Citigroup leads financials higher; Transocean still gains with oil; SanDisk eases

By Rebecca Melvin

New York, April 18 - Citigroup Inc. convertible preferred shares gained in trade Friday, along with the common stock, after the New York bank reported a larger-than-expected loss, but investors took solace that steps were being taken to get past credit problems.

Citigroup's $5 billion loss on $16 billion of write downs was accompanied by news that the bank would cut another 9,000 jobs in addition to 4,200 job reductions already announced.

Nevertheless the entire financial sector strengthened on the news, with convertible benchmarks higher such as Bank of America Corp. and Wachovia Corp., market players said.

However, the new Huntington Bancshares Inc. convertible preferreds dragged again, seen at about the 98 level, after the $500 million issue of 8.5% convertible preferreds disappointed on Thursday when they were initially released to the secondary market.

Elsewhere, Transocean Inc., which seems to be the market's proxy in the energy sector, gained again Friday as the name found buyers amid a continued spiral upward in oil prices.

Meanwhile, SanDisk Corp. convertibles traded Friday at about 74.5, which was off slightly from about the 75 level seen following several days of strength ahead of its earnings posted late Thursday.

The flash-memory device maker reported that international product sales helped lift its first-quarter earnings to an $18 million profit, compared with a loss of $600 million for the same quarter a year earlier.

Overall, the week in convertibles was tepid, although better toward the end of the week than at the beginning, players said.

However, many traders remained frustrated Friday with pricing on bonds that was no richer despite gains in stocks.

"My bread-and-butter vol., good IG stuff isn't working," one sellsider said, referring to investment-grade convertible bonds. "It's holding; but not richening. I can't capture any gama."

Citigroup up early, but retraces some gains

Citigroup's 6.5% convertible preferred stock gained Friday as its shares jumped 5% in early trade.

The paper was "all over the place, but generally higher, dollar neutral by 0.25 point to 0.75 point," according to a buyside source.

After the bank reported earnings that represented a second consecutive quarter losses, the rating agencies reacted. Standard & Poor's put Citigroup on credit watch negative; and Moody's Investors Service said it changed its outlook to negative from stable, but affirmed Citigroup's senior debt at Aa3.

Moody's said it affirmed Citigroup's ratings because even after the first-quarter losses incurred from credit costs, the company's regulatory capital surplus remains sizable.

Moody's also said Citigroup's capital position improved noticeably in the past seven months because the company has issued more than $30 billion in regulatory capital, and its write downs for the first quarter were within the agency's estimates. The negative outlook was due to investment bank charges that were on the high side of Moody's estimates.

Citigroup's net loss totaled $1.02 per share, and compared with a year-earlier profit of $5.01 billion, or $1.01 per share. Revenue fell by nearly half, or 48%, to $13.22 billion.

Citigroup's investment bank suffered the brunt of the write-downs and posted a $5.67 billion quarterly loss. Its consumer unit, which is its largest business, saw profit drop 45% to $1.43 billion.

Alternative investments suffered a $509 million loss, hurt by write-downs and a hedge fund asset tied to Old Lane Partners LP.

Investors showed they have some faith that Vikram Pandit, who took the helm of Citigroup in December, is rooting out credit problems and re-stabilizing the company.

Citigroup had $2.2 trillion in assets at the end of the quarter.

On Friday the Citigroup perpetual preferreds were at about $50.75 versus $25.50 for the common stock. That compared with trades Wednesday at $49.125 to $49.325 versus a common stock price of $23.40.

Shares of Citigroup (NYSE: C) retraced some of their early gains on Friday but still closed higher at $25.11, up $1.08, or 4.5%.

Huntington misses rally

The 8.5% convertible preferreds of Huntington Bancshares couldn't pull out of their slump Friday, and both the company's bonds and stock were lower despite a rally in financials and the broader stock markets.

Although the structure of the Huntington preferreds is almost identical to the Wachovia preferreds issued Monday, players received them with opposite reactions.

The Huntington 8.5% preferreds did claw back up to par early, according to one buysider, but then they slipped back to the 98 level as its shares dropped lower too.

Shares of the Columbus, Ohio-based regional bank (Nasdaq: HBAN) closed down 35 cents, or 3.5%, at $9.69.

Meanwhile, Wachovia's convertible preferreds gained Friday to about $1,095, versus a common stock price of about $27, according to a sellside source. On their initial day of secondary trading on Monday, they had jumped to the 105 mark.

The financial services company, based in Charlotte, N.C., priced $3.5 billion of perpetual convertible preferred stock at par of $1,000 with a dividend of 7.5% on Monday.

Shares of Wachovia (NYSE: WB) closed up $1.39, or 5.4%, at $27.24.

"I guess people don't want to own smaller banks," a buysider said of the Huntington preferreds.

But a sellsider had decidedly less complementary words for the new paper: "HBAN is crap," he said, attributing the poor performance to "horrible placing."

"It left no demand out there at all. Everybody got exactly what they wanted, and there was no demand. It's one of the worst I've seen, especially considering the stock traded up," he said.

Morgan Stanley & Co. and Lehman Brothers Inc. were joint bookrunners, with co-managers including Huntington Investment Trust, SunTrust Robinson Humphrey and Wachovia Securities.

Meanwhile, a third source pointed out that perhaps the bigger banks are more appealing to investors because they are subject to mark-to-market accounting on more of their products compared with home mortgages common to the smaller, regional banks.

"With regional banks, investors are waiting for the next shoe to drop," he said. "The write downs are going to slowly trickle out as they occur. I'm not saying they're doing anything wrong; it's just going to be a slow bleed relative to the other banks."

On Monday, when Wachovia priced the preferreds, its common stock fell, but for the week overall, the common notched a 6% gain, the source said.

Transocean extends gains

Transocean's convertible issues continued to extend gains as crude oil closed at another record high Friday. Crude oil for May delivery rose $1.83, or 1.6%, to $116.69 a barrel on the New York Mercantile Exchange on Friday. For the week, oil gained 6%.

Transocean's 1.625% series A convertible senior notes due Dec. 15, 2037 were at about 115.75 near the close, versus a stock price of $158.69.

The 1.5% series B convertible senior notes due Dec. 15, 2037 were at nearly the same level, and the 1.5% series C convertible senior notes due Dec. 15, 2037 traded at 117, all versus the $158 stock price.

Transocean is a Houston-based offshore oil and gas driller. Transocean shares (NYSE: RIG) closed up 3.7%.

SanDisk flat to slightly lower

The SanDisk 1% convertible senior notes due May 15, 2013 were seen at 74.6 late Friday versus a share price of $27.40. Earlier the notes were as high as 75, according to a source.

SanDisk is a Sunnyvale, Calif.-based maker of flash storage cards used in consumer electronics. Its stock (Nasdaq: SNDK) closed up $1.50, or 5.8%, at $27.40.

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