Convertible price dislocations plague market; Ford, Amgen off; ImClone little moved; Fannie Mae at parity

By Rebecca Melvin

New York, Oct. 1 - The convertible bond market was quieter and seemingly more depressed Wednesday in the aftermath of Tuesday's month-end and quarter-end activity, as traders were left to struggle with bond prices that were difficult to reconcile.

"This is one of the biggest messes," a West Coast-based sellside trader said, regarding the large dislocations in the convert market resulting from recent illiquidity.

Others agreed that it was hard to mark bonds given the wide spreads and the fact that trades are occurring outside existing spreads, and that there has been little follow through in the market.

To say that the market is in disarray is "to say the least," Michael Kao, chief executive and portfolio manager of hedge fund Akanthos Capital Management, told Prospect News.

Another long time convert trader said that he hadn't seen pricing like this since the 1980s when wide spreads, small premiums and large yields were features of the market.

An exception to quiet desks was the old Lehman Brothers convertibles desk that resumed trading in New York Wednesday under the Barclays Capital brand.

That desk, which had been active in Ford Motor Co.'s convertibles prior to the Lehman bankruptcy, traded Ford's 4.25% bonds lower in tandem with lower shares on sharply lower sales figures for the auto maker for September.

"They were in the high 50s versus the close," a Barclays trading desk representative said of the Ford bond price.

Those bonds had been well over 100 in May and still touching 80 in mid summer.

Amgen Inc. convertibles were also in trade, with the large, liquid investment-grade issues called down about 4 points in the last three weeks for no particular reason other than market liquidity problems.

Meanwhile the mystery bidder for ImClone Systems Inc. with a $70 per share offer was said by the Wall Street Journal to be Eli Lilly & Co., but the ImClone convertibles were little changed and not mentioned as an important focus of trade.

Few players are looking at individual names based on fundamentals because of overarching market uncertainty, sources said.

But there was some consideration of Fannie Mae, which cannot be squeezed any lower, and doesn't currently price in any potential that the government might seek to compensate preferred holders at some point before the termination date.

"The fact that any possible positive outcome is priced out of the issue shows how badly beaten up converts are," a New York-based sellside trader said.

Ford falls on lower sales

Ford's 4.25% convertible bonds due 2036 closed at 58 bid, 59 offered, versus a share price of $4.55, compared to previous a last trade on Trace at 61.5.

Shares of the Dearborn, Mich.-based car maker (NYSE: F) fell 65 cents, or 12.5% Wednesday after reporting September auto sales that were down 34% from the same moth last year.

Sales of the once popular Ford Explorer were down 67% in September versus a year ago. Blamed for the decline were the weakening economy and tight credit.

"Consumers and businesses are in a very fragile place," Ford marketing executive Jim Farley said in a company press release. "An already weak economy compounded by very tight credit conditions has created an atmosphere of caution."

The new drop comes on the heels of Ford and other carmakers receiving aid from Washington this week in the form of a $25 billion low-interest loan program aimed at helping the industry accelerate development of fuel-efficient vehicles.

The loans are expected to benefit primarily GM, Ford and Chrysler, and could save the auto makers hundreds of millions of dollars and make bankruptcy less likely.

Amgen weakens again

Amgen was lower as the convertible paper of one of the larger, more liquid names in the convert space continued to be used as a proxy for cash.

The Amgen 0.125% convertibles due 2011 (known as the A tranche) closed at about 91.25, versus a share price of $59.18, compared to 92.75 versus a share price of $59.27 on Tuesday.

The Amgen 0.375% convertibles due 2013 (known as the B tranche) closed at 89, compared to 90 on Tuesday.

Shares of the Thousand Oaks, Calif.-based biotechnology giant (Nasdaq: AMGN) were volatile Wednesday, but closed little changed, down 9 cents, or 0.2%, at $59.18.

The change in pricing, which is lower by about 4 points from previous levels, was attributed by one trader as the difference in pricing in a hedged market as opposed to an outright market.

The convert market had been priced for the hedge guy. A hedge guy is accepting less return to the upside, but on the other hand, he's creating value to the downside.

"It's a much tighter picture, with much less volatility when you short the stock. The outright guy exposed to volatility," a New York-based sellsider said.

ImClone chased by Eli Lilly

Despite the disclosure by the Wall Street Journal - ImClone itself refused to name the suitor - the ImClone 1.375% convertibles due 2024 were little changed at 96.25 versus a stock price that rose 4.7% to $65.35.

Shares of ImClone (Nasdaq: IMCL) gained $2.95 to $65.35.

"The best case is it takes you very close to the natural put. Marginal improvement on better credit in that case, but very marginal," the sellsider said about what impact company developments would have on the convertibles.

ImClone said on Monday that it planned to reveal the mystery suitor for the New York-based biotechnology company that was willing to pay a price that trumped that of Bristol-Myers Squibb Co.'s $62 a share offer. But then very late it changed its mind and said the company did not want to be named.

A formal Lilly offer could prompt Bristol-Myers to increase its bid. Bristol-Myers already owns about 17% of ImClone and together they co-market the successful Erbitux cancer drug.

Estimates for Erbitux were lowered for the third quarter early Wednesday. The sellsider familiar with the name said an increased Bristol-Myers bid was possible as were legal maneuvers by that pharmaceutical company based on Erbitux rights it may have.

Fannie Mae trades at parity

Fannie Mae's 8.75% mandatory convertible preferreds were trading at parity, which was seen having a number value of 2.5, versus a share price of $1.66, which was up 8.5% on the day.

The move represented a 13 cent change for the Fannie Mae common stock (NYSE: FNM).

The mandatory paper has been trading at parity, using the low conversion rate, meaning that the call option, which extends until May 2011 is valued at 0.

The January 2010 2.50 call for Fannie is currently 0.90-0.95, putting parity with the stock at $1.64 at 2.52.

"An issue like this which is factoring in zero chance of any further dividends, which ignores the 1.84 ratio at maturity so long as the stock is below the threshold price of 32.45 is ignoring any chance that the government will seek to compensate preferred holders at some point before the termination date," a sellsider said.

The Treasury Department's decision three weeks ago to put the Fannie Mae and Freddie Mac GSEs in conservatorship and suspend preferred dividends is the moment convertible players point to the beginning of the latest downturn.

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