Peabody slips, Ford gains; Prudential, CapitalSource improve; Fannie Mae seesaws; ban concerns remain

By Kenneth Lim

Boston, Sept. 25 - The convertible market continued to see relatively light trading Thursday as the ban on short selling continued to mute investment activity.

"We're not as busy as we have been," a sellside convertible trader said.

The usual names were active.

Peabody Energy Corp.'s 4.75% convertible due 2066 slipped about 3 points outright to change hands at 101.5 versus a stock price of $51.50 in line with its stock.

Shares of St. Louis-based Peabody (NYSE: BTU), a coal company, closed at $50.18, a 2.45% or $1.26 decline.

"I did see Peabody, that was down in line today," a market source said. "That's a pretty active name. Nothing really going on there...Looks like a mixed day for the sector, the stock could be just correcting. It's had a good run."

Ford Motor Co.'s 4.25% convertible due 2036 gained about a point outright to trade at 65 against a stock price of $5. Ford common stock (NYSE: F) closed at $4.98, down by 0.99% or $0.05.

Ford is a Dearborn, Mich.-based automaker.

Ban still on minds

The market continued to lament the ban on short selling of financial stocks, and optimism was not high that the ban would be lifted on Oct. 2.

"I think they're going to extend it," a trader said.

Investors on Thursday were also watching the news to see whether a $700 billion bailout plan would be approved in Congress.

"I believe that they need to do something," the trader said. "I think that when they do finally do this, in all probability it will help to free up the credit market, which has been frozen for too many days now."

A plan will likely help the convertible market, the trader said.

"The bond portion of the convertibles will improve," the trader said. "I think the economy is still going to be crap, and they're going to have to raise taxes next year, so stocks are going to be terrible. But I think it will be OK next year. This year when volatility went up, instead of being positive for convertibles, it was negative. It used to be that when volatility went up it used to be positive. I do think it's going to be OK next year."

But the market continues to reflect a lack of confidence, the trader said.

"When you look at some issues like some of these bonds that have enormous yields, you have to think that somebody must be very wrong here," the trader said.

Prudential, Fannie Mae active

Prudential Financial, Inc.'s Libor minus 240 basis points convertible due 2036 gained about 2 points outright on optimism that a government funded bailout for Wall Street would be approved sooner rather than later.

The convertible was seen at 97.75 on Thursday, while Prudential common stock (NYSE: PRU) gained 0.94% or $0.69 to close at $74.07. Prudential is a Newark, N.J.-based insurance company.

The convertible is currently trading to a put in December.

"There's a put coming up," a sellside trader said. "You don't see a lot of the financials trading otherwise. It's gone up probably because there's a little more confidence now, people think the government plan could be approved. Things are slightly better across the board."

Fannie Mae's 8.75% mandatory convertible preferred had a wild day amid speculation about the bailout plan.

"Fannie Mae has been going up and down, 1.90 to 3.75 with this talk of a bailout going on," the trader said.

Fannie Mae common stock (NYSE: FNM) closed at $1.94, up by 11.49% or $0.20.

CapitalSource climbs

CapitalSource's 7.25% convertible due 2037 gained about 3 points from its last trade a week ago, adding to its recovery since falling at the start of the month following a common dividend cut.

The convertible traded at 74.5 against a stock price of $13. CapitalSource common stock (NYSE: CSE) closed at $13.47, up by 5.65% or $0.72.

CapitalSource is a Chevy Chase, Md.-based finance company that operates as a real estate investment trust.

"This bond does not trade all that often, so you don't have a lot of data points," a convertible trader said. "When they cut the dividend [on Sept. 8], initially they traded lower, which was a surprise, but now it's starting to come back. It's a way better carry now than it was before."

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