Selling hits convertibles as stocks tumble; BofA weaker; Wachovia, NatCity reverse course; Amdocs eases

By Rebecca Melvin

New York, Oct. 6 - Convertibles players watched U.S. stocks melt down again on Monday amid worries that credit problems and slowing economic activity may be spreading globally and that the U.S. government's bailout plan won't alleviate the freeze in the credit markets very quickly.

Stock markets also tumbled in Asia, Europe and Latin America. Many European exchanges were down sharply, with the CAC in Paris dropping 9%, London's FTSE 100 down 7.9%, and the Dax in Frankfurt tumbling 7.1%.

In the end, the Dow Jones Industrial Average ended down only 370 points, or 3.6%, but that was after an 800-point plunge intraday gave way to a late rally.

"Most people were watching the market. Trading was weaker across the board, and there was no big buy program kick in toward the end of the day like in equities," a New York-based convertibles sellside trader said.

Reasons given for the meltdown were worries about a global economic slowdown, the fact that equities are merely catching up with where credit has been, and legal wrangling over Wachovia Corp. that will keep that company in limbo.

On Friday, markets were cheered by news Wells Fargo & Co. was stepping in with an accepted offer to buy all of Wachovia without any government assistance. But Citigroup Inc., which had an earlier accepted offer with government assistance, has filed lawsuits against both Wachovia and Wells Fargo. In filed court documents, Citigroup alleges that it swooped in to save Wachovia just hours ahead of its being seized by the Federal Deposit Insurance Corp.

Wachovia and National City Corp., which were supporting the market on Friday, reversed course.

Bank of America Corp., which reported third-quarter earnings after the close, was also lower. But Countrywide Financial Corp., which was taken over by Bank of America July 1, edged higher, a New York-based sellside desk analyst said.

Bank of America announced that it was cutting its fourth-quarter dividend by 50% to $0.32 per share, selling about $10 billion in stock and that its earnings were 68% lower than the year-earlier quarter.

There was some stuff trading, but no real markets, traders said.

Amdocs Ltd., for example, slipped about 0.5 point in pretty heavy volume despite the fact that the communications sector software services company has decent fundamentals and the convertible paper is pretty short dated with a put in March.

"People are selling everything. The fundamentals don't matter," a New York-based convertible sellside desk analyst said via email.

BofA edges lower

Bank of America's 7.25% series L convertible preferreds were seen closing at 822 versus a share price of $32.22 on Monday, compared to 838 versus a share price of $34.48 on Friday.

Shares of the Charlotte, N.C.-based bank ended down $2.26, or 7%.

Bank of America plans to assume the outstanding debt of Countrywide Financial totaling approximately $21 billion, Bank of America CFO Joe Price said during an earnings conference call on Monday.

Since July when Bank of America took over Countrywide, it has indicated that once it reached a point of determining its operating environment, it would indicate how it would handle the debt, Price said.

"While I don't want to get into all the details here, let me say that we have preliminarily determined where the various operations should sit within our corporate structure," Price said.

Bank of America's Countrywide floating-rate convertible debts totals $4 billion. The Countrywide Libor minus 350 basis points series A convertible senior notes due April 2037 - which total $2 billion- are putable on Oct. 15.

The Countrywide As traded at 98.1597, compared to 97.36 on Friday. The B series convertibles were little changed at 89.

"I assume they will pay it. There is a pending lawsuit from the B holders about the change of control, but other than that I don't know of any other issues," a Connecticut-based sellsider said.

Countrywide added $259 million in operating earnings to Bank of America this quarter, which was accretive to earnings per share by $0.06. The transition team is on track to reach targeted cost savings, which have been increased from original projections to $900 million after-tax, and expect to fully realize the benefits by 2011, the bank said.

The LaSalle transition will reach a significant milestone in the fourth quarter with expected major systems conversions. In addition, the cost savings achieved in connection with the transaction will exceed original projections.

The transition at Countrywide is on track, Bank of America said. The company today reached a major milestone by announcing in conjunction with a number of state attorneys general a proactive home retention program that will modify troubled mortgages using principal reductions for nearly 400,000 Countrywide customers nationwide.

The combined company modified loans for more than 73,000 customers during the third quarter, up from 14,000 in the similar period in 2007.

Countrywide added $259 million in operating earnings to Bank of America this quarter, which was accretive to earnings per share by $0.06. The transition team is on track to reach targeted cost savings, which have been increased from original projections to $900 million after-tax, and expect to fully realize the benefits by 2011.

Bank of America agreed on Sept. 15 to acquire Merrill Lynch. The company has begun to announce the senior management team of the combined company and the transition teams are beginning to map out their activities.

Wachovia, NatCity reverse course

Convertibles players are looking forward to Thursday when a short-selling ban on financial stocks is set to expire.

"That will ease things up a bit, assuming that they lift it," a New York-based sellsider said. "But as far as we know, they can make it up as they go along."

National City's 4% convertibles due 2011 last traded at 59 versus a closing share price of $2.56 on Monday, compared to a move back up to the 60s on Friday.

Shares of the Cleveland-based regional bank sank 95 cents, or 27%, on Monday after Fitch Ratings had downgraded the company's issuer default ratings, citing expectations of persisting "quality issues" in its mortgage and home equity portfolios as the economy weakens.

With market pressures making access to new forms of funding quite difficult, National City will need continued focus on maintaining its strong liquidity, Fitch Ratings said.

Wachovia's 7.5% series L perpetual convertible preferred closed at 550 versus a stock price of $5.78, down from about 565 versus a share price of $6.21 on Friday.

Wachovia common stock closed down 43 cents, or 7%.

Wells Fargo struck a $15.4 billion deal to buy the Charlotte, N.C., bank four days after Wachovia agreed to a takeover by Citigroup at a much lower price.

Amdocs edges lower in weak markets

Amdocs 0.5% convertibles due 2024 were seen trading at 95.6 and 96.5, which was lower than would be expected given the solid financial position of the company and the upcoming put.

"Even with some of the shorter stuff, the models aren't working too well in this environment," a sellsider said regarding the point spread in the Amdocs pricing.

The Chesterfield, Mo.-based software company announced it has signed a six-year agreement for managed services with MetroPCS Communications Inc.

The six-year managed services agreement will support MetroPCS' wireless plans. In addition to licensing the CES 7.5 suite of products, the agreement includes Amdocs' provision of certain billing and operational support services to allow MetroPCS to migrate from its current billing and operational support system to the CES 7.5 suite of products.

Mentioned in this article:

Wachovia Corp. NYSE: WB

Bank of America Corp. NYSE: BAC

National City Corp. NYSE: NCC

Amdocs Inc. NYSE: DOX

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