WaMu resets price talk on preferreds; Countrywide, Fannie Mae, homebuilders hammered after rate cut

By Evan Weinberger

New York, Dec. 11 - Washington Mutual Inc. was the talk of the street up until the Federal Reserve announced a 25 basis point rate cut on both the federal funds and the discount rate Tuesday.

WaMu's perpetual convertible preferred stock offering, originally announced at $2.5 billion then rumored to be upsized to $3 billion, remained a topic of intense speculation. Word of a shift in price talk for the issue dominated the conversation.

In other news, Fannie Mae preferreds and Countrywide Financial Corp. convertibles were both down after the apparently disappointing rate cut.

Homebuilders WCI Communities Inc. and Beazer Homes USA Inc. were also down. SL Green Realty Corp. and CapitalSource Inc. convertibles took it on the chin.

On Monday, a pharmaceutical company took the up escalator on the strength of a cancer drug. On Tuesday, Medarex Inc. fell down an elevator shaft on doubts over a cancer drug.

It wasn't all bad news on the street Tuesday, as ArvinMeritor Inc. held firm to a rosy outlook for its fiscal year that ends in September. The company's convertibles were rosy also.

One new deal was launched after the market close Tuesday. Network Equipment Technologies, Inc. launched $85 million in convertible senior notes due Dec. 15, 2014 on Tuesday after the market close talked at a 3.25% to 3.75% coupon and a 27.5% to 32.5% initial conversion premium.

There is a $20 million greenshoe on the Rule 144A transaction, and the convertibles are non-callable.

The deal is expected to price Wednesday after the market close.

Network Equipment Technologies is a Fremont, Calif.-based voice and data communications equipment producer. The company plans to use the proceeds for working capital and general corporate purposes, which may include capital expenditures and potential acquisitions.

And one new deal priced after the market close, at least as of press time. Yingli Green Energy Holdings Co. Ltd. priced $150 million in zero-coupon convertible senior notes due Dec. 15, 2012.

The convertibles will convert into 5.6 million American Depositary Shares that Yingli Green Energy priced at the same time at $31.

The convertibles will yield 5.25% and have an initial conversion premium of 29.17% on Yingli Green Energy stock and 40% of the ADSs.

There is a $22.5 million greenshoe on the convertibles and an 840,000 share greenshoe on the ADSs.

The deal is a Securities and Exchange Commission-registered transaction.

The conversion ratio is 23.0145, and the conversion price is $43.40 on the ADSs.

The convertibles are callable beginning Dec. 15, 2008 and putable on Dec. 15, 2010 at 116.43%.

Yingli Green Energy is a Baoding, China-based solar energy components producer. The company plans to use the proceeds to make an approximately $100 million equity contribution on Yingli Green Energy's new subsidiary, Yingli Energy (China) Ltd.

Those two deals got swallowed up by Washington Mutual and the rate cut, however.

Before the cut came, the markets were chugging along at mild gains and losses. And then, just about the entire stock market got their ears boxed.

"The move in both the stock market and the bond market was quite dramatic," one analyst said.

The Dow Jones Industrial Average tumbled 294.96 points, or 2.14%, to 13,432.77.

The Nasdaq dived 66.60 points, or 2.45%, to 2,652.35.

The Standard & Poor's 500 took a 38.31 point, or 2.53%, fall to 1,477.65.

One trader summed up the mood on the street succinctly: "Not enough - [The Fed] should have done one-half point on discount rate too."

WaMu deal richens, still coming in cheap

As of this writing, Washington Mutual still hadn't priced its possibly upsized offering of perpetual convertible preferred stock that was announced Monday after the market close. The deal was originally talked at an 8% to 8.5% dividend and an 18% to 23% initial conversion premium.

That was leading to some exceedingly cheap valuations.

One trader modeled the convertibles to 16.45% cheap using an 812 bps credit spread and a 45 vol.

An analyst used a 750 bps credit spread and 30 vol - which he said was more in line with the stock's historical volatility - to come out to the deal being 5.5% cheap.

A third analyst said that the recent spike in volatility was recent, and that it was safer to price the convertibles closer to the historical vol. "If you look at the long-term graph, this had a vol consistently in the teens," he said. "In August, the vol was in the 20s."

So as the wild cheapness numbers came in on Kymexes across the land, Bank of America, Lehman Brothers and Washington Mutual began floating richer price talk. The coupon was rumored to drop to 7.5% to 8% and the bottom end of the conversion premium rise to 20%.

And it was still coming out cheap, analysts said.

"They overshot. I think the terms are really too cheap," the analyst who came out with the 5.5% cheapness said.

The eagerly awaited convertibles were set to hit the street on the day after.

Washington Mutual stock crumbled Tuesday after it announced a major restructuring, including a layoff of more than 3,000 jobs and the shuttering of its subprime mortgage lending channel.

Along with the convertibles offering, the Seattle-based bank also slashed its quarterly dividend.

All this came because of a $1.5 billion to $1.6 billion write-down on WaMu's subprime mortgage portfolio.

