Convertibles weaker; CapitalSource, B of A, Citigroup, PNC Financial lower; General Motors mixed

By Rebecca Melvin

New York, Feb. 18 - The convertible bond market was weaker Wednesday, with financial paper a focus of trade and weighing things down even as another new government program was unleashed for the purpose of helping pull the economy out of its tailspin.

The newest program is aimed at reducing the high level of home foreclosures, and part of the plan includes increasing funding to Fannie Mae and Freddie Mac as a means of strengthening the mortgage market, maintaining mortgage affordability, and helping keep interest rates low.

The Treasury will continue to purchase mortgage-backed securities from the GSEs to promote stability and liquidity in the marketplace and will increase GSE retained mortgage portfolios allowed under the agreements to $900 billion from $850 billion.

Fannie Mae convertible preferreds were not heard in trade, but Fannie Mae common stock settled up 2 cents to 59 cents each. Fannie Mae issued $2.25 billion of 8.75% mandatory convertible preferreds in May 2008.

Sellers pulled CapitalSource Inc. into trade as its underlying shares tumbled after Fitch Ratings downgraded the Chevy Chase, Md.-based specialty finance company to junk, citing concern that weakening financial performance will persist in 2009.

The big banks dropped again as they have been pretty consistently since the government bailout plan for banks was rolled out last week by U.S. Treasury secretary Timothy Geithner.

Bank of America Corp. convertible preferreds fell into the 200s from the 300s, Citigroup Inc. got slammed back into single digits, and PNC Financial Services Group Inc. lost about a point as its shares continued to weaken after having announced a moratorium on foreclosures on Tuesday.

Real estate investment trusts were also lower, with Developers Diversified Realty Corp. "coming in heavy for sale," according to one New York-based sellsider, despite a little bounce in its shares.

It was "pretty slow today other than the meltdown in financials over the last hour or so," a New York sellsider said at the close.

Another sellsider said "it's still very quiet if you don't trade financials."

General Motors Corp. convertible bonds were mixed in trade after the troubled auto maker submitted its restructuring plan and asked for more aid from the U.S. government.

CapitalSource eases after downgrade

CapitalSource's 7.25% convertibles due 2037 ended down by about 3.5 points at 61.5 after earlier trades between 64 and 65.25.

But the CapitalSource 4% convertibles due 2034 traded at 64.5 and 65, which was little changed from previous trades; and the CapitalSource 1.625% convertibles traded at 99, according to a New York-based sellsider.

The common stock of the financial services firm for small- and medium-size businesses tumbled 82 cents, or 28%, to $2.14 in heavy volume.

Fitch Ratings said it downgraded the outfit's long-term issuer default rating to BB+ from BBB- and its senior subordinated rating to BB- from BB+, and placed ratings on Rating Watch negative.

The downgrade reflects concern that weakening financial performance will persist in 2009, reflecting mainly deteriorating asset quality, and this will further challenge the company's ability to comply with financial covenants under its bank line of credit, according to the agency.

B of A, Citi, PNC weaker

B of A's 7.25% convertible preferreds traded down to 280 compared to 320 in the previous session. Shares of the Charlotte, N.C.-based banking giant shed 33 cents, or 6.7%, to $4.57.

Citigroup's 6.5% convertible preferreds fell to 9.25 from 10.25, while shares of the New York-based financial services giant lost 15 cents, or 4.9%, to close at $2.91.

"Citi closed under $3," a New York-based sellsider stated, by way of indicating the severity of the situation.

Uncertainty facing not only the financials, but other sectors of the economy as well, in light of recent government actions has caused the latest downturn in stocks and convertibles, the sellsider said.

"Nobody knows what's going on. What is going to be affected by what? What's going to happen with the pharmaceuticals? Is it going to be generic-based or the big guys? Is health care going to benefit? How much alternative energy is going to be promoted with the stimulus? What kind of artificial floors is it going to create?" the sellsider said.

Meanwhile in the face of so much uncertainty, convertibles drifted lower.

Wells Fargo's 7.5% perpetual convertible preferreds traded at 440 Wednesday from about 510 on Tuesday.

REITs weaker

Developers Diversified's 3% convertibles due 2012 "came in heavy for sale," trading early at 42 but continuing to get hit lower and closing at about 39.5 bid, 40.5 offered.

The name is played for the premium. But the selling pressure on the convertibles was notable in light of the common stock, nevertheless. Shares of the Beachwood, Ohio-based REIT rose 23 cents, or 8%, to $3.08.

"REITs seemed a little bit on the heavy side. There are still some value buyers out there, but liquidity is tight. Financials are in focus every day, and you either trade financials or hope to slip in a few other names in," the sellsider said.

GM mixed

The GM 5.25% convertibles due 2032 (the GBMs) settled down 3.9% to 2.71 in better-than-average volume.

But the GM 1.5% convertibles (the GRMs), which mature in about three months, settled at 10.23, which was up 2.4%, and the 6.25% convertibles due 2933 (the GPMs), which have a put in about 10 years, settled up 1.8% at 2.82.

Detroit-based GM indicated that it could need as much as $30 billion from the government, including the $13.4 billion the company has already received. Under the company's baseline outlook, repayment of borrowed funds could begin in 2012.

GM will cut 47,000 jobs by the end of the year, or about 19% of its workforce, and reduce the number of models in its fleet.

Privately held Chrysler requested $5 billion in new loans, which is in addition to the $4 billion it received in December. Chrysler plans to cut 3,000 jobs, or about 6% of its workforce, and it will stop production of three vehicle models.

Ford Motor continues to say that it doesn't need federal assistance.

Mentioned in this article:

Bank of America Corp. NYSE: BAC

CapitalSource Inc. NYSE: CSE

Citigroup Inc. NYSE: C

Developers Diversified Realty Corp. NYSE: DDR

General Motors Corp. NYSE: GM

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