NatCity jumps 10 points on merger news; L-3, Triumph firm after reporting strong earnings

By Rebecca Melvin

New York, Oct. 24 - The convertibles market was pretty quiet and relatively unruffled Friday, with most things moving around at the margins, following an early panic that gripped stock markets, causing limit downs to be put in place ahead of the open, and as weakness prevailed through the session, sources said.

"People came in cautiously, given what happened internationally. But when our market opened, and it was reasonable, down 300 to 400 points, it wasn't too bad. I guess we're used to it," a New York-based sellside trader said.

In fact, the Dow Jones Industrial Average closed down 312.30, or 3.6%, to 8,378.95, but that was better than the free fall some had feared.

The S&P 500 and the Nasdaq closed down 3.45% and 3.23%, respectively.

Global stocks have been struggling as fears of a global recession take hold. Due to this turmoil, pundits are pricing in the probability that the FOMC will cut the fed funds target rate to 1.00% from 1.50% when it meets next week.

National City Corp. convertibles jumped about 10 points after the regional bank and PNC Financial Services Group Inc. announced that they have signed a definitive agreement for PNC to acquire National City for $2.23 a share, or about $5.2 billion in PNC stock.

"It opened up," a trader said of National City's convertibles. "It was good for the space. It's consolidation, and Paulson is moving that closer.

"People are waiting on the list of 20 firms that they are going to invest. It's said to be regional banks and insurance companies," he said.

After the close, the Treasury Department reversed course on its plan to list the firms that will receive injections, and instead will allow the companies to individually disclose it.

Prudential Financial Inc. traded, a bit weaker, but still better since having regained strength earlier this week.

L-3 Communications Holdings Inc. 3% convertibles were pulled into play, trading at a firm 95, after the defense company reported strong quarterly earnings.

Triumph Group Inc., another defense industry play or airline surrogate, also remains in favor with investors. While pricing of the convertibles wasn't stellar Friday, the aircraft-parts maker didn't disappoint with its second-quarter results posted late Friday.

Selling is still prevalent in the market, with convertibles prices languishing at levels not seen in 20 years. This is in spite of signs of strengthening this week in the credit markets. But there are a trio of elements that have to stabilize and improve before the market turns around, sources agree.

Those elements include the credit and stock markets and the convertibles market's technical, redemption issue.

"A lot of people see value. But I don't think that this is the bottom. Based on the credit and stock markets and technical selling, there's no appetite to buy," a New York-based buyside said.

NatCity jumps on merger news

National City's 4% convertibles due 2011 closed at about 82.125 versus a share price of $2.07 Friday, compared to trades at 82.5 early Friday and levels in the lower 70s prior to that.

Shares of National City were lower by 68 cents, or 25%, at $2.07.

"...love NCC paper," an East Coast-based sellside trader said.

There was some selling into strength, with one source noting that those who had bought the paper in the 50 to 60 range a few weeks ago were selling.

But in fact the National City 4% convertibles at 82 represent another potential 20% move higher given that PNC paper with 2011 maturities are trading at 98.5, the East Coast trader said.

"It's a better spread to the stock, so if you're a risk arb, it's the way to go," he said, adding that there are tremendous plays on similar instruments including convertible preferreds, bonds and stock.

National City and PNC agreed that PNC will acquire National City for $2.23 a share on an aggregate fixed amount of about $5.2 billion in PNC stock.

An additional $384 million of cash is payable to certain warrant holders. Total consideration approximates National City's market capitalization as of the close of business on Oct. 23, when National City stock was at $2.75. National City shareholders will be entitled 0.0392 share of PNC for each share of National City.

PNC a Pittsburgh-based diversified financial services company, is going to take in $7.7 billion in equity via preferred stock from the government's Troubled Asset Relief Program, or TARP.

National City will extend PNC's footprint into the Midwest, including Kentucky, Ohio and Indiana, and boost PNC's core deposits by $180 billion, increasing size of PNC to the fifth largest U.S. bank.

Other regional bank deals could emulate this one, independent research firm CreditSights said in a report.

The deal comes after the Cleveland-based regional player was told by its primary banking regulator, the Office of the Comptroller of the Currency, not to expect to get any of the $250 billion in capital being injected into U.S. banks by the federal government, according to a Wall Street Journal report.

The report said that the government's decision not to announce more than 20 additional banks that would receive infusions as part of the rescue plan underscores the potential fallout for banks shut out of the federal money.

The Treasury Department has decided to let banks individually announce any government investment.

Prudential remains in trade

Prudential's floating-rate convertibles due 2036 traded steady at about 96, which was off slightly from prices at 96.125 to 96.375 earlier in the week

Meanwhile, shares of the Newark, N.J.-based financial services and insurance company, which were weaker most of the day, jumped in late trading, ending higher by $2.01, or 6%, to $34.46. Insurance companies are expected to be the beneficiaries of new government investment through the TARP program.

L-3, Triumph report strong earnings

A lot of action in the convertibles market Friday had to do with options and squaring up positions, but there were trades on earnings as well.

L-3 Communications' 3% convertibles traded at 95 versus a stock price of $77. The New York-based intelligence and surveillance company reported that its third-quarter net profit rose to $212 million, or $1.73 per share, up from $199 million, or $1.56 a share a year earlier, and beating Wall Street's average forecast of $1.71 per share.

Revenue rose 6.2% to $3.66 billion.

For the full year, it held its forecast for earnings, excluding one-time items, at greater than or equal to $6.75 per share.

Its shares dropped $5.48, or 6.7%, to $76.25.

Triumph Group's 2.625% convertibles due 2035 were indicated to close higher at nearly 92, versus a share price of $36.46 Friday, compared with 86 versus a share price of $33.31 on Thursday.

Its shares gained $3.05, or 9%.

For the quarter ended March 31, Triumph earned $25 million, or $1.50 per share, up from $17.2 million, or 97 cents per share, a year ago. Earnings from continuing operations rose to $26.1 million, or $1.57 per share, from $18.7 million, or $1.05 per share. Sales increased 16% to $323.4 million.

The Wayne, Pa.-based company also raised fiscal 2009 guidance.

Richard C. Ill, Triumph's president and chief executive officer, said, "We had another very strong quarter marked by record sales and operating income, a robust backlog and greatly improved cash generation, which allowed us to reduce borrowings under our revolving credit facility by $22.7 million in the quarter."

In commenting on the outlook for the fiscal year 2009, Ill said, "Given our strong results through the first six months and assuming that the Boeing strike lasts through November, we now expect that earnings per share from continuing operations for the fiscal year will be in excess of $5.40 per diluted share, computed on 16.7 million shares."

Mentioned in this article:

National City Corp. NYSE: NCC

Prudential Financial Inc. NYSE: PRU

L-3 Communications Holdings Inc. NYSE: LLL

Triumph Group Inc. NYSE:TGI

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