Financials get knocked down; Omnicare remains active, holds gains; SBA prices upsized deal

By Rebecca Melvin

New York, April 20 - Selling hit financial convertibles on Monday, sending the sector lower as investors took profits from gains in those names notched in recent weeks.

Bank of America Corp. fell about 6 points despite better-than-expected earnings posted before the market open. The Charlotte, N.C.-based bank holding company's shares also sank as potential further credit problems weighed on investors.

Wells Fargo & Co. lost about 4.25 points on Monday, and PNC Financial Services Group Inc. slipped back after an advance last week, as its underlying shares lost 11%.

Elsewhere, Omnicare Inc.'s 3.25% convertibles remained active and held on to most of the gains they notched Friday when the converts and underlying shares ran up on a buyout rumor.

In the primary market, SBA Communications Corp. launched a $350 million offering of 5.5-year convertible senior notes ahead of the market open, which was upsized to $450 million upon pricing after the close. The deal had been seen plus 0.25 points in the gray market during the session.

BofA drops

Bank of America's 7.25% convertible preferred shares were quoted at 490.5 at the close Monday, versus a share price of $8.02. Earlier in the session the preferred paper had traded at 513.

Bank of America's common stock lost $2.58, or 24%, on Monday.

"Financials got clocked," a New York-based sellside trader said.

Ahead of the market open, Bank of America reported $4.2 billion of earnings in the first quarter, an amount that exceeded total earning for all of 2008, the company's press release boasted.

Revenue more than doubled to $35.76 billion. But investors were focused on what the company was saying about credit concerns.

Bank of America warned of worsening loan default problems. "Credit quality deteriorated further across all lines of business as housing prices continued to fall and the economic environment weakened," the release stated.

"Consumers are under significant stress from rising unemployment and underemployment levels. These conditions led to higher losses in almost all consumer portfolios," the release continued.

"Declining home values, reduced spending by consumers and businesses and continued turmoil in the financial markets negatively impacted the commercial portfolio. Commercial losses increased from the prior quarter driven by higher broad-based losses in the non-homebuilder portion of the real estate portfolio within Global Banking and the small business portfolio within Global Card Services," it said.

The provision for credit losses of $13.4 billion rose from $8.5 billion in the fourth quarter and included a $6.4 billion net addition to the allowance for loan and lease losses. Reserves were added across most consumer portfolios reflecting increasing economic stress on consumers. Reserves were also increased on commercial portfolios.

Nonperforming assets were $25.7 billion compared with $18.2 billion at December 31, 2008 and $7.8 billion at March 31, 2008, reflecting the continued deterioration in portfolios tied to housing.

Meanwhile, Wells Fargo's 7.5% convertible preferreds ended the day at 553.25, which was down 4.25 points, according to a sellsider.

Shares of the San Francisco-based financial services company fell 16%, or $3.26, to $17.

PNC's 4% convertibles due 2011 were offered early at 92.875, which was off from Friday's 93.25 trades. During the session Monday, the PNC 4s traded at 92.75 and were later seen trading at 92.125.

Shares of the Pittsburgh-based financial services company settled down $4.72, or 11%, to $36.88.

Omnicare remains active, holds gains

Omnicare's 3.25% convertibles due 2035 were seen late in the session at 71.125 bid, 71.50 offered outright with the stock at $26.50. They would be 71.5 bid, 71.875 offered versus a stock price of $27, according to a sellside trader.

The company's shares shed 83 cents, or 3%, to settle at $26.67.

Omnicare's 4% convertible preferred shares due 2033, which don't have takeover protection, weren't seen in trade.

Stocks and bonds of the Covington, Ky.-based geriatric pharmaceutical services company ran up on Friday on rumors that Walgreen's was a potential buyer of the company, the sellsider said.

"The WAG rumor has been out before, and while it may end up being true, it's also being floated in relatively close proximity to the standstill expiring," the sellsider said, adding that Omnicare has a standstill agreement with a shareholder that is supposed to expire with its annual meeting after earnings on April 30.

In the last hour of Friday's session, when the stock was near its closing price of $27.50, "the bonds traded in a wide 70.25 bid, 72 offered range with lots of volume. The higher price of 72 is still almost a 9% yield to put, so if you like the credit there's still a decent return at that price," the sellsider said.

Another New York-based sellsider, this one an analyst, said that he has a buy recommendation on the bonds.

A third source, noting that there has been a rumor "for years" that Omnicare "would get taken over by some big chain," said that the reason the bonds aren't higher and prior to the latest takeover chatter, had been trading in the mid to upper sixties is that the bonds have a rather long 6.5 years to put.

SBA prices upsized deal

SBA priced an upsized $450 million of 4% convertibles with a conversion premium of 22.5% at the midpoint of talk.

Its stock was down 6% on the day, settling at $24.80, but in line with its peers including Crown Castle International Corp. and American Tower Corp., according to a syndicate source.

Prior to pricing, the offering was seen 3% cheap by a sellside analyst, who used a credit spread of 975 points over Treasuries and a volatility of 42% at the midpoint of talk.

The Rule 144A convertible offering is being sold via joint bookrunners Citigroup, Barclays, Deutsche Bank, JP Morgan and Wachovia. There is a greenshoe of up to $50 million.

The notes are non-callable for life with no puts. Prior to July 22, 2014, the notes will be convertible only upon specified events and after that at any time. The notes may be settled in cash, shares of SBA class A common stock, or a combination of both.

In connection with the offering, SBA will enter into convertible note hedge transactions.

Boca Raton, Fla.-based SBA is an owner and operator of wireless communications infrastructure.

Mentioned in this article:

Bank of America Corp. NYSE: BAC

Omnicare Inc. NYSE: OCR

PNC Financial Services Group Inc. NYSE: PNC

SBA Communications Corp. Nasdaq: SBAC

Wells Fargo & Co. NYSE: WFC

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