Convertibles lifted with stocks' updraft; Ford, Chesapeake bounce; Sovereign higher on buyout talk

By Rebecca Melvin

New York, Oct. 13 - Some beaten-down convertible bond names bounced back on Monday as equities rallied sharply following an eight-day losing streak.

Trading of the hybrid convertible bonds was fairly quiet, however, as stocks made their moves without regular bond trading, which was closed for Columbus Day.

Ford Motor Co. convertibles rebounded amid more positive sentiment and rumors of a possible link up between two of the top three U.S. automakers or among other sector players. Specific talks were not confirmed by the automakers.

Ford's 4.25% convertible bonds due 2036 traded at about 32 on Monday, compared to 25 on Friday. General Motors Corp. convertibles also jumped.

Sovereign Bancorp Inc. convertibles improved - even though their underlying shares dropped back during the session - on news that the largest remaining U.S. savings and loan was in advanced talks with Banco Santander SA about a possible buyout by the Spanish bank.

The convertibles of two real estate investment trusts bumped higher, including istar Financial Inc. and KKR Financial Corp.

Natural gas producer Chesapeake Energy Corp. also reversed course as energy prices ticked upward.

On the New York Mercantile Exchange, crude oil for November delivery jumped $3.49, or 4.5%, to $81.19 a barrel, and natural gas for November delivery rose 15.3 cents, or 2.3%, to $6.688 per million British thermal units.

Natural gas futures dropped 11% last week and have retrenched 51% from a 30-month intraday high of $13.694 on July 2.

Chesapeake's 2.25% convertibles due 2038 traded at 45.7 versus a share price of $20.20 on Monday, compared to about 40 on Friday.

The astonishing market moves upward Monday - the Dow Jones Industrial Average surged 936 points, or 11% - were achieved on the back of new moves by U.S., European and Asian governments to support banks and restore confidence in financial markets.

Leaders of the 15 Euro-zone countries agreed to a plan that will guarantee loans between banks through 2009 and allow governments to buy stock in distressed financial companies. Britain said it would inject as much as $63 billion into three banks, including Royal Bank of Scotland.

The European Central Bank, the Bank of England and the Swiss National Bank announced they would lend unlimited amounts of dollars to banks.

The U.S. Treasury outlined details of a plan to buy troubled mortgage-related assets, recapitalize banks and guarantee interbank lending and loans.

Another positive development on Monday was Morgan Stanley's announcement that it was able to close a $9 billion deal with Mitsubishi UFJ Financial Group, giving that entity a 21% stake in Morgan Stanley.

Specifically, Mitsubishi UFJ acquired $7.8 billion of perpetual non-cumulative convertible preferred stock with a 10% dividend and a conversion price of $25.25 per share, and $1.2 billion of perpetual non-convertible preferred stock with a 10% dividend.

Ford makes U-turn

Ford Motor's 4.25% convertible senior notes due 2036 traded at about 32, or plus 6 points, versus a share price of $2.38 on Monday, compared to 25.25 versus a stock price of $1.99 on Friday.

The convertible paper, which was trading in the mid-60s a couple of weeks ago, has begun being quoted in points.

Chatter on Monday was that GM and Chrysler LLC, majority owned by Cerberus Capital Management, had held preliminary talks about a possible acquisition or combination. Neither automaker confirmed specific talks.

The New York Times reported that GM had approached Ford about a possible merger in July. But the struggling Dearborn, Mich.-based automaker had rejected the idea, and discussions ended last month.

Critics of potential tie-up plans say that they wouldn't resolve the liquidity issues afflicting automakers in the face of lagging sales.

Ford stock is now selling for pocket change, Shelly Lombard of Gimme Credit said in a research report Friday.

"It is, of course, being dragged down by this bear market we're in as well as the reality that, right now, most consumers are reluctant to buy a big ticket item like a car or are unable to get financing. So Ford's sales, both here and abroad, will decline and its operations will continue to burn through cash near term," Lombard said, noting that bond prices have hit new lows.

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.

Lombard estimated that Ford will be eligible for about $5 billion of recently approved federal loans, and that with that, minus the Lehman portion of its revolver, Ford has about $42 billion of actual and potential liquidity, which is enough to get the company into 2010, Lombard wrote.

Sovereign gains on takeover talk

Sovereign Bancorp 4.375% Trust Piers, or preferred income equity redeemable securities, due 2034 ended at 14.5 versus a share price of $3.68 on Monday, compared to 9 versus a share price of $3.81 on Friday.

Banco Santander said that it is in advanced talks to acquire full control of the Wyomissing, Pa., thrift.

One sellside trader said the convertible would be worth 50 if Santander buys the rest of Sovereign. But another sellsider argued that terms were uncertain.

He said if they have takeover protection, it assumes it's a takeover and not simply a wiping out of all equity classes and assumption of liabilities, which was the case with Washington Mutual.

iStar, KKR add with shares

iStar Financial's Libor plus 50 basis points senior floating-rate notes due 2012 traded at 45 on Monday compared to 44 on Friday. Shares of the New York-based commercial REIT surged 38 cents, or 35%, to $1.46.

KKR's 7% convertible senior notes due 2012 traded at 50 on Monday. The paper's indicated value was 68 compared to 65 on Friday.

Shares of the San Francisco-based REIT jumped 57 cents, or 17%, to $3.87 on Monday.

Mentioned in this article:

Ford Motor Co. NYSE: F

Chesapeake Energy Corp. NYSE: CHK

Sovereign Bancorp Inc. NYSE: SOV

iStar Financial Inc. NYSE: SFI

KKR Financial Inc. NYSE: KFN

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