WaMu Preferred Offering 'Priced to Sell'

Some investors aren't crying over Washington Mutual'sWM dividend cut for too long.

According to fund managers participating in the deal, investors including equity funds and more typical convertible bond investors are mopping up the $2.5 billion offering of perpetual convertible preferred stock WaMu announced Monday, in conjunction with its decision to slash its dividend. The convertible deal is expected to price Tuesday night, and it will carry a 7.5% to 8% coupon -- making for a relatively attractive opportunity, the investors say.

"The instrument is well-priced, and carries a nice dividend," says Vadim Iosilevich, principal and head of trading at hedge fund Alexandra Investment Management, who has put in an order for an allocation of the deal, which is being led by joint underwriters Morgan Stanley, Lehman Brothers, Credit Suisse and Goldman Sachs. "It is priced to sell."

According to Iosilevich's models, which blend the valuations of Washington Mutual's other debt, its equity, other outstanding convertibles and the cost of buying protection against the company's default in the derivatives market, the price of the new security is between 5% and 10% cheaper than what the model's so-called fair value would warrant.

Convertibles are often the asset class of choice for companies that need capital, but suffer from troubled credit outlooks. Straight debt issued in the corporate bond markets would cost the issuer a much higher coupon payment in many cases. Because a convertible instrument gives the investor the promise of potential equity returns in the future, the coupon payments are naturally lower.