Fannie Mae, Ambac, Countrywide better; Ford steady; Linear, Ceradyne little changed on downgrades

By Rebecca Melvin

New York, Sept. 3 - Financials were trading in the convertibles market on Wednesday, and despite economic worries weighing on investor sentiment in general, some convertibles in the finance space were steady or showed some gains.

Convertibles of Fannie Mae were steady to a little higher, while those of Ambac Financial Group Inc. jumped higher on news the bond insurer obtained Wisconsin regulatory approval to restart its Connie Lee Insurance Co. subsidiary as a new municipal bond insurer.

Countrywide Financial - considered by some to be a barometer of sentiment in the convertibles market - improved by almost a point on a dollar neutral basis over the past two days, sources said.

"I look at it as kind of a gauge of the fear out there," a New York-based sellside trader said of the Countrywide floating-rate convertible issues.

Ford Motor Co. traded steady to higher at 67.5 after the auto maker reported a 26% drop in August sales and cut second-half production plans due to lower demand for its cars and trucks, especially sport-utility vehicles.

Two convertible names traded unchanged to down slightly with news of downgrades on their underlying stocks. Linear Technology Corp.'s convertibles were unchanged for the B paper and weaker by 0.25 point for the A paper after Goldman Sachs downgraded the company to "neutral" from "buy" due to what it sees as limited upside in upcoming earnings estimates.

Ceradyne Inc. was little changed after Wachovia cut the company to "underperform" from "market perform," saying its contract for body armor with the U.S. army could get delayed again, hurting its earnings outlook.

Amdocs Ltd., which trades on an outright basis, also traded in size on Wednesday. No clear impetus was seen except for one possibility that players might be expecting a sweetener from the company to keep the relatively short-dated paper outstanding.

Fannie steady, Ambac higher

Fannie Mae's mandatory convertible preferreds, which traders are quoting in points due to the ease of citing points of premium over parity value at these levels, was pretty much steady as its underlying shares traded volatility, toggling the unchanged mark, to end the session down 1.5% on the day.

Fannie Mae's newer 8.75% mandatory preferreds were trading at 4.375 points to 4.625 points, which translates to about 18 bid, 18.25 offered, versus a share price of $7.50 during the session, a sellside trader said. That compared to a dollar value of about 17 on the preferreds on Tuesday.

Shares of the Washington, D.C.-based mortgage financing company (NYSE: FNM) closed down 11 cents, or 1.5%, at $7.32.

The preferreds were 4.75 points over parity a week ago.

Ambac Financial's 9.5% mandatory convertible equity units due 2011, which aren't generally quoted on the Street, traded at 58.30 early in the session, compared to last trades at about 53.

Shares of the New York-based bond insurer (NYSE: ABK) surged $1.58, or 22%, to close at $8.65 in heavy volume.

News on the tape was that Wisconsin insurance commissioner Sean Dilweg approved plans to restart the company's Connie Lee Insurance subsidiary as a new municipal bond insurer.

Countrywide Financial's floating-rate series A convertibles, which are putable on Oct. 15, traded at 98 to 98.25.

"You want to see the improvement: the Countrywide 10-15's are much better. They had been at 97.75, and today's last couple of trades are 98, 98 and a teeny. That may not sound like a lot, but it is," a New York-based sellside trader said.

Ford steady to higher

Ford's 4.25% convertible bonds due 2036 traded at 67.5 versus a share price of $4.60 intraday Wednesday, compared to an indicated level of 66.25 on Tuesday.

Shares of the Dearborn, Mich.-based auto maker (NYSE: F) closed up 6 cents, or 1.3%, at $4.57.

Sales dropped to 155,690 vehicles in August from 212,120 vehicles a year earlier, including all of Ford's brands, the auto maker said in a news release Wednesday.

In its Ford, Lincoln and Mercury brands, car sales were off 8.9%, crossover sales fell 1.3%, SUV sales tumbled 53%, and truck and van sales fell 38.5%.

Overall, during August, Ford, Lincoln and Mercury vehicle sales totaled 151,021, down 26%. The decline primarily reflects lower demand for SUVs (down 53%) and trucks (down 39%) and lower sales to fleet customers (down 31%), the release stated.

