Fannie Mae drops despite government support; financials widen on sector fears; Chesapeake holds firm

By Kenneth Lim

Boston, July 14 - Financials took a beating on Monday as the convertible market remained concerned about the health of the sector.

Fannie Mae's convertible preferreds fell with its stock as investors were unconvinced after the U.S. government pledged support for the mortgage finance agency.

Financials were hit across the board, with Washington Mutual Inc., National City Corp. and Lehman Brothers Holdings Inc. taking especially hard knocks.

Energy and oil names held up better on the back of strong oil prices, with Chesapeake Energy Corp. an active gainer.

Credit concerns were at the top of minds of convertible investors, a New York-based convertible trader said.

"A lot of fear and loathing," the trader said.

Fannie Mae falls with stock

Fannie Mae's 8.75% mandatory convertible preferreds continued their decline on Monday amid doubts that support from the U.S. government would significantly shore up the preferreds.

The convertible preferred was seen trading at about 23.5625 against a stock price of $10.20 in the afternoon, slipping dollar neutral from an early-morning trade at 24.25 versus $10.60.

The U.S. Treasury and the Federal Reserve on Sunday outlined a plan aimed at boosting confidence in mortgage financing companies Fannie Mae and Freddie Mac. The Treasury agreed to raise credit lines for the companies and to buy their shares if necessary to boost their balance sheets. The Federal Reserve also offered to lend the two agencies funds if needed.

But the support plan did not assuage everyone's concerns, a sellside convertible trader said.

"I think that people made a leap that it was safe because of the announcement," the trader said. "I don't believe that that's a logical assumption...What happens if the government takes them over? What's the preferred worth? Is the government going to extend its support to the stock?"

The concern was that the government's support for Fannie Mae's credit may not extend to the preferreds, the trader said.

"When you look at the story, they're not saying we're going to make the equity good," the trader said. "I think the real question is, because they have all these preferreds out there, do they have any of the structure like the [General Motors'] GBM out there? Are they really preferreds or just like enhanced equity?"

Financials continue slide

The government's support plan for Fannie Mae and Freddie Mac also did not help to ease concerns in the rest of the financial sector, as problems at IndyMac Bancorp Inc. plagued the sector.

"More so for the banks, even though Freddie Mac and Fannie Mae may be better, on the whole I think the IndyMac thing was more relevant for regional banks," a sellside convertible analyst said.

Regulators took over IndyMac on Friday after a run on the Pasadena, Calif.-based thrift and mortgage bank. IndyMac's troubles fueled speculation that other regional banks could also be in trouble.

"The financials were wider today," the analyst said.

Cleveland-based National City, also a regional lender, was one of the hardest hit on Monday.

National City's 4% convertible senior note due 2011 dropped about 15 points outright to trade at 65 against a stock price of $3.25. National City common stock (NYSE: NCC) fell 27.6% or $1.22 to close at $3.20 on Monday.

"National City was pretty active, came down with the stock," a sellside trader said. "Spreads are widening across the board. Sucks to be in that space now. The problem is there's so much fear in the market. National City said there's nothing wrong with them, but even then everyone's selling like they're going out of business next week. It's crazy."

Other financials that suffered on Monday included Seattle-based Washington Mutual, which saw its 7.75% perpetual convertible preferred trade at 40.5 against a stock price of $3.23 at the close, a 13 point drop. Washington Mutual common stock (NYSE: WM) closed at $3.23, lower by 34.75% or $1.72.

Both National City and Washington Mutual issued statements on Monday saying that each had sufficient capital.

Lehman Brothers' recently sold 8.75% mandatory convertible preferreds was seen bid at 55 against a stock price of $14, as Lehman common stock (NYSE: LEH) fell 14.07% or $2.03 to close at $12.40.

Lehman was rumored over the weekend to be considering options to prop up its stock. Media reports on Monday said the bank could be looking into finding a strategic partner, selling assets or buying back stock.

But the convertible trader said the rumors did not necessarily move the convertibles one way or another.

"There's no way to know right now what, if anything, is going to happen," the trader said. "And in a market like this it's going to be hard to know if something is good or bad. If they raise more money, people will think something must be wrong if they need so much money. If they buy back stock, people will think it's bad for the credit."

Chesapeake holds up

Standing firm against the financial tide were energy names, market sources said.

Chesapeake Energy was active on Monday as its common stock continued to improve on the back of strong oil prices.

Chesapeake's 2.25% convertible senior note due 2038 was up about ¼ point out right at 113.5 bid, 114 offered against a stock price of $64.00. Chesapeake common stock (NYSE: CHK) slipped 0.82% or 52 cents to close at $63 on Monday.

Chesapeake is an Oklahoma City-based natural gas production company.

"Energy was active, in line," a sellsider said. "They've been getting better coming off the last couple of weeks."

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