Countrywide Financial gains; Fannie Mae, AIG up; Smithfield first steady, then falls after earnings

By Rebecca Melvin

New York, Aug. 26 - Countrywide Financial Corp.'s series A convertibles held mostly steady to slightly higher Tuesday even as investors continued to waver on expectations of what will happen come October when the paper is putable, market sources said.

Fannie Mae convertible preferreds and common stock gained after Goldman Sachs economists said anxiety over a possible U.S. government bailout of the mortgage financing company and its cohort Freddie Mac is unwarranted.

American International Group Inc. traded a point higher as its shares bounced back from a drop Monday, which was related to fears of a ratings agency downgrade and an analyst's move to trim his price target on the giant insurer.

Convertible trading volume was slim, and when asked if financials were the most traded, a New York-based sellsider said, "Mostly nothing's traded. Everybody wishes they were on vacation."

But a smattering of activity was seen in names outside the financial sector.

Smithfield Foods Inc. convertibles held mostly steady but looked to head lower toward the end of the session as their underlying shares fell after the meat producer posted a loss for the latest quarter and cited high commodity costs.

Peabody Energy Corp. traded mostly in line with shares that closed up 1.6% on the day.

Grey Wolf Inc.'s floating-rate bonds traded a little better in an extension of trade from Monday when Precision Drilling's purchase of the Houston-based oil drilling services company was confirmed for $2 billion in stock and cash.

Grey Wolf's 3.25% convertibles, which are currently callable, weren't seen in trade as "they will probably go away," a sellside trader said.

Countrywide steady to slightly higher

Countrywide series A convertibles due April 2037, which pay a coupon of Libor minus 350 basis points, traded at 97 on Tuesday compared to 96.5 to 97 on Monday.

One sellsider said he had several sellers of Countrywide looking for buy interest. And while prices didn't go down, it's still peculiar that prices aren't going up as the put date approaches.

Another sellsider said: "It's a scary situation."

Although Bank of America Corp., which took over Countrywide Financial, isn't expected to walk away from the debt, it's not guaranteeing the debt either.

While Bank of America might not want to "deal" with the debt come October nor May 2009 for that matter, the securities will be dealt with in some fashion, the sellsider said recently. "I believe the real issue was all the CDS written against the Countrywide paper that would have caused some serious issues for those that would be paying it off."

A third source said he thinks Bank of America might try to sweeten the convertibles to keep them outstanding by either raising the coupon, lowering the conversion price, or formally guaranteeing the bonds.

But others disagreed. "I'm not sure that they could," a sellsider said, although he agreed that Bank of America doesn't really want $2 billion in cash going out the door.

"There is no way they formally guarantee these and not everything else. I think that's a major hang-up in getting people to accept a sweetener. [A] guarantee is not on the table because every other trustee will sue them on behalf of all the other issues," one source said.

Countrywide's series B convertibles, which are not putable until May 2009, traded Tuesday at 93.875.

Fannie Mae, AIG higher

Fannie Mae's 8.75% mandatory preferreds were seen closing at about 14 versus a share price of $5.62 on Tuesday, compared with about 13 versus a share price of $5.19 on Monday.

The older Fannie Mae 5.375% series 2004-1 convertible perpetual preferred traded at 30,000.

Shares of the Washington, D.C.-based mortgage company (NYSE: FNM) closed up 8.3%, or 43 cents, at $5.62.

AIG's 8.5% mandatory equity units due May 2011 traded at 45.5 versus a share price of $19.15 on Tuesday, compared to a close indicated at about 45 versus a share price of $18.78 on Monday. That compared to $48 versus a share price of $20.32 on Aug. 19.

Shares of the New York-based financial services and insurance company (NYSE: AIG) closed up nearly 5% to $19.64.

Smithfield eases after early strength

Smithfield Foods' 4% convertible senior notes due June 2013 traded early at 123 versus a share price of $22.75, which was little changed compared to Monday's share price close of $23.53. At the close though, a late, small trade looked like it was done at 119.63, but it wasn't known at what share price.

"It was a good vol play on the earnings. It saw a little activity, down a touch as it's been better over the last couple of weeks; but not that active," a New York-based sellside trader said.

I think people were unwinding those," he added.

Smithfield, the largest U.S. pork producer, is dealing with higher commodity prices for key ingredients like corn and fuel, while also dealing with low prices for its products because of an oversupply of meat on the market. Given the unclear future related to commodities, Smithfield declined to give an outlook in its earnings release.

Smithfield reported a net loss of $12.6 million, or 9 cents a share, compared with year-earlier net income of $54.6 million, or 41 cents a share. Smithfield's loss from continuing operations, which excluded beef operations to be sold but included 15 cents in hedging losses and a 4-cent-a-share write-down, was 21 cents.

Revenue for the quarter ended July 27 rose 20% to $3.14 billion. Analysts had expected a loss, excluding items, of 4 cents a share on revenue of $2.87 billion.

Shares of the Smithfield, Va.-company (NYSE: SFD) fell $1.62, or 7%, to $21.91.

Peabody adds a point

Peabody Energy's 4.75% convertibles due 2066 were indicated to close at about 127.5 versus a share price of $62.74 on Tuesday compared to about 126.5 versus a share price of $61.74 on Monday.

Shares of St. Louis-based Peabody (NYSE: BTU) added $1.00, or 1.6%.

Massey Energy's 3.25% convertible senior notes due 2015 edged higher to about 104.8 on Tuesday, compared to 104.5 on Monday.

Richmond, Va.-based Massey common stock (NYSE: MEE) rose less than 1%, or 49 cents, to $65.16.

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