Financial convertibles lower on credit concerns; Energy names gain with oil; Synnex to price

By Rebecca Melvin

New York, May 6 - Prices on convertible financial paper "came in" on Tuesday relative to their underlying stocks, as market activity remained relatively quiet, albeit more active than the previous session, market participants said.

Financial equities led stock markets higher on Tuesday, but a wider-than-expected loss from Fannie Mae and a loss from Legg Mason Inc. reported in tandem with new debt issues, namely convertibles, to raise capital, meant the convertibles were lower on credit concerns, a New York-based sellside analyst said.

The existing convertible preferred shares of Fannie Mae were inactive but were seen closing at about 72,194, which was higher outright from previous levels, but was lower compared with the mortgage lending company's common stock, which added 8.9% on the day.

"The market is taking negative news pretty well. I guess it has been expecting worse," a West Coast-based sellside trader said of the broader markets.

Meanwhile, a couple of convertible energy names were up in line with their underlying shares as oil prices pushed to record highs again amid supply concerns.

The convertibles of Transocean Inc. gained outright, and Nabors Industries Ltd. gained on a hedged basis.

Nevertheless, it was still "painfully slow and quiet," the West Coast trader said of the convertibles market on Tuesday.

Fannie Mae and Legg Mason accounted for two of the trio on new issues that came to light Tuesday, with pricing seen evenly spaced over the next three days.

Legg Mason's $1 billion of mandatory convertible equity units were seen pricing after the market close on Wednesday. It was oversubscribed and up in the gray market, sources said.

Fannie Mae's $2 billion of three-year mandatory convertible preferred stock was seen pricing after the close on Thursday. It was also up in the gray and said to be priced attractively.

There was no gray seen in Synnex Corp., which was the first up, with pricing seen after the close Tuesday. It was expected to price a $100 million offering of 10-year convertible senior notes.

Fannie Mae down on hedged basis

The existing Fannie Mae 5.375% series 2004-1 convertible perpetual preferred stock was seen closing at 72,194, versus a stock price of $30.91 on Tuesday, compared to 70,900, versus a share price of $28.29 on Monday.

Meanwhile, the newly announced offering was up in the gray at 50.25 bid, 50.75 offered, according to a New York-based buysider.

Fannie Mae stock had initially fallen on the news that it posted a loss, after payment of preferred dividends, of $2.51 billion, or $2.57 per share, for the first quarter as the weak housing market continued to hammer mortgage and credit markets. Before preferred dividends, it posted a loss of $2.19 billion. But later in the session the shares came steaming back up.

Its plan to raise capital caused its regulator, the OFHEO, to reward the company by saying that it can lower its capital surplus to 15% from 20%.

"Fannie is needed by the government to provide liquidity to the mortgage market and the OFHEO is willing to allow them to hold less excess capital as long as they raise capital," a convertibles financial analyst said.

"I think Freddie will come to the market as well," the analyst said, referring to Fannie Mae's sister lender Freddie Mac.

"Fannie Mae is extremely levered and loosing $2 billion to $3 billion on a GAAP basis. Their accounting is hard to understand. I'm confused how to value them. But the fix is in place and they can make extremely attractive mortgage loans as wider spreads than they've been able to do for a long time," the analyst said.

Valuation of the new issue of $2 billion of three-year mandatory convertible preferred stock, at par of $50, didn't seem to be on the front burner of many convertibles trading desks as several sources said they hadn't yet looked at it.

The offering, which is being sold via joint bookrunners Lehman Brothers, J.P. Morgan Securities Inc. and Banc of America Securities LLC, was talked with a dividend of 8.75% to 9.25% and an initial conversion premium of 18% to 22%.

Fannie Mae will concurrently offer $2 billion of common stock. Following soon will be an offering of non-cumulative, non-convertible preferred stock.

Proceeds will be used for general corporate purposes, including enabling the company to maintain a strong, conservative balance sheet, enhancing long-term shareholder value and providing stability to the secondary mortgage market.

The home-mortgage lending company is based in Washington, D.C.

Legg Mason gains in the gray

The oversubscribed Legg Mason deal traded in the gray market at 50.5 and was seen later at 50 bid, 51 offered, sources said.

"Legg Mason has its issues in terms of outflows and it will be a while before it turns around, but it's valued more cheaply than its peers and once it gets the SIV issue behind it, it looks attractive," the convertibles buyside analyst said, adding that as an asset manager the company has a balance sheet with net zero debt.

The Baltimore-based asset manager, with $950 billion in assets under management as of March 31, said it plans to sell $1 billion of mandatory convertible equity units, with a unit price of $50.

There is a greenshoe of $150 million.

The deal was talked to yield 6.75% to 7.25% for the coupon, with an initial conversion premium of 17.5% to 22.5%.

Proceeds will be used for general corporate purposes, which may include support of liquidity funds managed by its subsidiaries, financing acquisitions and repayment of outstanding debt.

Citi Global Markets, Merrill Lynch, Goldman, Sachs and J.P. Morgan Securities are joint bookrunners, with Citi Global and Merrill as global coordinators and structuring agents.

Synnex quiet in gray

Sources said they did not hear any gray market on Synnex, a Fremont, Calif.-based business process services company, which planned to price $100 million of 10-year convertible senior notes. The deal was talked to yield 3.5% to 4% for the coupon, with an initial conversion premium of 35% to 40%.

The notes are non-callable for five years, with a put in year five.

There is contingent conversion subject to a 130% hurdle and contingent payment at a 120% hurdle. There is also dividend and takeover protection.

Proceeds are earmarked for general corporate purposes and to reduce outstanding balances under certain credit arrangements

Record high oil lifts energy names

Crude oil rose to a record $122.73 a barrel in New York amid threats to supply in Nigeria and Iraq.

The higher prices pulled up the convertibles of oil drillers including Nabors Industries, which saw its 0.94% convertible due 2011 add on a hedged basis, trading at 107.5 versus a stock price of $39 intraday, and seen closing at about that level.

On Monday, the 0.94% convertibles were at 106.5 versus a stock price of $38.97.

Nabors' zero-coupon exchangeable due June 15, 2023 traded at 113.25 versus the $39 stock price.

Nabors common stock (NYSE: NBR) closed at $39.15, up about 0.5%.

Nabors is a Hamilton, Bermuda-based oil and gas land drilling contractor.

Houston-based offshore oil and gas drilling contractor, Transocean saw gains outright. Its 1.625% convertible due 2037 gained about a point to close at 114.3 versus a stock price of $157.85. Its common stock (NYSE: RIG) closed up $3.98, or 2.6%, at $157.85.

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