Fifth Third gyrates in trade; Countrywide steady; ExpressJet tanks; WCI adds on exchange offer

By Rebecca Melvin

New York, July 9 - Financial convertibles moved higher and then reversed course again Wednesday, ending weaker after early trades were done at higher levels, convertibles players said.

The early gains came on the heels of the previous session's financials-led rally in equities. Trading was fairly active, sources said.

Fifth Third Bancorp, which priced its 8.5% perpetual convertible preferreds less than two weeks ago, was at 118 to 119 in early trade, higher compared to Tuesday. But it was seen ending lower at 115 as its shares sank into negative territory and dropped fairly hard late in the session to close down 4.4%.

Bank of America Corp. and Wachovia Corp. convertibles followed a similar pattern as investors begged off any bullish sentiment for the time being.

But Countrywide Financial Corp.'s floating-rate convertibles, which continue to trade after the deal with Bank of America closed last week, were active but mostly unchanged at a pretty healthy 97.25 for the series A paper and at 95.25 for the series B bonds.

A CreditSights report published Wednesday underscored existing sentiment that Bank of America is expected to honor the old Countrywide debt.

ExpressJet Holdings Inc. convertibles dropped in trade by about 10 points after the company, the parent of ExpressJet Airlines, said it will halt its branded commercial carrier operations on Sept. 2 due to high oil prices.

The Houston-based regional carrier operates a fleet of 39 aircraft under its name. It will continue operating a fleet of 205 aircraft under an agreement with Continental Airlines, however, and it will maintain a charter operation of 30 aircraft through ExpressJet Corporate Aviation.

Meanwhile, WCI Communities Inc. convertibles gained a couple of points in response to an offer from the company to exchange the $125 million of 4% convertibles for new 16% senior secured notes due 2013.

Fifth Third moves up, then down

Fifth Third's 8.5% series G perpetual convertible preferreds moved up to as high as 118.875 bid, 119.375 offered versus a stock price of $11.80 on Wednesday but later was seen at 115 versus the closing stock price of $11.10. That compared to 116.678 versus a stock close of $11.61 on Tuesday.

Last week, the 8.5s were at 106.368 versus a stock price of $10.18 after initially pricing on June 26. At that point, the Cincinnati-based regional bank also cut its dividend.

On Wednesday, shares of Fifth Third (Nasdaq: FITB) closed down 51 cents, or 4.4%, at $11.10.

BofA, Wachovia retrace gains

Shares of Bank of America (NYSE: BAC) dropped a steeper 6.3% to $22.06, but its 7.5% series L perpetual convertible preferreds traded at 882.5 versus a share price of $23.20 earlier in the session. That compared with 888.5 versus a share price of $23.87 on June 30.

The 7.5s of the Charlotte, N.C.-based bank were seen down to 870 at the close versus the $22.06 share price, compared with 885 versus a share price of $23.54 on Tuesday.

Wachovia's 7.75% series L perpetual convertible preferreds were seen closing at 865.38 versus a share price of $12.29, compared to 879.21 versus a share price of $15.54 on Tuesday.

Shares of the commercial bank, also based in Charlotte, N.C., sank $1.25, or 8%, despite an upgrade from Merrill Lynch to "neutral" from "underperform."

Merrill said that any further deterioration in credit quality for Wachovia was already priced in and that the banks' stock price outlook depended on whether it remained independent or not.

Merrill said sale of the bank could drive the shares materially higher but noted that a potential buyer like JPMorgan Chase will not be willing to pay $16 a share to $20 a share. Other possible buyers are Wells Fargo & Co. and Banco Santander, a Merrill analyst said.

If Wachovia remains independent, it might have to cut its dividend again and raise up to $10 billion of equity capital. And in addition, it might have to incur a $14.9 billion goodwill impairment charge related to its Golden West Financial acquisition, the Merrill analyst said.

Countrywide still active

CreditSights sees Bank of America ultimately honoring the outstanding debt from the old Countrywide based on a discussion with Bank of America following a recent 8-K filing, as well as prior analysis.

