Financials mostly quiet, Wachovia better; Countrywide gains on tender news; Chesapeake, Ford weaken

By Rebecca Melvin

New York, Oct. 10 - Selling slowed somewhat in the convertibles market Friday, and a few positive developments materialized, even as stock markets whipsawed violently and ended lower again to conclude one of the worst week's in Wall Street history.

Bond trading closed at 2 p.m. ET, as recommended by the Securities and Financial Market Association, and it will remain closed Monday for Columbus Day. That curbed some convertibles activity, players said.

In early trading, financials outperformed the rest of the market, and Wachovia Corp. gained on news that Citigroup Inc. was walking away from takeover talks, making room for the Wells Fargo & Co. deal to be pursued.

Countrywide Financial Corp. convertibles strengthened after Bank of America Corp. said it would make an early tender this month for the floating-rate series B convertibles at 98.

The series B bonds had been putable in March. But the early discounted tender will follow on the heels of the Oct. 15 put on the series A bonds, a welcome move from the perspective of both convertible players and the company, sources said.

Bank of America will be able to save a few dollars, and investors will get their cash sooner rather than later, a Connecticut-based sellside trader said.

But there was plenty of pain going on Friday, especially in the energy and commodity sectors.

Chesapeake Energy Corp., a long-time darling of the convert market, ground lower amid signs of growing financial troubles affecting the natural-gas producing giant.

Other notable loser was Ford Motor Co.

Financials mostly quiet, Wachovia better

Wachovia's 7.5% convertible preferred shares were at 540 when the stock was at about $5 Friday. Shares of the Charlotte, N.C. commercial bank closed higher at $5.15, which was up a whopping $1.55, or 43%.

The Wachovia deal will create the nation's third largest nationwide banking chain. The combined company is to be called Wells Fargo and will be based in San Francisco. It will have $1.42 trillion in assets, $787 billion in deposits and 280,000 employees.

"Wachovia is a solid name now. It's Wells Fargo paper," a sellside trader said.

Citigroup still plans to sue for damages but stepped aside after negotiations this week to try to carve up the Wachovia assets.

Regulators have already signed off on the Wells Fargo deal, and Wachovia will skip a shareholder vote to issue stock.

Among other banking names, Bank of America was "acting okay," with its stock a little better.

"People are hoping if they don't blow on it, nothing will happen," a sellsider said.

Overall activity was muted Friday compared to recent days.

"I have below-the-market buyers waiting to see if discount bids get hit. People are waiting. There's no panic calling like yesterday. People are sitting tight," an East Coast-based sellside trader said.

On Thursday, markets plunged in what looked like capitulation late in the session. The markets opened Friday only to free fall again. But they regained their footing early, before ending off for an eighth straight day.

The Dow Jones Industrial Average closed down just 128 points, or 1.5%, to 8,451. But the index has lost 22% over the last eight days, and convertibles players were hopeful that there were signs Friday that the market was making a bottom.

"Hopefully down 100, bouncing off 8K a few times, is the start of stabilization," a New York-based sellsider said.

There was other news not directly affecting convertibles but being watched all the same. Well-known financials analyst Dick Bove had made comments that Morgan Stanley would be hurt by the Lehman Brothers auction of credit default swaps held Friday. Slumping shares of the New York investment bank weighed on the market, sources said.

People are also watching developments among prime brokerages in regard to their cost of capital and treatment of convertible arbitrage players.

But on the positive side, they are hoping for some positive government intervention to be announced before the end of Sunday.

Chesapeake weakens further

Chesapeake Energy's 2.25% convertible senior notes due 2038 closed at 40 Friday versus a stock price of $16.52, compared with 66.25 against a share price of $33.80 on Oct. 1.

The Oklahoma City-based natural gas producer's 2.75% convertibles due 2035 were at 55 on Friday.

A double whammy of credit problems and falling natural gas prices has hurt Chesapeake and fueled speculation of further trouble ahead.

Late Friday, the company disclosed that its co-founder and chief executive, Aubrey McClendon, had been forced to sell substantially all his shares in the company to meet margin calls.

McClendon said in a prepared statement that he had frequently purchased shares of stock using margin loans from brokerages because of his complete confidence in the company.

Chesapeake said it would slash another $1.5 billion from its 2009 and 2010 capital budget and was also making additional cuts to its 2008 spending. The move came about three weeks after it announced it would cut $3.2 billion from its capital budget during that time.

Ford slumps lower

Ford Motor's 4.25% convertible senior notes due 2036 slumped to 25.25 by the close Friday, versus a stock price of $1.99. That compared to 31 versus a share price of $2.08 on Thursday.

Ford shares ended down nine cents, or 4.3%, after surging to $2.55 in morning trading and falling to a bottom at $1.88.

The Dearborn, Mich.-based automaker's shares tumbled on Thursday after Standard & Poor's warned the automaker's credit could fall further into junk status.

Investors have begun to speculate whether company will file for Chapter 11 bankruptcy protection, but both Ford and Detroit rival General Motors Corp. have offered assurances that they aren't considering that option.

Ford is in the midst of a multi-year operating turnaround and has shied away from predicting when it will have positive earnings, saying only that it's possible in 2010 when savings from its independent health care VEBA kick in, Gimme Credit high yield analyst Shelly Lombard noted in a research report Friday.

At the end of the second quarter, Ford had $26.6 billion of cash and $11.6 billion available on committed secured and unsecured lines of credit. Its liquidity took a hit when Lehman, a member of Ford's bank group, filed bankruptcy, Lombard said.

Barclays is buying some of Lehman's operations but it is unclear whether the $890 million of Ford's revolver that Lehman had committed to fund will be made available.

"It is also unclear how much of the recently approved federal loans Ford will be eligible for, but we are estimating $5 billion. So, minus the Lehman portion of the revolver, Ford has about $42 billion of actual and potential liquidity," Lombard wrote.

Ford appears to have enough liquidity to get through 2009 and into 2010. Of course the risk is that Ford's cash burn will increase, especially given that vehicle sales are projected to be down from 16 million in 2007 to roughly 13.5 million units this year and next, she added.

Mentioned in this article:

Wachovia Corp. NYSE: WB

Bank of America Corp. NYSE: BAC

Chesapeake Energy Corp. NYSE: CHK

Ford Motor Co. NYSE: F

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