National City, Kinross Gold set to price, looking cheap; BofA bringing billions; Human Genome slashed

By Evan Weinberger

New York, Jan. 23 - The dam burst and the flood of new deals market watchers expected heading into 2008 began in earnest Wednesday.

National City Corp. launched $1 billion in convertible senior notes due Feb. 1, 2011 Tuesday night. Those convertibles have a $150 million greenshoe and were set to price after the close Wednesday.

Then, Wednesday morning, Toronto-based gold miner Kinross Gold Corp. launched $400 million in senior unsecured convertible notes due March 2028. The convertibles have a $60 million greenshoe and were set to price Wednesday after the close as well.

Finally, Bank of America Corp. announced late in the trading day that it was bringing $6 billion in depository shares and convertible preferred stock. Charlotte, N.C.-based Bank of America had still not decided how much of the $6 billion would be issued in convertibles and how much would come as the depository shares. The depository shares are equal to 1/25 of a share of BofA preferred stock.

The bank did set talk for the convertibles at a 7.25% to 7.75% dividend and a 20% to 25% initial conversion premium.

They are callable beginning Jan. 1, 2013 subject to a 130% hurdle.

The deal is expected to price Thursday after the close.

A market source not linked to the deal said Bank of America may not bring a convertible at all. "The demand for the BAC straight preferred is so strong, they may just increase it and not do any convertible preferreds," the market source said.

Bank of America stock (NYSE: BAC) gained $3.18, or 8.50%, to close at $40.57 Wednesday.

Trading activity heavy

Trading activity was relatively heavy, even though one sellside analyst said he noticed market players turning their attention to equities as markets made a staggering turnaround Wednesday.

One of the biggest movers was Human Genome Sciences Inc., which was hammered after it reported safety concerns linked to dosage levels of a Hepatitis C drug in late-stage testing.

SLM Corp., the parent company of student lender Sallie Mae, was slashed early but recovered as financials rallied in the afternoon.

Washington Mutual Inc., Countrywide Financial Corp. and Citigroup all ended the day higher.

Markets shake, rattle and roll

Equity markets went on a wild ride Wednesday. After dropping more than 200 points at the open, the Dow Jones Industrial Average struggled to regain much of the value.

Then the bottom dropped out again, with the index falling more than 320 points.

That was followed by a rally, with all three major indices ending the day significantly in the black, or the green, depending on the screen.

The Dow closed 298.98 points, or 2.50%, higher at 12,270.17.

The Nasdaq finished up 24.14 points, or 1.05%, at 2,316.41.

And the Standard & Poor's 500 stretched 28.10 points, or 2.14%, for a 1,338.60 close.

A sellside analyst said the rise could be attributed to a lot of short covering, adding "but that's a cliché."

The rally could have been sparked by a large number of buyers sitting on the sidelines and thinking now was a good time to get in. "They might be wrong by tomorrow," he said, highlighting the unease still affecting markets.

Another analyst said that financial names were strong "right off the bat," and that there were some big moves in heavily shorted names. He added that homebuilders, REITs and consumer finance stocks did well also.

National City looking cheap

Cleveland-based bank holding company National City saw its balance sheet sink in the fourth quarter of 2007, weighed down by bad mortgages. National City lost $333 million, or 53 cents per share, in the fourth quarter.

So to pay down some debt and have some cash on hand, National City launched $1 billion in convertible senior notes due 2011 Tuesday after the close.

The convertibles are talked at a 3.5% to 4% coupon and a 22.5% to 27.5% initial conversion premium.

"Funny thinking a 3.75% coupon is cheap when the common dividend yield is 5.13%, but the math guys with the blackboards think this models cheap," a trader said. "This gives a great deal for NCC."

An analyst told Prospect News he worked the deal out to be 4% cheap, using a volatility of 30% and a credit spread of 275 basis points over Libor.

"It looks cheap, as you would expect," he said. "I bet this is going to get a lot of attention."

A second analyst was using a credit spread of 250 bps over Libor and a 25% vol and came out with a 101.75 target on the convertibles. He said that the long-term volatility for National City was more like a 22% rather than its recent stay in the 30s. Modeling with a 30% vol, he said, was "aggressive."

He added that he heard the underwriters - Goldman Sachs is the bookrunner - were using a vol in the 30s.

There are no calls or puts on the Securities and Exchange Commission-registered transaction.

National City plans to enter into hedge and warrant transactions upon or shortly after pricing the convertibles. The company expects the transactions to reduce the dilution of its stock upon conversion of the notes.

The notes carry full dividend protection in the form of a conversion ratio adjustment. There is fundamental change protection but no public acquirer change-of-control waiver.

National City stock (NYSE: NCC) was lifted on the rising tide Wednesday, gaining 15 cents, or 0.98%, to close at $15.44.

Kinross looks golden

The first thing analysts mentioned when discussing Kinross' coming $400 million in convertible senior notes due 2028 is the company's business.

"I would assume that it would also get a lot of attention because it's gold, and in this environment gold is a very defensive thing to have," an analyst said in the morning, prior to the market's wild ride. "I guess it's a welcome addition to convertibles."

Newmont Mining Corp. was the big gold miner in the convertibles universe until now.

But they also said that the deal was looking cheap.

The convertibles are talked at a 1.75% to 2.25% coupon and a 35% to 40% initial conversion premium.