Outstanding bank debt facilities have already been repaid, and the Red Oak Merger Corp., a subsidiary of Bank of America, assumed the debt of the old Countrywide; and Red Oak was renamed Countrywide after the closing.

The merger is taking place as a two-step process, according to the company, CreditSights said. The first step was merging Red Oak and the old Countrywide, and this operation is going to be managed within the existing operations of Bank of America, which aims to integrate the best practices from both organizations in terms of mortgage banking and cross-selling opportunities.

Bank of America also noted that about half of the personnel at the new Countrywide is from legacy Bank of America while half is from the old Countrywide.

Bank of America also sold some Countrywide assets to various of its subsidiaries, but CreditSights said it didn't believe that the sales belied a lack of commitment to Countrywide debt. Following the closing, Moody's Investors Service and Standard and Poor's raised Countrywide's ratings to be equal with Bank of America's, indicating they are comfortable with the buyer's support of Countrywide debt, CreditSights said.

Countrywide's Libor minus 350 basis points series A convertible senior notes due April 2037 traded at 97.25 and 97.5, a level that was unchanged compared with last week.

Countrywide's Libor minus 225 bps series B convertible senior notes due May 2037 traded at 95.25 to 95.50.

ExpressJet languishes

ExpressJet Holdings' 4.25% convertibles due 2023 were seen closing at 45, compared to 54.5 on Tuesday. The paper has dropped steadily since April when it was above 90.

Shares of ExpressJet (NYSE:XJT) closed down 5% to 36 cents a share.

The company will discontinue its 13 daily departures from Sacramento International Airport, including flights between Sacramento and Bakersfield; Santa Barbara; Tucson, Ariz.; Tulsa, Okla.; San Antonio; Oklahoma City; Spokane, Wash.; Colorado Springs, Colo., and Albuquerque, N.M.

The 39 aircraft currently used in ExpressJet operations will be among those returned to the lessor no later than June 2009.

On Monday, Delta Air Lines Inc. announced it was ending its Delta Connections partnership with ExpressJet.

WCI adds on exchange offer

WCI Communities' 4% convertible added about 2 points after the builder of planned-lifestyle communities offered to exchange the convertible senior subordinated notes due 2023 for five-year secured notes, which will yield 16% for three years.

The offer requires at least 85% of the principal amount outstanding of the notes to be tendered in the offer, which expires Aug. 4.

For three years, interest on the new notes will accrue at 16% per year and will be payable by increasing the principal amount of the notes or by issuing PIK notes, according to a T-3 filing with the Securities and Exchange Commission.

After Aug. 5, 2011, interest on the new notes will accrue at 15% per year and may be paid in cash or in PIK notes.

In addition, the new notes will be callable at 102 beginning Aug. 5, 2010, at 101 beginning Aug. 5, 2011 and at par from Aug. 5, 2012 onward.

The 4% convertibles were seen trading at 84.25 and had been 85 bid, 85.75 offered; later they were called 83.75 bid, 85 offered, which compared to a trade on July 2 at 82.75.

PIKs aren't that easy to value, one trader said, but the exchange promoted trading up about 2 points.

WCI, which priced the 4% issue in July 2003, received notice at the end of June that some of its convertibles holders intended to put the notes at par on Aug. 5, and at the end of the first quarter, the company had less than half the money needed to pay it off, according to analysts.

In addition, billionaire investor Carl Icahn had been in talks with the Bonita Springs, Fla.-based homebuilder regarding restructuring options.

In a regulatory filing, Icahn said he and his firm - which own almost 15% of WCI's equity - were discussing "alternative restructuring proposals" with WCI.

The WCI 4% convertibles were at 83 bid, 85 offered versus a share price of $1.43, compared to 82.5 versus a share price of $1.37 on Tuesday.

Shares of the Florida homebuilder (NYSE: WCI) settled up 3 cents, or 2.2%, to $1.40.

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