Merrill Lynch sees better buyers; Ford adds, but GM mixed; Charming Shoppes, Watson edge higher

By Rebecca Melvin

New York, Nov. 25 - The convertible bond market saw quiet, pre-holiday trading Tuesday, with some activity in financial names marking a continuation of the sharp rebound in financials that helped drive a broad market rally over the previous two sessions.

Despite the fact that there's another trading day Wednesday before the Thanksgiving holiday, convertibles players said things were "getting quiet" on Tuesday.

Merrill Lynch & Co. and Prudential Financial Inc. were among financials that found better buyers in good two-way flow as financial news dominated headlines.

A day after news emerged that the government stepped in to rescue troubled Citigroup Inc. with a $20 billion capital injection and more than $300 billion in loan guarantees, Treasury secretary Henry Paulson announced further steps Tuesday involving hundreds of billions of dollars to alleviate the strained credit markets.

"I think the government has shown that it is not going to let any bank fail," a New York-based sellside trader said, adding that he thought financials would continue to be a leader in the market.

Ford Motor Co. gained handily as its shares jumped in strong volume, but General Motors Corp. was mixed. The U.S. auto industry's fate hangs in the balance as lawmakers expect to see more commitments from the automakers to change their business practices before they'll give them $25 billion in loans.

Charming Shoppes Inc. was about a point stronger outright, but mostly quiet after the women's apparel retailer reported a wider third-quarter loss and unveiled restructuring plans, including closing stores and ending its Lane Bryant catalog. Charming Shoppes shares traded 20% higher intraday but closed up by 10%.

News that Watson Pharmaceuticals Inc. will gain 17 generic drugs due to the proposed merger of Teva Pharmaceuticals Inc. and Barr Pharmaceuticals Inc. wasn't considered big news, a New York-based sellside trader said.

He saw no Watson bonds in trade, but they were seen 0.75 point better as their underlying shares added 1.3% in average trading.

Investors eye Merrill

Merrill Lynch's 0% convertible bonds due 2032 traded as high as 103.75 intraday and ended at about 103.5 following an early sale at 102.5.

"Someone sold a big piece at the wrong price. I wish I had known about it, I would have bought it at that price," a sellsider said.

Another trader said that "lots" of Merrill was trading around the 103.5 bid, 103.75 offered mark.

Shares of the New York investment bank, which is being purchased by Bank of America Corp., ended down 17 cents, or 1.5%, at $11.36.

"There were better buyers. I don't think there was ever any doubt that the deal would get done, but as you get closer to the deal, and with the vote on Dec. 5, it just increases motivation," a sellsider said, anticipating that the bonds will continue to accrete up to the 109 area until the deal closes.

Bank of America is acquiring New York-based Merrill, the world's largest and most widely recognized brokerage, in an all-stock deal under which Bank of America will exchange 0.8595 of a share of B of A for each Merrill share.

Prudential floaters pull higher

Prudential's floating-rate convertibles due 2037 traded at 87.5 to 88, with one New York-based convertibles player quoting a trade at 88, compared to Monday when they traded between 85.875 bid, 86.25 offered.

Prudential's floating-rate convertibles due 2036, which can be put back in 16 days, were reported trading at high as 99, according to one sellsider, compared to 97.875 bid, 98 offered on Monday.

Shares of the Newark, N.J.-based financial services and insurance company also rose, jumping $1.04, or 5.5%, to $19.99.

Under new government programs unveiled Tuesday, the Federal Reserve will extend up to $200 billion in non-recourse loans to holders of asset-backed securities backed by consumer and small-business loans. Related to this, the Treasury is providing $20 billion in credit protection to the Fed's $200 billion Term Asset Backed Securities Loan Facility.

It will also purchase up to $100 billion of debt issued by Fannie Mae and Freddie Mac and up to $500 billion in mortgage-backed securities backed by the government-sponsored entities.

Financials, which had been hit hard last week after the Treasury Department said it no longer planned to buy soured mortgage securities, have improved this week.

The government's steps were credited for playing a part in stabilizing the market. But another positive factor in the stabilizing of the convertibles space is participation by non-traditional investors that have come in and continue to come in, taking advantage of current pricing, traders said.

"We've certainly pinched outside the standard circle of investors, and that has paid off," a New York-based sellside trader said.

The non-traditional investors are more value oriented with lower premium, higher yield requirements, another trader said.

There are also large multi-strategy funds that were not previously involved in convertibles that are getting involved or will get involved in 2009, and that is making a difference. But the days of hedge fund dominance are gone, at least for the next few years, one trader said.

In other economic news, the updated reading on the economy's performance, released Tuesday by the Commerce Department, showed gross domestic product shrank a greater-than-expected 0.5% annual rate in the July-September quarter.

That was weaker than the 0.3% rate of decline first estimated a month ago and marked the worst rate since the economy contracted at a 1.4% pace in the third quarter of 2001.

Ford higher, GM mixed

Ford's 4.25% convertible due 2036 traded at 20.5 versus a share price of $1.67 on Tuesday, compared to a level of about 18 on Monday.

Shares of the Dearborn, Mich.-based automaker ended a penny lower from that level, but were up 10 cents, or 6.4%, on the day, closing at $1.66.

General Motors' 5.25% convertible due 2032 traded at 3 intraday and ended at 2.70, which was still up 5.6% on the day.

But the GM 6.25% convertible due 2033, which was higher intraday at 3.5, ended down at 2.97. The shorter-dated 4.5% convertible due 2032 slipped 6% to 3.

Detroit-based GM shares also ended lower, down 3 cents, or less that 1%, at $3.56.

Charming, Watson edge higher

Charming Shoppes' 1.125% convertibles due 2014 traded Tuesday at 36.55, compared to a level of 35.4 seen Monday.

Corona, Calif.-based Watson Pharmaceuticals' 1.75% convertibles due 2023 was quoted at 90 bid, 91 offered, compared to 89 bid, 90 offered on Monday.

Mentioned in this article:

Charming Shoppes Inc. Nasdaq: CHRS

Ford Motor Co. NYSE: F

General Motors Corp. NYSE: GM

Merrill Lynch & Co. Inc. NYSE: MER

Prudential Financial Inc. NYSE: PRU

Watson Pharmaceuticals Inc. NYSE: WPI

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