Countrywide little changed on Citigroup news; Comtech surges; EMC rebounds; Halliburton falls

By Evan Weinberger

New York, Nov. 27 - Countrywide Financial Corp. convertibles were little moved by the $7.5 billion injected into Citigroup by the Abu Dhabi government's investment arm. Fannie Mae preferreds rose on the news.

In other trading, Comtech Telecommunications Corp. convertibles surged and EMC Corp.'s convertibles regained their footing. Symantec Corp. and ON Semiconductor Corp. also moved up steadily.

On the down side of the ledger, Halliburton Corp.'s convertibles slid as oil prices dipped Tuesday.

While there were a decent number of trades, market watchers said there wasn't much of a theme to convertibles activity Tuesday. "Quiet in the morning, picked up as the day went on," an analyst said. "Things did feel firmer today; obviously the bounce in the equity markets helped." He added that there was still trouble in speculative-grade convertibles.

Two new issues were announced Tuesday, one of which got hearts racing. Washington-based government-secured mortgage backer Freddie Mac announced that it will bring $6 billion in non-cumulative perpetual preferred stock to market after the close. Most of the offering will be in non-convertible preferreds, but a portion will be convertibles. A source close to the deal told Prospect News the deal was a few days away from pricing.

Freddie Mac also announced Tuesday that it was halving its fourth-quarter common stock dividend to 25 cents as part of a near-term capital raising plan so that it can reach a federally mandated 30% capital surplus.

Also Tuesday, Penn Virginia Corp. launched $150 million in convertible senior subordinated notes due Nov. 15, 2012 Tuesday before the market open. The notes are talked at a 4.5% to 5% coupon and a 35% to 40% initial conversion premium.

The registered transaction has a $22.5 million over-allotment option. The notes are expected to price Thursday after the market close.

Equity markets soared Tuesday, although not in a straight line up, on news that the Abu Dhabi Investment Authority will invest $7.5 billion in Citigroup. The investment authority will receive convertible equity units with an 11% yield to start, but can be remarketed, convertible into no more than 4.9% of Citigroup stock. The investment authority will not have a seat on Citigroup's board.

Market watchers said this was the first of what could be many deals where government investment authorities, hedge funds and other players inject large amounts of capital into struggling financial firms. "The deals are in the works and expect many more before year-end," one trader said. He added that he could see similar deals for Countrywide, Washington Mutual Inc. and CIT Group Inc.

It may be more difficult for those firms to make those deals happen, another trader said. "Citigroup has a relationship going back a long time with the Middle East that the other banks don't have," he said. "It's not gonna happen overnight."

Stock markets shook off further reports of falling house prices and plunging consumer confidence to post strong gains Tuesday.

The Dow Jones Industrial Average jumped 215 points, or 1.69%, to close at 12,958.44.

The Nasdaq stretched 39.81, or 1.57%, for a 2,580.80 close.

The Standard & Poor's 500 closed at 1,428.23, an addition of 21.01 points, or 1.49%, on the day.

There was skepticism that the good times would continue to roll. "I have no idea as to how long the rally will last, but I would not bet that this is anything more than a one-day move," an analyst said.

Moving forward in convertibles, a trader said that the private placement in Citigroup by the Abu Dhabi Investment Authority was the best possible outcome for the convertibles market. The list of financial firms that need to raise capital quickly is "endless," he said. "There's $7.5 billion more buying power still out there for the convertibles market," he added. "This maintains buying power, so at the end of the day, it's an important thing."

Penn Virginia seen cheap

Penn Virginia's offering of $150 million in convertible senior subordinated notes due 2012 was seen as cheap to one analyst. The deal, which has a coupon talked at 4.5% to 5% and an initial conversion premium talked at 35% to 40%, is set to price Thursday after the market close.

"It looks pretty cheap, using 400 over or 28 vol," the analyst said, adding that the deal models out at around 105 if priced at the mids. "I think it'll probably price at the aggressive end."

The Penn Virginia offering comes with a contingent conversion subject to a 130% hurdle until Sept. 15, 2012. The notes carry takeover and dividend protections and a net share settlement feature.

Penn Virginia expects to enter into convertible note hedge and warrant transactions with one or more of the underwriters intended to reduce potential stock dilution upon conversion of the notes. The underwriters expect to enter into various derivative transactions related to common stock upon or shortly after the notes are priced. The underwriters will have the option to modify their hedge positions before the convertibles reach maturity, which may have a negative pull on the company's common stock price.

