Bank of America, Wachovia hold up despite lower stocks; Bunge lower on merger; Allied Waste higher

By Rebecca Melvin

New York, June 23 - Several convertible financial names held steady or gained Monday despite further pressure on their underlying shares amid headlines that Goldman Sachs & Co. downgraded the sector to "underweight" from "neutral" and word that Citigroup Inc. may begin a fresh round of layoffs.

The convertible preferreds of Bank of America Corp. and Wachovia Corp. "actually held up well. They both ended the day a little stronger," a Connecticut-based buysider said, attributing the higher levels to gamma related to the yield on those issues.

Citigroup's convertible preferred stock was also better amid a nearly 4% decline in its underlying shares.

"At some point, if the stocks keep moving lower, then I would expect to start to see them not hold up so well, and just move lower on a higher delta," the buysider said.

He said he lightened up on Wachovia on Monday, selling into strength.

Merger news prompted some activity in the convertibles market as well on Monday. Bunge Ltd. saw a chunk come out of its convertible mandatories and preferreds amid a 9.4% decline in its shares after the agriculture company announced that it will buy Corn Products International in an all-stock deal worth about $4.8 billion plus $414 million in Corn Products' debt.

Meanwhile, the convertible bonds of Allied Waste Industries Inc. were also in play, moving up to the 97.5 mark, where it was quoted around midday, after news that Republic Services Inc. had agreed to buy its larger rival for about $6.24 billion. The deal would combine the second and third-largest U.S. trash haulers.

After the markets closed, China Sunergy Co. Ltd. announced a small deal of $45 million of five-year convertible senior notes. But that was the only action in the primary market in convertibles Monday.

China Sunergy's five-year bullets were talked with a coupon between 4.5% and 5%, and an initial conversion premium of 20% to 27%, according to a market source.

China Sunergy is a manufacturer of solar cell products in Nanjing, China.

Financial preferreds grab a bit, no end in sight

Convertibles players were chagrined to watch financial stocks fall again on Monday, after the sector led stock markets 3% lower last week. In regard to Citigroup's lay offs, one source said: "It's hard to know when one ends and another begins. But this is a new one," he said, adding that the expected 10% cut in Citigroup's investment bank division was seen hitting the fixed income group pretty hard.

Nevertheless, financial convertibles were better amid the soft market.

"The stocks have come off so much, the preferreds are starting to grab a little bit," one source said.

As for the reason why converts were holding on against lower stocks when oft times they don't, the source suggested that maybe the lack of movement in rates allowed investment grade sectors to remain more buoyant.

Bank of America's 7.25% series L perpetual convertible preferred shares traded midday at about 940 versus a share price of $27.

After the close, the 7.25% convertibles were seen at about 933 to 934 versus $26. That compared with about the same level versus a stock price of $27.10 on Friday.

Shares of the Charlotte, N.C.-based bank (NYSE: BAC) dropped $1.22, or 4.5%, to $25.88 on Monday.

The reason for its loss wasn't clear. "I think it was just the general bias against regional banks. It's somewhere between a money center and a regional, given where the market cap is now," a buysider sid.

And there is no let up in sight as to how low the sector will go, sources said. "There's one story after another, and they say they aren't done with their write downs and have more capital raising,"

As that happens, he added, the supply of converts swells and that weighs on everything that came before it.

Wachovia's 7.5% perpetual convertible preferred stock ended at about 922.5 versus $17 on Monday, compared to 928.75 versus a share price of $17.43 on Friday.

Shares of Wachovia (NYSE: WB) ended down 51 cents, or 2.93%, at $16.92 on Monday, after dropping 1% on Friday.

"The Wachovia has done well. I think it's still a little on the cheap side," the Connecticut-based buysider said. However playing the financials opportunistically, he sold some of the name on Monday.

Citigroup's 6.5% perpetual convertible preferreds closed at about 45.43 versus a share price of $18.55, compared with 46.4 versus $19.20 on Friday.

Shares of the New York bank giant (NYSE: C) closed down 75 cents, or 3.9%, on Monday.

Citigroup, which one buysider considered overbought because a lot of hedge funds wanted to play the potential that the dividend on the common would be cut, may still be a little rich compared to other financial convertible preferreds.

More personnel cuts at Citigroup shouldn't be seen as indicative of the overall sector though.

"Citi is in the middle of a pretty drastic restructuring. I don't think you can extrapolate what they are doing to all of the banking system. That's kind of expected. There are going to be among all its business units, a fair amount of fat that they can take out," the buysider said.

Bunge falls on merger news

Bunge was hammered by investors Monday after the White Plains, N.Y.-based food and agricultural products maker said it would buy Corn Products for $4.8 billion and assume about $414 million in debt, and despite increasing its 2008 full-year earnings guidance to $9.35 to $9.65 per share, from $7.10 to $7.40 per share, citing better-than-expected performance in its agribusiness and fertilizer segments.

Bunge's 5.125% mandatory convertible preference shares due Dec. 1, 2010 traded at 1,143 versus a stock price of $126 early in the session, and later it traded at 1,021 versus a stock price of $111.

Bunge's 4.875% convertible perpetual preferred stock traded late in the session at 129.5 versus a stock price of $107.25.

Bunge (NYSE: BG) dropped $11.47, or 9.4%, on the day.

Allied Waste adds on merger news

The convertible bonds of Phoenix-based Allied Waste Industries gained about 1.5 point early in the session after the company and Republic Services announced a definitive merger agreement that was unanimously approved by both boards. The transaction is expected to close in the fourth quarter. Under the agreement, Allied Waster will own 52% of the combined company.

Allied Waste's 4.25% convertible senior notes due 2034 closed about 0.5 point lower however at about 97, versus a share price or $13.29, compared to about 96, versus a share price of $13.56 on Friday.

Shares of Allied Waste (NYSE: AW) closed down 27 cents, or 2%.

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