells Fargo, Ferro strengthen as shares surge; Comtech, International Game launch new issues

By Rebecca Melvin

New York, May 4 - A number of convertibles names moved higher along with their underlying stocks on Monday as equities rallied sharply, pushing the S&P 500 index into positive territory for the year.

It wasn't clear if convertibles kept pace with gains in equities, however.

At least a couple of convertibles players were skeptical of the strong upward move.

"I think that this is irrational exuberance," a New York-based sellside trader said.

Wells Fargo & Co. convertible preferreds moved up as their shares surged nearly 24% despite reports that the San Francisco-based banking services company may have to raise more capital due to government stress test results.

Alcoa Inc. convertibles zoomed as their shares jumped 7% as investors bet that materials companies stand to do better with the prospects of economic recovery improving.

Fero Corp. surged as its shares screamed up more than 50%, making it one of the biggest percentage gainers on the New York Stock Exchange.

Alcoa and Transocean Inc. were among the top volume names of the day. But otherwise the market was pretty quiet, sources said.

In the primary market, a small deal emerged from issuer Comtech Telecommunications Corp., which was expected to price $200 million of convertibles after the close of markets via bookrunners Merrill Lynch & Co. and J.P. Morgan Securities Inc.

After the close of markets, International Game Technology Inc. launched a $500 million offering of 20-year convertibles that were supposed to price after the close on Tuesday. The paper was being sold via Goldman Sachs & Co., Banc of America Securities LLC, Morgan Stanley & Co. Inc. and Wachovia.

Both issues were Rule 144A deals.

Wells adds as shares surge

Wells Fargo's 7.5% convertible preferred shares settled at 645 on Monday, versus a closing share price of $24.25, compared to 613 versus a closing share price of $19.61 on Friday.

Shares of the company gained nearly 34% in more than double the average three-month volume.

The shares were reacting more to billionaire investor Warren Buffet's pronouncement that Wells Fargo passed his stress test with flying colors, than to the government's stress test, which is expected to be announced Thursday, according to a sellside source.

As for the government's stress test, "they're leaking everything anyway," he said, so the announcements may be anticlimactic.

"The market is ignoring the fact that reports say the government stress test may require more capital raising from the large financials, like Bank of America Corp. and Citigroup Inc., the sellsider said. "They're reacting more to Buffet."

Stress test results, which were originally expected to be released Monday, have been delayed until Thursday after the close of markets.

Given that Citigroup and Bank of America are expected to be in need of more capital, according to press reports, Credit Sights analyzed options for those two banks.

"For banks that were initially found to be in need of more capital, these banks are now in private discussions with banking regulators to rebut the regulatory findings and/or work out the details how to raise the needed capital," the CreditSights report said.

"The takeaway is that the bank regulators are moving away from broad systemic measures extended to most all banks and now are taking a more tailored approach which will focus resources and support on the banks deemed to need it most," the CreditSights analysts wrote.

Banks, which are found to be in better shape from a capital perspective, may also be able to repay the TARP funds, which several have expressed interest in doing as soon as possible, they said.

"We sense that the government is focused on banks having a higher capital cushion (or buffer) above the strict regulatory well-capitalized minimum for a tier 1 of 6%," CreditSights analysts David Hendler, Baylor Lancaster and Pri de Silva said in a report published Monday.

Alcoa, Ferro jump

Alcoa's 5.5% convertible bonds were seen in trade Monday at 176 versus a share price of $10.40. That compared to a Friday trade of 157.5 versus a stock price of $9.05.

Shares of the Pittsburgh-based aluminum producer closed slightly off that trading level at $10.36, but that was up nearly 7% on the day.

Stock investors are piling on to names that stand to benefit from a revival of economic growth. On Monday data showed increased construction spending and pending home sales.

Ferro, a Cleveland-based producer of specialty materials and chemicals for a range of manufacturers, saw its shares surge 56% in more than double the average three-month running volume to 2.8 million shares, from 1.3 million.

The company offers inorganic specialty products, including glazes, frits, enamels, pigments, dinnerware decorations, and other performance materials, as well as other products.

Ferro's 6.5% convertibles due 2013 traded at 46 versus a share of $4.40 and was seen closing at 47 versus a share price of $5.04.

That's up from about 41 in previous trades.

Comstock, International Game to price

Comstock Telecommunications was expected to price $200 million of 20-year convertibles after the close Monday, which were talked to yield 2% to 2.5% with an initial conversion premium of 22.5% to 27.5%.

Syndicate sources wouldn't confirm where the issue priced. But a market source said that the issue did price beyond the cheap end of talk for the coupon at 3%, and at the cheap end of talk for the premium.

He said there was poor demand.

The Rule 144A deal was being sold via joint bookrunners Merrill Lynch & Co. and JPMorgan and included an option to purchase up to an additional $30 million principal amount of the notes.

The notes will be non-callable for five years, with puts in years five, 10 and 15.

Proceeds will be used to fund its acquisition strategy and for general corporate purposes.

Melville, N.Y.-based Comtech develops, makes and markets products, systems and services for advanced communications solutions, including telecommunications transmission, mobile data and RF microwave amplifiers.

International Game said after the close that it planned to price $500 million of five-year convertibles after the market close Tuesday.

The paper was talked to yield 3.5% to 4% with an initial conversion premium of 27.5% to 32.5%, according to a market source.

The notes are non-callable for life. There is a fundamental change put at 100% of principal plus interest.

International Game intends to use a portion of the net proceeds of the offering to enter into one or more hedging transactions with initial purchasers and affiliates of the paper.

The company will use the remaining proceeds to pay down outstanding revolving debt under its senior credit facility.

In connection with the convertible note hedge and warrant transactions, the hedge counterparties or their affiliates may enter into derivative transactions with respect to the company's common stock.

International Game is a Reno, Nev.-based maker of gaming machines and systems.

Mentioned in this article:

Alcoa Inc. NYSE: AA

Comtech Telecommunications Corp. NYSE: CMTL

Ferro Corp. NYSE: FOE

International Game Technology Inc. NYSE: IGT

Transocean Inc. NYSE: RIG

Wells Fargo & Co. NYSE: WFC

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