Citi drops on credit fears; ProLogis slides lower; Nortel unfazed by Chapter 11; SandRidge plans deal

By Kenneth Lim

Boston, Jan. 14 - The convertible market had a quiet session on Wednesday as concern about the fate of Citigroup Inc. kept investors away.

Citigroup's convertible preferreds fell with the stock amid concerns about the bank's health after it said it would spin off its brokerage business.

Worries about the financial sector did not help ProLogis, which continued to slide as its stock succumbed to weakness in the sector.

Nortel Networks Corp. held steady even after the company filed for bankruptcy protection, as observers said the distressed company's problems had already been reflected in prices for some time.

Meanwhile, SandRidge Energy, Inc. said it will sell $220 million of perpetual convertible preferreds.

The market in general had a quiet session on Monday as jittery investors hesitated on fears about the fate of Citigroup.

"It was a very quiet day," a sellside convertible trader said. "It's been a very quiet start to the year. It was better in December, seems to have dropped off again in January. The whole market as a whole is attractive, but financing is the key, though."

Citigroup fears weigh on market

Citigroup's 6.5% convertible preferred fell about 5 points outright on Wednesday as the bank's plan to spin off its brokerage business raised fears about its stability.

The convertible traded at about 20.5 against the closing stock price of $4.53. Citigroup common stock fell 23.22% or $1.37 on Wednesday.

Citigroup is a New York-based bank holding company.

Citigroup said Tuesday that it will merge its brokerage business with Morgan Stanley's global wealth management business in a new company that will be called Morgan Stanley Smith Barney. Citigroup will receive $2.7 billion from Morgan Stanley under the deal and retain a 49% stake in the new company.

"The fear now is Citigroup's going to be taken apart, which means they're desperate for capital," a convertible trader said. "The irony here is the Smith Barney sale was supposed to be good for its balance sheet."

The trader noted that spreads on Citigroup's credit default swaps widened to about 400 basis points, which could force the bank to raise more capital.

"Creditors and investors are worried, and the more worried they are the more capital they need to put up to reassure the market," the trader said. "For the preferreds you're worried about what's going to happen with your dividends."

There is little certainty about how further sales of Citigroup businesses will affect the Citigroup preferreds. Even whether the company will sell more units remains to be seen, the trader said.

"It's hard to say," the trader said. "What else do they have to sell, and what's going to be left? Will they be able to generate enough cash to meet all their obligations, and what's going to happen to the dividends on its preferreds? I don't have the answers. I think there's even a question about whether they can sell some of their business even if they wanted to because no one else is big enough or stable enough to afford it."

The Citigroup concerns took its toll on the rest of the market, the trader said.

"All the spreads have gone out," the trader said. "It's like 2008 all over again."

ProLogis slides further

The ProLogis 2.25% convertible due 2037 continued to weaken on Wednesday as financial names and real estate investment trusts took a beating.

The convertible eased a point outright to trade at 54 against a stock price of $11.25. ProLogis common stock dropped 10.01% or $1.22 to close at $10.97 on Wednesday.

ProLogis is a Denver-based REIT that focuses on distribution and retail properties.

"They've been doing poorly for the last week," a sellside analyst said. "The stock's really come off. I think all of them haven't done well. There was a report that came out that downgraded a bunch of REITs, plus it's earnings season, so people could be selling in anticipation of the results that are coming out."

JPMorgan this week downgraded ProLogis's common stock to underweight from neutral, citing job losses and poor liquidity as concerns that should weigh on REIT earnings in 2009.

Nortel bankruptcy surprises few

Nortel's convertible notes eased slightly on Wednesday after the company filed for Chapter 11 bankruptcy protection.

The company's 1.75% convertible due 2012 and its 2.125% convertible due 2014 were unchanged at 16.5. Nortel common stock last traded at $0.32.

Nortel is a Toronto-based networking solutions provider.

"They had a major dealer shout out today, but at the last market the bonds hadn't moved much," a sellside trader said.

Nortel said Wednesday that it is filing for Chapter 11 bankruptcy protection. The company said it had about $4.175 billion of debt securities that will be accelerated because of the bankruptcy. Nortel has $575 million outstanding in each series of the convertibles.

The news did not surprise the market given that Nortel's notes had been trading close to their bond floor for a long time, observers said.

"I know the convertibles were trading really, really low and spreads were ridiculously wide, so we weren't even paying attention to them," a convertible analyst said. "We were trying to look at things that were safe and that's at the bottom of our list."

SandRidge plans deal

SandRidge Energy plans to price $220 million of perpetual convertible preferreds, the company said in a press release.

There is an over-allotment option for a further $40 million in the Rule 144A offering.

The company's common stock closed at $6.41 on Wednesday, lower by 9.72% or $0.69.

Proceeds will be used to repay an outstanding revolving credit facility and for general corporate purposes.

SandRidge is an Oklahoma City-based oil and gas company.

Mentioned in this article:

Citigroup Inc. NYSE: C

Nortel Networks Corp. NYSE: NT

ProLogis NYSE: PLD

SandRidge Energy, Inc. NYSE: SD

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