Tough talk surrounded WaMu throughout Tuesday. Punk Ziegel analyst Richard Bove published a note to investors Tuesday morning saying that JPMorgan Chase was looking to make a major acquisition, and identified Washington Mutual as a prime target.

So Washington Mutual's stock was already on a downward spiral prior to the Federal Reserve's afternoon rate cut announcement. That's when the bottom dropped out.

Washington Mutual stock (NYSE: WM) fel $2.46, or 12.37%, to close at $17.42.

Rate cut slams mortgage brokers

Along with Washington Mutual, other players in the mortgage and housing game were battered Tuesday on the Fed's rate cut.

Washington-based government-supported mortgage backer Fannie Mae saw steep losses on the day.

Fannie Mae's 5.375% series 2004-1 convertible perpetual preferred stock closed Tuesday at 80,058.5 versus a closing stock price of $34.29. They closed Monday at 80,965 versus a stock price of $36.91.

Fannie Mae stock (NYSE: FNM) spilled $2.62, or 7.10%.

Calabasas, Calif.-based Countrywide, America's largest mortgage lender, was also bashed.

Countrywide's Libor minus 350 bps series A convertible senior debentures due April 15, 2037 closed Tuesday at 82.134 versus a closing stock price of $11.33. They closed Monday at 84.3586 versus a stock price of $12.51.

Countrywide's Libor minus 225 bps series B convertible senior debentures due May 15, 2037 closed Tuesday at 78.8898 versus a stock price of $11.33 after finishing Monday at 79.0536 versus a stock price of $12.51.

Countrywide stock (NYSE: CFC) lost $1.18, or 9.43%.

Homebuilders, realtors hammered

The smaller-than-hoped-for rate cut did a number on homebuilders as well, as investors feared the cuts would not open the spigot on new loans nearly enough.

Atlanta-based Beazer Homes saw its 4.625% convertible senior notes due June 15, 2024 close Tuesday at 68.8504 versus a closing stock price of $8.91. They closed Tuesday at 73.1444 versus a stock price of $10.19.

Beazer stock (NYSE: BZH) gave back $1.28, or 12.56%, on the day.

WCI Communities, based in Bonita Springs, Fla., took the bigger stock blow Tuesday, but its convertibles weathered the storm.

WCI's 4% convertible senior subordinated unsecured notes due Aug. 5, 2023 closed Tuesday at 71.8 versus a closing stock price of $3.83. They closed Monday at 72.8 versus a stock price of $4.81.

WCI stock (NYSE: WCI) lost 98 cents, or 20.37%, on Tuesday.

New York-based commercial real estate investment trust SL Green watched its 3% exchangeable senior notes due March 30, 2027 close Tuesday at 87.2226 versus a closing stock price of $97.75. They closed Monday at 88.844 versus a stock price of $105.24.

SL Green stock (NYSE: SLG) fell $7.49, or 7.12%, on Tuesday.

CapitalSource not immune

Even financial institutions not directly linked to mortgages were not immune from fears of the spread of the credit contagion.

Chevy Chase, Md.-based corporate financier CapitalSource watched both its convertibles sink Tuesday.

CapitalSource's 7.25% senior subordinated convertible notes due July 15, 2037 closed Tuesday at 91.78 versus a closing stock price of $17.71. They closed Monday at 92.4304 versus a stock price of $19.20.

The bigger hit came in CapitalSource's 4% convertible senior unsecured notes due July 15, 2034, which closed Tuesday at 94.7599 versus a stock price of $17.71. They closed Monday at 99.1155 versus a stock price of $19.20.

CapitalSource stock (NYSE: CSE) fell $1.49, or 7.76%, on Tuesday.

Medarex down on drug doubts

Princeton, N.J.-based pharmaceutical company Medarex tumbled after the cancer drug ipilimumab, which it is developing with Bristol-Myers Squibb Co., failed to meet its goals in late-stage trials on melanoma patients.

That news Monday afternoon sent the company's convertibles and stock tumbling.

Medarex's 2.25% convertible senior unsecured notes due May 15, 2011 closed Tuesday at 107.405 versus a closing stock price of $10.56. They closed Monday at 121.054 versus a stock price of $13.35.

Investors were in no mood for failure Tuesday, and the company's stock plunged $2.79, or 20.90%.

ArvinMeritor ends day on upswing

Troy, Mich.-based auto parts maker ArvinMeritor (NYSE: ARM) told analysts Monday that it was standing by full-year earnings guidance that was above Wall Street predictions.

That sent the company's convertibles and stock up on a day when seemingly everything else was down.

ArvinMeritor's 4.625% convertible senior notes due March 1, 2026 closed Tuesday at 87.59 versus a closing stock price of $12.25. They closed Monday at 84.73 versus a stock price of $11.25.

ArvinMeritor's 4% convertible senior notes due Feb. 15, 2027 closed Tuesday at 76.0299 versus a stock price of $12.25. They closed Monday at 73.4516 versus a stock price of $11.25.

ArvinMeritor stock rose $1, or 8.89%.

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