Financials extend losses; Wells Fargo preferreds sink to 400; Watson in focus after better earnings

By Rebecca Melvin

New York, Feb. 19 - Financial convertible bonds and preferred shares were under pressure again on Thursday amid persisting fears about the health and fate of the U.S. banking system.

"The administration wandering through like a drunken sailor is taking any confidence or chance of banks raising capital on their own out of the market," a New York-based sellside trader said.

Bank of America Corp.'s convertible preferreds stepped lower to end the day near 233, down from 280 on Wednesday.

Citigroup Inc.'s perpetual convertible preferreds dropped to 8.45 Thursday, from 9.25 Wednesday and from 10.25 Tuesday.

Wells Fargo & Co. hit 400 on its downward slide.

PNC Financial Services Group Inc. weakened again. And Huntington Bancshares Inc. and Fifth Third Bancorp suffered even greater declines.

Elsewhere, convertible players eyed Watson Pharmaceuticals Inc. convertibles, which were better bid after the branded and generic drug maker posted better-than-expected quarterly results and said its 2009 profit could be better than current expectations

But BioMarin Pharmaceutical Inc. convertibles and stock slumped after the Novato, Calif.-based biopharmaceutical firm missed estimates, said it will only break even in 2009 and revised its outlook for 2010 and 2011 lower.

Stocks have put in a horrible week so far, mostly due to financials, with the Dow Jones Industrial Average breaking through its Nov. 20 low on Thursday to sit at 7,465.95, a level not seen since October 2002. Convertibles have lost ground as well mostly in financial names; but the market otherwise has been pretty quiet and little changed.

Fear over banks mounts

"The fear has really ratcheted up," a New York-based sellsider said, adding that he didn't believe the government would have moved ahead with recent programs if its ultimate goal was to nationalize banks.

"Geithner said that's not part of the plan, and I believe him," the sellsider said.

Other convertible players concurred but were still uncertain about what the final outcome would be.

"I just think they're making it up as they go," a New York-based sellside analyst said.

Starting the stir were a few lawmakers last weekend, who when asked about nationalization, responded that it was within the realm of possibility, the first sellsider said.

In addition, former Fed chairman Alan Greenspan this week told the Financial Times that temporary nationalization of some banks might be the "least bad solution" to the banking crisis.

Responding to a question at a luncheon Wednesday, Federal Reserve chairman Ben Bernanke, said, "As a general rule, it's very challenging for governments to manage banks for a protracted period."

He also said that the administration has "a very strong commitment" to keep banks private.

Weighing in on the debate, a New York-based convertibles buysider said Thursday: "There's no history of nationalization of banks or any other industries in the U.S. A new administration that seems cautious rather than aggressive is not likely to nationalize banks."

"Bank solvency is not essential if regulatory/governmental bodies provide life support for the sick institutions. The red ink and strained balance sheets are the overhang from past bad loans. Most banks have positive cash flow today - and today banks are taking little risk with new loans and investments," the buysider added.

"If banks with good cash flow can be kept alive - possibly with such life support measures as credit from the Fed - such banks eventually will return to health.... [They] eventually will generate new capital from retained earnings. History is filled with examples of insolvent banks that recovered. History is likely to repeat," the buysider said.

Data also stoking fear

On the other hand, there have been more layoffs and a spike in defaults in auto loans in January, a sellsider said.

And with credit card defaults going higher, it's a matter of "rolling injuries. You get hit by one car, and just as you start to get up, you get hit by another one. It's one thing after another, and with all the money going at it, I think there's a real sense of 'Oh boy, we've got to get this right,'" the sellsider said.

"PNC is in. It traded down to 92 because of fear. I think people are saying, 'I can't have a bank explosion on my books,'" the sellsider said.

The 4% convertibles of PNC Financial, formerly of National City Corp., traded down to 91.5 but came back again to 93.5, the sellsider said.

Shares of the Pittsburgh-based bank fell $1.50, or about 6%, to $24.10.

Banks much weaker

B of A's 7.25% convertible preferreds traded down to 233 Thursday, compared to 280 in the previous session. Shares of the Charlotte, N.C.-based banking giant shed 64 cents, or 14%, to $3.93.

Citigroup's 6.5% convertible preferreds fell to 8.45 from 9.25, while shares of the New York-based financial services giant lost 40 cents, or 13.75%, to close at $2.51.

Wells Fargo's 7.5% perpetual convertible preferreds slumped to 400 Thursday from 440 Wednesday and 510 on Tuesday. Shares of the San Francisco-based bank dropped $1.04, or 8%, to $12.01.

Meanwhile the convertible preferreds of Huntington Bancshares were quoted down to 205 near the close of Thursday. Shares of the Columbus, Ohio-based regional bank sunk 21% to $1.03.

The convertible preferreds of Fifth Third Bancorp were at 18.25, while shares of Cincinnati-based regional bank sank nearly 18% to $1.21.

Watson in focus after earnings

Watson's 1.75% convertibles due 2023 were last at 93, according to NASD Trace, versus a stock price of $29.81.

Shares of the Corona, Calif.-based drug maker ended higher by 88 cents, or 3%.

"WPI moved off the earnings. I was out trying to buy them. There were a lot of bids, but not a lot of trades," a sellsider said.

The branded and generic drug maker reported net revenue increased $17.9 million, or 3%, to $645.2 million for the fourth quarter compared to the same period of 2007.

Watson president and CEO Paul Bisaro said in a release: "This was a very positive quarter for Watson, capping off what proved to be a watershed year for the company."

Bisaro went on to say that the company boasted strong performance in all divisions, but with the biggest news of 2008 coming from its brand division.

"....we received first cycle approvals on two new products and had one new NDA [New Drug Application] accepted by the FDA, putting us in the unique position to potentially introduce three new brand products in 2009 to treat the top three conditions in urology - a specialty focus for Watson," Bisaro said.

Watson estimated total net revenue for 2009 at about $2.65 billion. It said if foresees total generic segment revenue between $1.45 billion and $1.55 billion; total brand segment revenue between $445 million and $470 million; and total distribution segment revenue between $660 million and $710 million.

Research and development investment for 2009 was expected to be $180 million to $190 million. Selling, general and administrative expenses for 2009 were expected to be $450 million to $470 million. Amortization expense for 2009 is expected to be about $88 million.

BioMarin tumbles

BioMarin's 1.875% convertibles due 2017 fell about 25 points outright to 74 versus a share price of $12.04 on Thursday.

On Feb. 10, the BioMarin convertible paper traded at 103 versus a share price of $19.00, and on Jan. 8, the paper traded at 100 versus a share price of $18.625.

The Novato, Calif.-based biopharmaceutical firm, which makes treatments for rare disorders, said fourth-quarter profit was 27 cents a share, missing consensus estimates.

Net income was $24.5 million for the fourth quarter of 2008, compared to net income of $2.6 million for the fourth quarter of 2007.

Mentioned in this article:

Bank of America Corp. NYSE: BAC

BioMarin Pharmaceutical Inc. Nasdaq: BMRN

Citigroup Inc. NYSE: C

Fifth Third Bancorp NYSE: FITB

Huntington Bancshares Inc. NYSE: HBAN

PNC Financial Services Group Inc. NYSE: PNC

Watson Pharmaceuticals Inc. NYSE: WPI

Wells Fargo & Co. NYSE: WFC

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