Citigroup trades little changed on job cut news, GM mixed; Level 3 longer-dated paper strengthens

By Rebecca Melvin

New York, Nov. 17 - Citigroup Inc.'s convertibles were little changed in light trade Monday after the New York-based banking giant said it would shrink further by 53,000 jobs in an effort to control costs in the face of rising debt losses and slowing economies.

"We saw some of that early, but it died back fairly quickly," a New York-based sellsider said about trading of the Citigroup convertible preferred shares.

An East Coast-based sellside trader focused on financials said, "Nothing's trading today; it's deadly."

Others concurred it was a pretty slow day.

General Motors Corp.'s convertibles traded mixed as the underlying shares gained on optimism that the troubled auto giant will receive loans from the government before the end of the year to tide the company over until January when president-elect Barack Obama takes the helm.

Also on Monday, it was reported that GM will sell its stake in Suzuki Motor for ¥22.37 billion to raise cash.

Level 3 Communications Inc. saw its longer-dated 3.5% convertibles gain 1.5 to 2 points on news that the Broomfield. Colo.-based network service provider is tendering for three shorter-dated convertibles, which will be paid for by raising about $400 million in a privately placed convertible deal.

Elsewhere, Avnet Inc. was a little weaker but fairly active in trade on Monday. Itron Inc. was also mentioned in trade, as were a pair of real-estate investment trusts, Essex Property Trust Inc. and SL Green Realty Corp., which held up pretty strong despite drops in their underlying shares.

Eyeing the horizon for new issuance

Although Level 3 announced that it plans to raise $400 million from the sale of 15% convertible senior notes due 2013 in a private deal, there remains no new issuance in the public convertible primary market. The dry period has extended for more than nine weeks since a small flurry of deals priced Sept. 10.

"People are waiting for that data point when a new deal comes and it does well. That will give buyers confidence and propel our market back," a sellsider said, adding that doing well would mean an initial close at 102.5 or higher.

The next meaningful, large move depends on that, he said. "Hopefully it's within weeks and months."

Another sellsider said that the current shrinkage in the corporate convertible universe will lead to shorter supply that is going to push prices higher as the lack of new issuance persists.

"People bought them at the bottom, and they are going to want to hold on to them, and there's going to be a scarcity value," the sellsider said.

"Pricing has to get better for new issues," he said, and when it does there will be a flood of people looking to do something, rather than a trickle, he believes.

Citigroup little changed to lower

Citigroup's 6.5% convertible preferreds were quoted early at 26.75, which was essentially unchanged from previous levels. The preferreds were seen closing at 26 versus a share price of $8.89, compared to $26.85 versus a share price of $9.52 on Friday.

Shares of Citigroup moved up at one point during the session but still ended down 6.6%, still languishing in the single digits.

The bank held a widely publicized town meeting early Monday in which chief executive Vikram Pandit laid out the details of the cutback.

One sellsider said the steep cut in jobs wasn't unexpected and that it was what the company had to do given current circumstances.

But the sheer size of the job cuts is dramatic. The company will be retrenching to 300,000 employees from 350,000, affecting about 15% of its work force. And that is on top of a previous round of 23,000 job cuts.

A large segment, or about half, of the new cuts will be related to the sale of units, such as the German retail banking business. That business is expected to account for about 9,000 job cuts.

The cuts are expected to be implemented in early 2009 and conclude by midyear, with the idea being to get expenses down as much as 20% to $50 billion to $52 billion in 2009. The bank has lost $20.3 billion in the last year.

GM mixed as shares trade higher

GM is another major American company with its equity trading in the single digits, but the shares were up 5.7% Monday, closing at $3.18.

Meanwhile, the GM 5.25% convertibles due 2032 (the GBMs) lost 9 cents, or 2.1%, to $4.19.

Likewise, the short-dated GM 1.5% convertibles due June 2009 (GRMs), which are not very equity sensitive, eased nearly 2%, or 20 cents, to $10.10.

The GM 6.25% convertibles due 2033 (the GPMs) gained 15 cents, or 3.6%, closing at $4.30.

"I think GM and the others will get the $25 billion from congress before the end of the year, and they will split it up among the three, and it's not going to be enough," a New York-based sellsider said referring to GM, Ford Motor Co. and Chrysler.

Then when Obama takes office, he'll give them another $25 billion to appease the unions, and it's still not going to be enough; and then they'll get hung out to dry, he said.

There are automakers from overseas in the U.S. south that are non-union, and that will continue to do well, he said. "But you can only run something inefficiently and backwardly only for so long. It's like going out in your backyard, and cutting all the trees down for firewood, and then saying, "Gee, now I have no firewood.'"

"They're going to have to do a chapter. The airlines did chapters - that's how they got rid of their legacy costs, and the steel makers did it," he said, referring to Chapter 11 bankruptcy protection filings.

Level 3 trades on tender news

Level 3's 3.5% convertibles due 2012 traded at 42.5 bid, 43.325 offered Monday, which was up compared to prior trades of about 41.5.

"They [the 3.5s] are up a little on tendering for the three of the shorter converts. That gets them to 2011, tendering at a discount, but it helps for a long time," a New York-based sellsider said

Level 3 is tendering for the 6% convertibles of 2009, the 6% convertibles of 2010 and the 2.875% convertibles.

Another sellsider pointed out: "That pushes out a lot of their debt, but they're not tendering for all of it. Still, it puts them in much better position."

"They are conditional tenders, depending on a minimal amount of each issue, and everything is contingent on everything else," he added.

Equity holders were cheered about not getting diluted up front. The Level 3 common closed up 3.5%, or 3 cents, at $0.90.

Another positive is that they are using only a minimal amount of existing cash, the sellsider said. "They have about $580 million in cash on hand and they will only have to use about $40 million of it."

"The company seems always able to come up with something," he said

The private deal was viewed as positive because it shows there are some investors willing to take $400 million of debt, and the paper also bears a very handsome coupon, the sellsider said.

But he didn't view it as positive for the overall convertible public market because of how expensive the debt is coming.

"In every environment there is a price you're going to have to pay to raise funds. The question is what are you willing to pay? If this is indicative of what you have to pay to raise financing, it's not so positive for issuers," the sellsider said.

Mentioned in this article:

Avnet Inc. NYSE: AVT

Citigroup Inc. NYSE: C

Essex Property Trust Inc. NYSE: ESS

General Motors Corp. NYSE: GM

Itron Inc. Nasdaq: ITRI

Level 3 Communications Inc. Nasdaq: LVLT

SL Green Realty Corp. NYSE: SLG

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