Wachovia adds on debut; CapitalSource gets another look after deal with California bank; Endo trades well

By Rebecca Melvin

New York, April 14 - Wachovia Corp., which announced and priced $3.5 billion of perpetual convertible preferred shares before the open, figured large in trade on Monday, while much of the remainder of the convertible bond market wavered in sympathy with stocks amid thin volume, market participants said.

"Volume is Monday-ish," a New York-based sellside trader said of convertibles trading. "Stocks were trying to figure out what they wanted to do this morning. Trading was very choppy."

Wachovia's new 7.5% convertible preferreds gained about 5 points, or 5%, on their debut, even as the major bank's common stock sunk, ending lower by 8%.

Concurrent with the preferred offering, Wachovia bank priced an offering of common stock, also for $3.5 billion, which came at about a 15% discount to the previous share price.

Financial convertibles overall were heavy. But the 5% pop in Wachovia helped traders remain sanguine.

"BAC was down 3% on the day; and we're not hedged, so we lost money. But there was a 5% pop in Wachovia," a New York-based buysider said, referring to Bank of America Corp.'s convertible preferred shares.

CapitalSource Inc., which has three convertibles issues, was getting another look from investors on Monday after the specialty finance company said that it has agreed to assume the $5.6 billion loan portfolio of California industrial bank Fremont Investment & Loan and to operate its 22 retail banking branches.

Elsewhere, a pair of issues that priced late last week were in play, including Endo Pharmaceuticals Holdings Inc.'s 1.75% convertibles, which were trading well in the neighborhood of 105, and Virgin Media Inc.'s 6.5% convertibles, which continued to trade at 98.75 bid, 99.125 offered, which was about where it was on its debut Friday.

Wachovia deal pleasing

Wachovia's 7.5% convertibles traded early at 105.25 versus a stock price of about $25.15. The Charlotte, N.C-based financial services company sold $3.5 billion of perpetual convertible preferred stock at par of $1,000 with a dividend of 7.5% and an initial conversion premium of 30%.

As far as valuing it up, one source said he didn't get a chance. "It just flew by," he said, referring to the fact that it was announced and priced in the same morning.

Concurrent with the preferred share offering, Wachovia priced about $3.5 billion of common stock at $24 a share, which represented a discount to the $27.81 share price on Friday.

Wachovia shares (NYSE: WB) closed down $2.26, or 8.1%, at $25.55, effectively higher than the $24 price offered early Monday.

Wachovia's off-the-shelf offering of series L preferreds was sold via Wachovia Securities and Goldman Sachs. There is a greenshoe of $525 million.

The offering was one of a string on mega financial deals to hit the convertibles market in recent months, and these issues have tended to dominate trading in recent weeks.

"Trace looks light for convertibles, leading me to believe the action is still in the mega deals: Citigroup, Bank of America, Lehman, etc.," a Connecticut-based sellside trader said. Those deals were all convertible preferred shares rather than notes.

A New York-based buysider said he saw the Wachovia deal as a good way of gradually increasing his weighting of financials.

"These preferreds - if you wake up in a year or so - would have made you money. You are paid quite well to wait," he said

"If you look at them against the common stock, there's a marginal yield advantage, and the conversion is not too high, and financials should remain volatile, but with good upside over the medium to long term," the buysider said of the Wachovia preferreds.

With all the new financial paper, you have a choice about how you play it, the buysider noted. "You don't have to own a lot of them," he said. "And you don't have to trade down assets."

He suggested that if the common shares traded up to $28, he might use it as an opportunity to sell, and then wait for an opportunity to bet back in when they came off.

"I think financials will range trade for a while, but we're toward the bottom of the range right now," he said.

Meanwhile the new Wachovia convertibles were looking rather cheap compared to other preferred convertibles, such as Bank of America, for example.

"Any new deal has to be priced at a discount, and then it will fade to fair value," the buysider said.

On Monday, Wachovia reported that it swung to a first-quarter net loss, hurt by higher credit costs and $2 billion in valuation losses related to continuing credit market pressures, and it missed the consensus estimate by a wide margin.

Revenue fell 4.5% to $7.9 billion. The bank also lowered its quarterly dividend to 37.5 cents a share.

Independent research firm Creditsights noted in a report that by business segment, Wachovia's first-quarter results reflected slightly better sequential trends in wealth management, which was up 1%, and capital management, which was up 4%, while the general bank segment was down 7%, sequentially lower.

"The takeaway message was that Wachovia faced an environment of rapidly deteriorating home mortgage credit quality and ramped up provisions substantially," the Creditsights report stated.

CapitalSource gets another look

CapitalSource's 1.25% convertibles due 2034 were seen at about 88 on Monday, while its underlying shares (NYSE: CSE) surged 14% to $11.92.

Its sister issues, the 7.75% convertibles due 2037 and the 3.5% convertibles due 2034, were at 75 and 68, respectively, although they weren't seen much in trade.

"They're still pretty beaten up," a buysider said of the convertibles. The deal Monday was seen as relieving some credit concerns hovering about the Chevy Chase, Md.-based small business services firm.

There were concerns about its Tier 1 construction loans; with this portfolio, there's not much credit risk, a source said. "We're taking a look at it," he said.

CapitalSource positioned the deal as a "positive development in its depository strategy." Under the definitive asset purchase agreement, CapitalSource will assume all of the retail deposits, or about $5.6 billion, and operate its 22 retail banking branches of Fremont Investment & Loan, a California industrial bank.

The transaction is subject to regulatory approval, however, and isn't expected to be completed until the third quarter.

Together with CapitalSource's commercial finance lending franchise, it strengthens its business model and positions it to grow by taking advantage of attractive lending opportunities in the market, the company said.

As part of the asset purchase agreement, the company's new bank (yet to be named) will acquire quality assets about equal to the deposits assumed, including about $3 billion of cash and short-term investments and a commercial real estate loan participation interest of about $2.7 billion.

CapitalSource is not acquiring the Fremont business or any contingent liabilities, except the retail branch network.

CapitalSource is acquiring an A Participation Interest and not the related B Participation Interest. The A Participation Interest receives 70% of the principal payments from a $5.5 billion pool of commercial real estate loans. And as of March 31, the A Participation Interest was 48.8% of the $5.5 billion pool. The loans are managed by a subsidiary of iStar Financial Inc.

Endo, Virgin Media active in trade

The new convertibles of Endo Pharmaceuticals and Virgin Media remained active on Monday after pricing last week.

"There were rumors that they [Virgin Media] will sell a division," a buysider said by way of explanation for why the Virgin Media convertibles were finding bids.

The New York-based cable and communications company faces challenges in the medium term given its sector in the softening U.K. cable market, he said to explain the convertibles' below-par price.

The prospects in the United Kingdom are muddy, and there is no catalyst for it to pick up any time soon, he said. "It's not a bad company, although it's highly leveraged," the source said.

The Virgin Media 1.75% convertibles traded at 99 versus a share price of $12.325 on Friday, compared to about the same price versus $12.38 on Friday.

Another source said that the issue was bid at 98.75 and was hit at that level several times.

Virgin Media shares (Nasdaq: VMED) closed higher by nine cents, or nearly 1%, at $12.47.

Meanwhile Endo Pharmaceuticals convertibles were at 104.75 bid, 105.125 offered versus a share price of $26.76, compared to 106 versus a share price of $25.76 on Friday.

Shares of the Chadds Ford, Pa.-based specialty drug maker (Nasdaq: ENDP) ended unchanged on Monday at $25.76.

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