Penn Virginia will also be issuing a concurrent 2.2 million shares of common stock. There is a 330,000 share greenshoe on the common stock offering.

Penn Virginia is a Radnor, Pa.-based oil and gas driller operating onshore in the continental United States. The company plans to use the proceeds of the convertible notes to pay down debt from its existing revolving credit facility and to pay for the convertible note hedge transactions. The proceeds on the common stock offering will go toward paying down debt on the revolver and for general corporate purposes.

Penn Virginia stock (NYSE: PVA) closed down $2.49, or 5.67%, to end at $41.40 Tuesday.

Countrywide little moved

Calabasas, Calif.-based mortgage lender Countrywide is another financial firm rumored to be looking for a deal similar to Citigroup's. And while the nation's largest bank's deal with a Middle Eastern government sent financial stocks flying, it didn't necessarily help Countrywide's convertibles. "I saw CFCs. They got better," a trader said. "They were trading at 76.75, then up to 77 bid at the end of the day. That's still less than one-year paper trading at 23 points, you're talking like a 23% yield to put, so obviously people have some questions."

In the end, Countrywide's Libor minus 350 bps series A convertible senior debentures due April 15, 2037 closed Tuesday at 77.478 versus a closing stock price of $8.97. They closed Monday at 77.9205 versus a stock price of $8.64.

Countrywide's Libor minus 225 bps series B convertible senior debentures due May 15, 2037 closed Monday at 72.6217 versus a stock price of $8.97 after closing Monday at 72.9727 versus a stock price of $8.64.

Countrywide stock (NYSE: CFC) gained 33 cents, or 3.82%, on Tuesday.

Fannie Mae up

Washington-based government secured mortgage backer Fannie Mae saw its 5.375% series 2004-1 convertible perpetual preferred stock (NYSE: FNM-PI) gain $1.46, or 3.94%, to close at $38.55 Tuesday.

Fannie Mae stock (NYSE: FNM) added 48 cents, or 1.66%, for a $29.40 close on the day.

Comtech surges

Melville, N.Y.-based Comtech Telecommunications surged Tuesday in both the convertibles and equity markets.

Comtech's 2% convertible senior notes due Feb. 1, 2024 closed Tuesday at 156.501 versus a closing stock price of $48. They closed Monday at 150.565 versus a stock price of $45.80.

Comtech stock (Nasdaq: CMTL) rose $2.20, or 4.80%, on the day.

EMC rebounds

Hopkinton, Mass.-based data storage producer EMC rebounded from steep losses Monday.

EMC's 1.75% convertible senior notes due Dec. 1, 2011 closed at 133.266 versus a closing stock price of $18.19 Tuesday. They finished Monday at 130.346 versus a stock price of $17.37.

EMC's 1.75% convertible senior notes due Dec. 1, 2013 closed Tuesday at 134.659 versus a stock price of $18.19 after closing Monday at 132.072 versus a stock price of $17.37.

Stock in EMC (NYSE: EMC) climbed 82 cents, or 4.72%, on the day.

Symantec rides high

Convertibles and stock issued by Symantec, a Cupertino, Calif.-based computer security software producer, rose higher Tuesday, a day after federal regulators approved Symantec's takeover of data loss prevention software maker Vontu.

Symantec's 0.75% convertible senior notes due June 15, 2011 closed Monday at 109.248 versus a closing stock price of $17.68. They closed Monday at 108.348 versus a stock price of $17.16.

Symantec's 1% convertible senior notes due June 15, 2013 closed Tuesday at 110.347 versus a stock price of $17.68 after finishing Monday at 108.569 versus a stock price of $17.16.

Symantec stock (Nasdaq: SYMC) added 52 cents, or 3.03%, on the day.

ON switched on

Phoenix-based computer chipmaker ON Semiconductor's 2.625% convertible senior subordinated notes due Dec. 15, 2026 closed Tuesday at 106.176 versus a closing stock price of $8.62. They closed Monday at 104.187 versus a stock price of $8.31.

ON stock (Nasdaq: ONNN) picked up 31 cents, or 3.73%, on the day.

Halliburton down as oil slips

Oil prices slipped to around $95 per barrel Tuesday, and Houston-based energy services firm Halliburton fell as well.

Halliburton's 3.125% convertible senior notes due July 15, 2023 closed Tuesday at 186.466 versus a closing stock price of $35.08. They closed Monday at 191.60 versus a stock price of $35.83.

Halliburton stock (NYSE: HAL) fell 75 cents, or 2.09%, in trading Tuesday.

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