Countrywide dominates trading; KKR Financial convertibles slip; Nuance, VeriSign also move

By Evan Weinberger

New York, Aug. 16 - Countrywide Financial Corp. was the star of the day in both the equities and convertibles markets Thursday after announcing that it had tapped into a credit facility to increase its current liquidity. Much like the pattern that Countrywide stock took, the company's convertibles slumped then rallied as the day wore on.

Also trading Thursday were convertibles issued by KKR Financial Corp., Nuance Communications Inc., the new issue priced Wednesday from VeriSign Inc. and Fannie Mae.

No new issues priced Thursday.

Convertibles trading was uneven as investors were trying to make sense of the flurry of news coming out. "There's a lot of choppiness in a lot of the financial names," one analyst said. "There's a lot of negative sentiment right now."

One trader said that the relative quiet and the outsized alarm is causing investors, brokers and fund managers to keep their actions quiet. "Brokers are doing so little, anybody who does anything is keeping it internal," he said.

But as has been characteristic of the financial markets in recent weeks, the graph of the major stock indexes was jagged Thursday. After dropping around 340 points early in the day, the Dow Jones Industrial Average rallied late, with much of that rally concurring with a rise in Countrywide.

By the end of trading, the Dow had recovered and only lost 15.69 points, or 0.12%, closing at 12,845.78.

The Nasdaq gave back 7.76 points, or 0.32%, closing at 2,451.07. The Standard & Poor's 500 actually advanced on the day, picking up 4.57 points, or 0.32%, to close at 1,411.27.

Wild day for Countrywide

Countrywide opened the day by announcing that it had tapped an $11.5 billion credit facility to help the Calabasas, Calif.-based mortgage lender weather a liquidity storm.

The company also announced that it was all but halting new loans that couldn't be backed by the government-sponsored lending behemoths Fannie Mae and Freddie Mac. That means a stop to subprime, alt-A and jumbo mortgages, which are loans of more than $417,000, the Fannie Mae limit. The goal, according to a company statement, is to have 90% of its mortgages in conformity with Fannie Mae.

Countrywide also announced that it would be moving its mortgage-lending operation into the relative safe-haven of its commercial bank, which has an asset value of around $90 billion.

"Our objective is to navigate the difficult conditions in today's market as we complete the transition of our bank business and funding strategy," Countrywide president and chief operating officer David Sambol said in a Thursday statement announcing the moves. "With these changes, we believe we are well-positioned to leverage opportunities presented by a consolidating industry."

In a jittery market, the announcements, which were meant to calm fears that the largest non-agency mortgage lender in the United States might head into bankruptcy, instead moved markets in the other direction.

Countrywide stock dropped more than 20% right out of the blocks. The convertibles, which had been trading in the 80s, slipped into the 70s, several analysts said.

Much of that drop can be attributed to the general negative sentiment around most mortgage lenders, a further analyst said. "I don't think it's tied to the action taken today," he said. "I think it's the other things."

But an upbeat assessment from ratings agency Moody's Investors Service, even as it downgraded Countrywide to its lowest investment-grade level, sparked a rally. Moody's said that Countrywide had ample liquidity to survive through 2008 in the current environment, although the mortgage business will decline. The diversity of Countrywide's portfolio also will help.

"They're pretty positive on it," another analyst said.

The Moody's review sent the stock up, and it even traded over $20 for a few minutes before a sell-off in the last few minutes of trading.

The convertibles followed suit. Countrywide's Libor plus 350 basis points series A convertible senior debentures due April 15, 2037 closed at 85 versus a closing stock price of $18.95. They closed at 85 versus a $21.29 stock price on Wednesday. They had been trading as low as 78.5 earlier in the day, an analyst said.

Countrywide's Libor plus 225 bps series B convertible senior debentures due April 15, 2037 closed Thursday at 83 versus a stock price of $18.95. They closed Wednesday at 82.5 versus a $21.29 stock price. The series B had been as far down as 75.5.

Countrywide stock (NYSE: CFC) finished Thursday down $2.34, or 10.99%, making up almost half of its losses.

Not everyone is convinced that Countrywide is a safe place to invest, even with the actions and the word from Moody's. The rapid change of fortune in the mortgage sector is part of the reason.

"I would just want to be minimizing my exposure to risk," one analyst said when asked if he would get out of Countrywide stock and convertibles.

Other names active

In other convertibles trading, KKR Financial's 7% convertible senior notes due 2012 continued to slip, although the stock rallied.

The convertibles closed at 72 versus a closing stock price of $13.25 on Thursday. They finished Wednesday at 76 versus a stock price of $10.52.

Stock in the San Francisco-based mortgage-lending arm of buyout firm Kohlberg Kravis Roberts & Co. (NYSE: KFN) advanced $2.73, or 25.95%, on the day.

Nuance Communications' 2.75% senior convertible debentures due Aug. 15, 2027 closed at 108.75 versus a closing stock price of $17.65. The debentures closed Tuesday at 113.5 versus a closing stock price of $18.45.

Stock in the Burlington, Mass.-based speech and imaging technology provider (Nasdaq: NUAN) slipped 50 cents, or 2.75%, on Thursday.

Mountain View, Calif.-based VeriSign, a voice and data network services provider, saw its newly issued 3.25% junior subordinated convertible debentures close at 100.25 versus a closing stock price of $29.21. They had closed Wednesday, their first day of trading, at 103.25 versus a stock price of $29.51.

VeriSign stock (Nasdaq: VRSN) slipped 30 cents, or 1.02%, on Thursday.

Finally, Fannie Mae's 2004-1 convertible perpetual preferred stock closed at 98,000 off of a 100,000 par offering. The Washington, D.C.-based government-backed mortgage giant saw its stock (NYSE: FNM) close at $65.28, a rise of $3.83, or 6.23%.

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