Conseco strengthens ahead of put; Smithfield strong; Freeport-McMoRan preferreds at parity

By Rebecca Melvin

New York, Sept. 1 - Convertibles players weren't overly spooked by a slide in equities led by financial names on Tuesday, which marked the first day of September.

"A lot of it is company specific," a New York-based buyside analyst said of the downturn, mentioning a series of downgrades on financial names and word that CIT Group Inc. is deferring Sept. 15 interest payment on its 6.1% junior subordinated straight notes due 2067.

"Convertibles were up nearly 4% in August, so I wouldn't be surprised to see people taking profits on things they have bought. But I'm not seeing a meaningful change in the information that I think is important."

In August, the convertibles market posted a return of 3.89%, marking a sixth consecutive positive month, according to Barclays Capital convertibles research analysts.

Both credit and equities drove the performance upward. Year to date, the BarCap Convert Composite has returned 35.04%, second only to the BarCap High Yield Index, which was up 40.95%, and has significantly outperformed the S&P 500 index, which is up 14.97%.

A couple of distressed names among financials were in trade, including Fannie Mae, which saw its $100,000 par 5.375% convertible preferreds in trade at about 6 cents on the dollar on Tuesday, and American International Group Inc., which saw its shares and debt pulling back on Tuesday after a surge through August.

Also among financials, Conseco Inc. convertibles have traded up in recent days on expectation that the Carmel, Ind.-based insurance company may be close to restructuring its soon putable convertible paper.

Wells Fargo & Co. convertible preferreds were last at 855, with a lot of put trading on a negative rumor, a sellsider said.

Outside the financial sector, Freeport-McMoRan Copper & Gold Inc. convertibles traded at parity after the mining concern said it will redeem its 5.5% convertible perpetual preferred stock on Sept. 21.

Smithfield Foods Inc. convertibles traded at 86.5 versus a stock price of $12.25 on Tuesday, compared to 84.5 versus a stock price of $11.65 two weeks ago.

Fannie Mae, AIG pulled into trade

Fannie Mae's 5.375% convertible preferreds traded at 6500 on Tuesday, compared to a week ago when the paper was at 6750.

Its common shares have been volatile and on Tuesday slid 34 cents, or 18%, to $1.59.

AIG, which has seen its shares running up, fell on a Sanford Bernstein downgrade and $10.00 price target, which shot its stock down 21% to $36 from $45.33 on Tuesday.

AIG's convertible mandatories are "seeing distressed types looking at it again," said Jonathan Iseson of Matrix Capital Group in Manhattan. Iseson recently moved over to Matrix from Northeast Securities Inc.

Meanwhile, Wells Fargo was lower Tuesday. But Iseson pointed out that it was reported of the San Francisco-based lender late in the session that its president and chief executive officer, John Stumpf, said that Wells Fargo plans to repay $25 billion of Troubled Asset Relief Program funds soon.

Tuesday's moves "were not at all surprising" given the recent run in equities and other securities like convertibles, a buyside analyst said.

"The convertible composite is up 35% versus 15% for the S&P...at some point people are going to take some profits."

"AIG has caught people's attention, moving down so hard, and it could be moving the whole market," the analyst said.

AIG shares started moving up sharply in July when it did a reverse split at the beginning of that month, when its shares were down to below $10. Then it steadily went up $52 on July 28.

"You've got a short squeeze, and momentum begetting momentum. People forget that once all the conversions take place, shares go from about 134 million to about 700 million," the analyst said.

"Credit spreads have tightened, and names like Assured Guaranty, XL capital and AIG, where the equity has moved and you have a strong delta, have benefited very much, but how much more can credit spreads tighten in the near term?" the analyst asked.

Freeport-McMoRan preferreds at parity

Freeport-McMoRan's 5.5% perpetual preferred shares traded at parity, which would be about 130.68, based on a common stock of $60.70.

The Phoenix-based mining company said it may redeem the preferreds if the closing price of its common stock exceeds 130% of the $46.45-per-share conversion price for 20 days in any 30-trading-day period.

Freeport-McMoRan will pay $1,000 per preferred, and holders may elect to convert their securities until 5 p.m. ET on Sept. 18 at a conversion rate equal to 21.5305 shares of common stock per preferred. In lieu of issuing any fractional shares of common stock, the company will pay an equivalent amount in cash.

At current market prices, the market value of the common stock issuable upon conversion is significantly greater than the cash redemption value. The company therefore expects holders will elect to convert their preferreds before the redemption date.

There are 831,554 preferreds outstanding, equivalent to about $832 million in redemption value.

If all the preferreds are converted, Freeport-McMoRan would issue 17.9 million common shares.

Mentioned in this article:

American International Group Inc. NYSE: AIG

Conseco Inc. NYSE: CNO

Fannie Mae NYSE: FNM

Freeport-McMoRan Copper & Gold Inc. NYSE: FCX

Smithfield Foods Inc. NYSE: SFD

Wells Fargo & Co. NYSE: WFC

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