WaMu Preferred Offering 'Priced to Sell'

According to investors, the WaMu offering is already trading 4% higher in the so-called gray, or pre-issuance, market. That means investors, assuming the security will price at par, are willing to buy it at 104 cents on the dollar. That compares with other recently issued financial sector convertibles -- Prudential Financial's(PRU - Cramer's Take - Stockpickr) $3 billion convertible offering of Dec. 7, albeit structured slightly differently, is trading about one point below its initial offering price.

"These financial companies need to refinance their balance sheets, and they're searching for the best asset class in which to do so," says a convertible analyst who declined to be named because his firm is working on the deal. He believes the market may see more like WaMu's deal. In private placements, convertibles have factored in Bank of America's(BAC - Cramer's Take - Stockpickr) liquidity injection for Countrywide(CFC - Cramer's Take - Stockpickr) and Chinese Citic Securities' $1 billion investment in Bear Stearns(BSC - Cramer's Take - Stockpickr), among others.

The perpetual convertible preferred stock is a hybrid security that has elements that resemble a bond, such as its coupon payment. But it also resembles equity, as investors may be forced to convert the security into straight stock under certain conditions. In this case, investors cannot convert the security into common shares until the stock price rises 18% to 23% over its closing price Tuesday night.

Washington Mutual is down almost 8% in Tuesday's trading. Investors may be disappointed that the company followed in the footsteps of lenders like IndyMac Bancorp(IMB - Cramer's Take - Stockpickr) and Fannie Mae(FNM - Cramer's Take - Stockpickr) by slashing its dividend. WaMu reduced the dividend to 15 cents per share Monday, from 56 cents per share. It announced job cuts and plans to halt all subprime lending operations as well.

But the stock price is also likely pressured by investors who short stock to hedge against convertible investments, say investors. A convertible, because it has a bond-like element, falls in value when the underlying stock price falls, but not as far, so investors short the stock to capture a relative gain if the convertible slips.