The company expects the second half of 2008 will be more challenging than the first half, as weak economic conditions and the consumer credit crunch continue.

Linear unchanged to lower

Linear Technology's 3% (series A) convertibles due 2027 were quoted at 91.375 bid, 91.875 offered versus a share price of $31.50 toward the end of the session.

Linear Technology's 3.125% (series B) convertibles due 2027 were at 95.5 bid, 96.5 offered, versus the same share price.

Shares of the Milpitas, Calif.-based semiconductor company sank $1.32, or 4%, to $30.94.

But the series A paper was down only about 0.25% on a dollar neutral basis and the series B paper was basically unchanged, a sellside trader said.

The stock was trading down on a Goldman Sachs downgrade to "neutral" from "buy," based on the investment firm's expectations of limited upside in earnings potential in the near term.

"We believe the September quarter is tracking in line with expectations of 0%-2% [quarter-over-quarter] growth. However, we see potential risk to December quarter Street estimate of 2% [quarter-over-quarter] growth, which is above our estimate of up 1.5%. Our checks continue to suggest very tight inventory management, which may negatively impact build rates in 2H08," Goldman analysts Craig Hettenbach and James Covello wrote in a research note.

"Furthermore, seasonal weakness in industrial (33% of sales) will likely cap upside to estimates until at least the March 2009 quarter. LLTC is up 7% vs. a 4% decline in the S&P since we upgraded on 3/27/08. The stock is down 5% [year over year] vs. a 13% decline in the S&P [year over year]," they wrote.

"We continue to view LLTC as a solid long-term investment. However, we are moving to the sidelines as we see limited upside to estimates over the next two quarters," they said.

Ceradyne holds after stock downgrade

The shares of Ceradyne were also trading lower on a downgrade, but the convertibles were said to be holding steady.

The Ceradyne 2.875% convertible due 2035 traded at 98 versus a share price of $41.75 early Wednesday, and they were quoted later at 98 bid, 98.75 offered. That was basically unchanged from Tuesday and last were par to 101 versus a share price of $43.77.

The downgrade by Wachovia was prompted by a major contract delay for the Costa Mesa, Calif.-based specialty ceramics maker, which the bank believes could hurt the company's earnings outlook as early as the fourth quarter of 2008 and 2009.

"The much-anticipated X-SAPI body armor contract, already delayed by about one year from its original target award date, could be delayed again as the Government Accountability Office reviews a protest submitted by one of Ceradyne's competitors (Arizona-based ArmorWorks)," Wachovia analyst Gary Liebowitz said.

Ceradyne makes ceramic inserts for body armor used by U.S. troops. In July it narrowed its full-year profit forecast, saying it now had a better idea of the Pentagon's requirements for products using its ceramic protection products.

Shares of Ceradyne (Nasdaq: CRDN) fell $3.73, or 8%, to $40.92.

Amdocs unchanged

Amdocs 0.5% convertibles due 2024 were seen trading at 98.5, which was unchanged, compared to a 1.3% decline in its shares (NYSE: DOX) which were down 40 cents to $29.79.

At the end of the session, the convertibles were quoted 98.45 bid, 98.625 offered versus a share price of $29.60.

There was "good" volume in the name, traders said, but it isn't seen as very interesting convertible paper given its yield to put.

"People are speculating about a sweetener to the paper. It's relatively cheap debt, and the worst case scenario is that they get the put back to the company in six months," a sellside trader said.

"Every now and then they trade really well," one trader said, noting that the stock and the bonds have been trading in a tight range since about the beginning of July.

Liberty slides

Liberty Media Corp.'s 3.25% exchangeable debentures currently attributed to the Liberty Entertainment group slid 3½ points to around the 106 bid region after the Englewood, Colo.-based media and communications conglomerate announced plans to spin its entertainment assets off into a stand-alone public company.

Liberty said it intends to spin off its Liberty Entertainment group subsidiary to create a new publicly held company, Liberty Entertainment Inc. The existing entertainment group already trades as a tracking stock on the Nasdaq; those shares would be exchanged for shares of the new public company.

Liberty envisions the new company being composed of its current entertainment-oriented holdings, including its approximately 47.9% stake in DirecTV Group Inc., among other assets.

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