Using a 400 bps over Libor credit spread and a 42% vol, a second analyst said the Kinross convertibles modeled out to 104 if they price at the mids.

Other analysts were using slightly higher vols and somewhat lower spreads and coming out with similar results.

The second analyst said that Kinross was a BB to a BB- company, so credit wasn't much of an issue. Leverage will not be an issue for Kinross, all analysts polled by Prospect News agreed.

But the play may be an acquired taste. A third analyst said Kinross would be better for hedged investors than for outrights.

He said the upside-downside tradeoff for outrights wasn't high enough. He said they might as well stick with Kinross stock.

Even there, there's a risk. "Fundamentally, it looks overvalued compared to its peers," the analyst said.

That potential volatility is what makes the convertibles a good bet for hedge funds, he added.

The Rule 144A transaction has call protection for the first five years and puts in years five, 10 and 15.

There is a contingent conversion subject to a 130% hurdle.

The convertibles carry full dividend and takeover protections and a net-share settlement agreement.

The company plans to use the proceeds to repay outstanding term loans with the rest of the proceeds going toward capital expenditures and general corporate purposes.

Kinross Gold stock (NYSE: KGC) fell $1.26, or 5.83%, to $20.34 Wednesday.

Human Genome hammered

Rockville, Md.-based biotech Human Genome Sciences announced Thursday that patients receiving a higher dose of their experimental Hepatitis C drug Albuferon suffered "serious pulmonary adverse events" in phase three trials.

The patients suffering the pulmonary events received a 1,200 microgram injection of Albuferon every two weeks. The tests showed that there were no serious safety concerns at the lower, 900 mcg dose.

In a statement, Human Genome said that all patients undergoing the tests were now receiving the 900 mcg dose, which is also the dosage the company said it was planning to market.

"For some time we have viewed the 900-mcg dose administered every two weeks as the most likely marketed dose of Albuferon," H. Thomas Watkins, Human Genome's president and CEO, said in a company statement.

That wasn't good enough for investors, according to one analyst. "These guys could have a great Hep-C drug," he said. "Other analysts are out there defending it. You can't fight the market. It's just ugly."

The analyst added, however, that he wouldn't go as far as some other analysts defending the convertibles because he wasn't as well-versed in the science.

Human Genome has another drug in phase three trials and several more in the pipeline.

The analyst called the possibility that Human Genome was using flawed testing methods "the nightmare scenario."

"If there's something inherently wrong with how they make their drugs or test their drugs, then this not only makes this drug un-approvable, it affects the pipeline," he said.

Investors apparently thought the nightmare scenario was near, because Human Genome was cut deep.

Human Genome's 2.25% convertible subordinated notes due Oct. 15, 2011 closed Wednesday at 71.4 versus a closing stock price of $5.62. They closed Tuesday at 86.35 versus a stock price of $10.02.

The company's 2.25% convertible subordinated notes due Aug. 15, 2012 closed Wednesday at 76.626 versus a stock price of $5.62. They closed Tuesday at 93.92 versus a stock price of $10.02.

Human Genome stock (Nasdaq: HGSI) was nearly cut in half, losing $4.40, or 43.91%, on the day.

Sallie Mae drops, recovers

Reston, Va.-based student lender Sallie Mae announced that it lost $1.6 billion in the fourth quarter of 2007 due to higher borrowing costs and decreased government subsidies.

Sallie Mae lost $3.98 per share in the last three months of 2007, compared to a rise of 2 cents per share in the same period of 2006.

Sallie Mae's 7.25% series C mandatory convertible preferred stock due Dec. 15, 2010 went on a wild ride. The preferreds closed Tuesday at 908 versus a stock price of $19.02. They tumbled in early trading, a sellside analyst said.

And then they rallied with the rest of the market.

In the end, Sallie Mae's preferreds closed Thursday at 1,006.53 versus a closing stock price of $18.69.

Sallie Mae stock (NYSE: SLM) closed down 33 cents, or 1.74%, on the day. The stock had dropped by as much as 11% at around noon.

Other financials close higher

Calabasas, Calif.-based mortgage lender Countrywide saw both of its convertible debentures close higher Wednesday.

Countrywide's Libor minus 350 bps series A convertible senior debentures due April 15, 2037 closed Wednesday at 86.1 versus a closing stock price of $5.99. They closed Tuesday at 81.8 versus a stock price of $5.32.

Countrywide's Libor minus 225 bps series B convertible senior debentures due May 15, 2037 closed Wednesday at 83.202 versus a stock price of $5.99 after finishing Tuesday at 82.02 versus a stock price of $5.32.

Countrywide stock (NYSE: CFC) moved up 67 cents, or 12.59%, on the day.

Seattle-based savings and loan Washington Mutual's 7.75% series R non-cumulative perpetual convertible preferred stock closed Wednesday at 972.01 versus a closing stock price of $16.10. They closed Tuesday at 940 versus a stock price of $14.77.

Washington Mutual stock (NYSE: WM) gained $1.33, or 9%, on the day.

And New York-based banking giant Citigroup's 6.5% non-cumulative convertible perpetual preferred stock closed Wednesday at 51.5 versus a closing stock price of $26.36. They closed Tuesday at 49.8875 versus a stock price of $24.40.

Citigroup's preferreds have a par value of 50.

Citigroup stock (NYSE: C) picked up $1.96, or 8.03%, on the day.

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