Countrywide, Vornado, Beazer Homes up; XM, AMD tack on gains; convertibles market mulls rate cut

By Evan Weinberger

New York, Sept. 18 - XM Satellite Radio Holdings Inc. convertibles continued their slow but steady climb, while Ford Motor Co. convertibles continued their recent strong showings. Advanced Micro Devices Inc. also kept marching forward Tuesday.

And in other news, the Federal Reserve cut the federal funds rate 50 basis points to 4.75% at 2:15 p.m. ET, sending stocks racing to the end of the trading day. One analyst said the market reaction was either "euphoria or relief," and he wasn't sure which.

The Fed also lowered the discount rate by 50 bps to 5.25%, and several commercial banks, including Wells Fargo & Co. and Bank of America Corp., lowered their rates on borrowers.

The precipitate cause for the rate cuts were the problems in the mortgage lending sector, specifically the subprime sector. So market watchers expect to see improvements in Countrywide Financial Corp.'s convertibles as well as the company's stock. Also moving up Tuesday were Vornado Realty Trust convertibles.

"It should alleviate the credit crunch and boost the economy," one fund manager said of the rate cuts. "Financials and economically sensitive names will benefit."

Another analyst said the cuts would be a "net-net" positive for financial firms.

Beazer Homes USA, Inc. also saw its convertibles improve on the day Tuesday.

One new deal was announced Tuesday. Powerwave Technologies, Inc., a Santa Ana, Calif.-based wireless communications networks services provider, announced that it will launch $130 million in subordinated convertible notes due 2027. The convertibles, which are expected to price before market open Wednesday, are talked at a 3.875% coupon and a 30% initial conversion premium. There is a reported $20 million greenshoe on the Rule 144A deal.

There are puts at years seven, 10 and 15, talk of a soft call after six years subject to a 130% hurdle and a hard call at seven years. Dividend protection and make-whole agreements are built in.

Several sources reported the convertibles being reoffered at between 98.5 and 99.5. Settlement is expected to be Sept. 24.

Powerwave intends to use the proceeds for working capital and general corporate purposes. More specifically, the company plans to pay back old debt, including possibly buying back a portion of its 1.25% convertible subordinated notes due 2008.

But the big story of the day was the Fed slashing interest rates. The equity markets responded in full-throat approval.

The Dow Jones Industrial Average picked up 335.97 points, or 2.51%, on the day for a close at 13,739.39, the first 300-plus point gain since 2002. The Nasdaq added an even 70 points, or 2.71%, to close at 2,651.66. And the Standard & Poor's 500 closed at 1,519.78, a gain of 43.13 points, or 2.92%, to make it the big winner on the day.

The convertibles market largely maintained control while stocks went wild. "Stocks are more liquid than converts and stock investors, maybe, more visceral than convert investors," one trader said. Therefore, it was "no surprise" the stock market was ripping while convertibles were "a little more quiet."

Another analyst said that convertibles investors kept their solid, though not breakneck, pace going even as other markets soared. "I haven't seen anybody taking any new strategies," he said. "It was a steady day, and obviously when equity markets are up, then there's an overall good tone in the marketplace."

And with many market watchers unsure what the rate cuts will mean in the long term, if anything, company fundamentals are going to remain the key deciding factor for smart investors. "We will still focus on individual companies with strong free cash flow," the fund manager said.

Countrywide, REITs, homebuilders up

While the Fed hopes its rate cut will spur the entire economy, the sector that may see the most immediate gains is the financial sector. The lowered cost of borrowing should spur those companies forward, according to a trader. "It will decrease borrowing costs for all," he said.

Armed with that information, investors looked to Calabasas, Calif.-based mortgage lender Countrywide. The company's Libor minus 350 bps series A convertible senior debentures due April 15, 2037 closed at around 92 versus a closing stock price of $19.88. They closed Friday at 91 versus a stock price of $19.42.

Countrywide's Libor minus 225 bps series B convertible senior debentures due April 15, 2037 closed at around 89.5 versus a stock price of $19.88. They closed Friday at 87.75 versus a stock price of $19.42.

Much like the rest of the market, the big gains in Countrywide came in its stock (NYSE: CFC), which gained 61 cents, or 3.17%, on Tuesday.

Staying in the housing sector, New York-based real estate investment trust Vornado saw its 2.85% convertible senior debentures due April 1, 2027 close at 93.25 versus a stock price of $107.21. They closed Monday at 92.5 versus a stock price of $103.64.

Vornado stock (NYSE: VNO) soared $3.57, or 3.44%, on Tuesday.

Beazer Homes gained on the day as well. Beazer's 4.625% convertible senior notes due June 15, 2024 closed at 74 versus a closing stock price of $11.18 after opening Tuesday at around 71 versus a stock price of $9.66.

The Atlanta-based home builder saw its stock (NYSE: BZH) gain a substantial $1.71, or 18.06%, on Tuesday.

XM continues steady rise

Washington, D.C.-based XM Satellite Radio continued to move up in investors' eyes Tuesday, according to an analyst. He said that since sales moved away from retail outlets to placement in new cars, the company's prospects have improved.

With two companies that install satellite radio in new cars, General Motors Corp. and Ford, seeing improved sales last quarter, XM did better as well, the analyst said.

XM's 1.75% convertible senior notes due Dec. 1, 2009 closed Tuesday at 87.38 versus a closing stock price of $14.82. That was a slight but noticeable gain over Monday's close of 87.25 versus a stock price of $14.71.

XM stock (Nasdaq: XMSR) picked up 11 cents, or 0.75%, on Tuesday.

In a related rise, Ford's 4.25% convertible senior notes due Dec. 15, 2036 closed at 114.63 versus a closing stock price of $8.42. The Dearborn, Mich.-based automaker's convertibles closed at 113.625 versus a stock price of $8.28 on Monday.

Ford stock (NYSE: F) posted a 14 cent, or 1.69%, gain Tuesday.

AMD marches on

Sunnyvale, Calif.-based semiconductor producer Advanced Micro Devices had a good day on the markets. The company's 6% convertible senior notes due May 1, 2015 closed at 88.5 versus a closing stock price of $13.30 on Tuesday. They finished trading Monday at 87.5 versus a stock price of $12.84.

AMD's 5.75% convertible senior notes due Aug. 15, 2012 closed at 90.94 versus a stock price of $13.30 on Tuesday after closing Monday at 88.371 versus a stock price of $12.84.

AMD stock (NYSE: AMD) added 46 cents, or 3.58%, on Tuesday.

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