Sellers slam Fannie Mae; Countrywide, Merrill, Webster, all lower; Medtronic, NII eke out gains

By Rebecca Melvin

New York, July 11 - Fannie Mae convertibles fell again Friday in a maelstrom of trading that created volatility in the whole market and many more sellers than buyers as investors again weighed the future for the two largest U.S. mortgage lenders, Fannie Mae and Freddie Mac.

The government-sponsored enterprises had been a focus of trade for much of the week, starting Monday when Lehman Brothers outlined potential hazards for the enterprises related to proposed accounting rules changes.

"[Fannie Mae] came in dramatically, then gapped up, and then came in again," a New York-based sellside trader said on Friday.

Other financials also came under fire, including Countrywide Financial Corp., which was down after Citigroup cut its estimates and price targets for some U.S. bank stocks including Bank of America Corp., which acquired Countrywide; and Webster Financial Corp., which was sharply lower after the regional bank said it will report a larger-than-expected loan loss provision of $25 million for the second quarter.

Even two issues with short-dated options, Merrill Lynch & Co. Inc. and Prudential Financial Inc., were much lower.

"It was all about financials," a New York-based sellside analyst said of the convertibles market.

But all sectors were under pressure and even the short-dated convertibles of Minneapolis-based software maker Fair Isaac Corp. saw at least one seller Friday, according to a sellsider.

During the turbulent week, a few things did richen, however, some sources said, as players tried to ferret out low premium, high delta, mostly investment grade names like Medtronic Inc. to take shelter in.

NII Holdings Inc., which isn't investment grade, also had some interest this week, although its convertibles ended mixed.

Fannie Mae extends downward spiral

The Fannie Mae 8.75% mandatory convertibles preferreds, which have a par of $50, closed out at 22 bid, 23 offered, versus the closing share price of $10.25, which compared to 28.75 versus a share price of $13.60 late Thursday.

The older Fannie Mae 5.375% series 2004-1 convertible perpetual preferred stock was seen trading in the 41,000 range, compared to 48,000 bid, 49,000 offered on Thursday.

Shares of Washington, D.C.-based Fannie Mae had recovered briefly on Friday and Freddie Mac had actually been in positive territory before succumbing to heavy selling ahead of the close.

The stock (NYSE: FNM) ended down another 22% on Friday.

Early in the session, Treasury secretary Henry Paulson said no bailout of Fannie and Freddie was on the horizon, and the government's primary focus was to support the enterprises in their current form. But those words didn't immediately pacify investors, who sent shares lower initially upon hearing the message.

Later the market staged a mild turnaround after Sen. Christopher Dodd, the Banking Committee chairman, said the Federal Reserve discount window would be open for the GSEs.

Countrywide lower in active trade

Countrywide's three-month Libor minus 350 bps series A convertible senior debentures due April 15, 2037 closed down at 96.50 bid, 97.50 offered, compared to 97.25 bid, 97.50 offered on Thursday.

The Countrywide three-month Libor minus 225 bps series B convertibles due 2037 closed down at 93 bid, 94 offered, compared to about 95.

The name was actively traded, sources said.

Citigroup cut its estimates and price targets on several U.S. banks, including JPMorgan Chase & Co and Bank of America, on higher assumed losses on credit card, home equity, residential construction, and sustained weak capital markets environment.

Analyst Keith Horowitz said in a research note that his mark-to-market estimate for Bank of America of $1.2 billion included a $530 million subprime collateralized debt obligation-related hit, $430 million monoline exposure, and $280 million for auction-rate securities.

Webster drops on loan loss news, downgrade

Webster Financial, which priced $225 million of 8.5% perpetual convertible preferred shares in early June, was indicated closing at 755.32, versus a share price of $15.42, compare to 832.32, versus a share price of $17.85 on Thursday.

Shares of the Waterbury, Conn.-based regional bank (NYSE: WBS) fell $2.43, or 13.6%.

The bank said that it expects to report a higher loan loss provision for the second quarter of $25 million, and FTN Midwest downgraded the bank to "neutral" from "buy," cutting its price target to $19 per share from $26 per share.

Selling hits Merrill, Prudential, Fair Isaac

Merrill Lynch's 0% convertibles dropped below par in active trade Friday, a move that raised eyebrows, given that the notes have an index-linked increasing put price, which currently stands at 108 plus.

"That's a pretty substantial discount," a New York-based sellside trader said, who said he saw an offer on the notes at 99.

Another pretty substantial move on a short-dated piece of paper was Prudential's floating-rate convertible notes due 2037, which traded down to 97.5 bid, 98.8125 offered.

"Some people let go of short-dated stuff to raise some capital. They wanted to put their money someplace else," the sellsider said.

The Prudentials are "capital intensive and you can't really hedge. I think you're seeing more interest in those [names] that you can hedge," he said.

Fair Isaac's 1.5% convertible senior notes due 2023 were also on the firing line as people were "obviously trying to raise capital," according to another New York-based sellsider.

Fair Isaac is short dated, it is yielding 5.25%, with a balance sheet that looks fine, but it is capital intensive and people are looking to get more cash on their books, the sellsider said.

Medtronic adds

Medtronic 1.5% due April 2011 was at 107.375 Friday versus a share price of $52.36, compared to trades Tuesday at 105 versus a share price slightly higher at $52.59.

There are also Medtronic 1.625s due April 2013 and two tranches of Medtronic 1.25s due September 2021, but the 1.5s which mature in 2011 trade the most, according to one sellsider.

They have 10 points of premium, a $0.50 dividend on the common, which cuts into returns, but a high bond floor.

"There's a small enough premium and just enough time to the upside," he said, "Yeah, you could make some money."

Shares of the Minneapolis-based medical device maker (NYSE: MDT) closed down 76 cents, or 1.4%, to $52.36.

NII ends mixed

The NII Holdings' 3.125% due June 2012 were last 82.375, compared to a recent trade of 82.75, which was flat to slightly higher on a dollar neutral basis.

The liquid NII 2.75% convertibles due 2025 were also trading this week, but ended slightly to the downside by about 0.25 point on a hedged basis.

Shares of NII (Nasdaq: NIHD) were down 86 cents, or 2%, on Friday, at $41.90.

The Reston, Va.-based provider of digital wireless communication services in Latin America has a story that looks pretty good based on fundamentals, sources said.

The stock has been punished of late due to concerns about increasing competition and questions surrounding the roll out of network upgrades and other costs, but "the story itself is getting better, unlike most things out. There is more positive interest in it," a New York-based sellsider said.

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