Ocwen, AmeriCredit lower, Countrywide stabilizes on rate concerns; Sirius gains

By Ronda Fears

Nashville, Oct. 22 - Concern about interest rates, earnings results and the anticipation of lower earnings down the road put pressure on financial sector convertibles Friday, particularly mortgage and auto lenders, a sellside market source said.

"Rates in the credit market [Treasuries] actually were a non-event Friday, but the overall impact of higher interest rates is beginning to show in the lending sector, mortgages especially, and the auto group, too," he said. "It's weighing on the markets, in general, I think."

In the mortgage lending group, Ocwen Financial Corp. fell again hard Friday, although Countrywide Financial Corp. stabilized after a sharp decline on its earnings and outlook mid-week.

Auto loan company AmeriCredit Corp. also dropped sharply Friday on its earnings and outlook. Ford Motor Co and General Motors Corp. were lower, too, as both automakers' results have been carried by their respective lending arms.

Issues moving higher were rare in the session, as stocks fell sharply as weak earnings from some giants like Microsoft Corp. weighed on the markets along with crude oil futures topping $55 a barrel. But, Sirius Satellite Radio Inc. was still finding buyers for its new convertible, and the issue rose 1 to 2 points.

AmeriCredit, Ford, GM off

AmeriCredit reported third-quarter net income of $68.8 million, or 43 cents a share, beating analysts' consensus estimate and nearly doubling year-ago profits of $33.3 million, or 21 cents a share. But lower auto sales dimmed the market's reaction to the results.

AmeriCredit's 1.75% convertible plunged 8 points to 115 bid, 116 offered while the stock fell $1.54, or 7.82%, to $18.15.

The company posted an 18% gain in revenue to $340 million from third quarter 2003, with finance charges rising 28% to $269.9 million while servicing income fell 14% to $59.4 million. Vehicle loan originations increased 46% to $1.09 billion, compared with $745.1 million a year earlier.

Looking forward, AmeriCredit forecast 2004 net income will amount to $230 million, or $1.44 a share, to $250 million, or $1.56 a share. That compares with 2003 profit of $1.42 per share on $1.22 billion in revenue.

But a sellside trader said rising interest rates are expected to curtail auto sales and that will hurt AmeriCredit, as well as Ford and GM.

Ford's 6.5% convertible trust preferred dropped 0.15 point to 49.5, he said. Ford shares closed Friday off 9 cents, or 0.69%, to $12.97.

GM's convertibles were similarly lower, and GM shares ended off 27 cents, or 0.71%, to $37.81.

Ocwen tax surprise buried

Ocwen Financial Corp. earlier this week reported a big surge in third-quarter net income - $39.3 million versus $4.6 million a year before - and a "nice tax benefit" but a convertibles trader said investors couldn't overcome concerns about interest rates.

The Ocwen 3.25% convertible fell another 3.5 points or so on Friday, he said, after falling by the same amount on Thursday. The issue settled out Friday at 96 bid, 97 offered while the underlying stock lost 74 cents, or 8.72%, to $7.75.

On Wednesday, the West Palm Beach, Fla.-based specialty mortgage lender reported third-quarter net income of $39.3 million, or 61 cents a share, up sharply from net income of $4.6 million, or 7 cents a share, in the third quarter 2003. Part of the improvement was due to a net tax benefit of $31.8 million, reflecting the partial reversal of $37 million of the valuation allowance on deferred tax assets that had been provided in prior years.

Part of Ocwen's decline, the trader said, was in sympathy with a big drop for Countrywide on Thursday, although Countrywide steadied on Friday.

"Countrywide, being so big, [the largest independent U.S. mortgage lender] is a bellwether for the whole group so when they fall, everyone else falls," the trader said.

Countrywide's 0% convertible on Friday was basically unchanged at 155 bid, he said, after falling as much as 4 points on Wednesday. The huge mortgage company posted a 47% drop in quarterly earnings and cut its outlook as mortgage refinancings fell and interest rates climbed.

Countrywide has scheduled a conference call on its outlook for noon ET on Nov. 3.

Sirius exposure worth risk

One of the bright spots of the session was the new issue of Sirius, though, which continues to find some buying interest, which a buyside source seemed to indicate that investors believe the exposure to the story is worth the risk.

"Now that Ford is pushing the satellite radio in all new cars, SIRI should pick up enough customers to survive," said a hedge fund source who participated in the latest Sirius convertible offering.

"At first I was a non-believer, but once I got a receiver in my car, I will not listen to anything else. Howard Stern probably does more to raise the profile of satellite radio than anything else, since who knows how many people would actually sign on for Howard alone."

Ford, the second U.S. automaker, announced earlier this week that it is targeting up to 20 of its vehicle lines for factory installations of Sirius over the next two years and plans to expand the availability of Sirius as a dealer-installed option this fall.

Sirius is targeting 1 million subscribers by the end of 2004 and recently got a boost by signing on controversial shock jock Howard Stern, who will begin broadcasting on Sirius Satellite in 2006. The new Sirius convertible was sold on the heels of announcing the Stern deal. Sirius has about 600,000 subscribers, behind rival XM Satellite Radio Holdings Inc.'s 2.5 million.

"As an example [of the possible Howard Stern impact], maybe Ford's decision was in part based on the hoopla over Howard," the hedge fund source said. "So, the free publicity is probably worth more than anything. Some people are also talking about getting other paid premium channels on satellite radio like HBO and Showtime. I'm not counting on that, but that does keep hope alive in the stock."

In any event, he said, "it's a great trading position."

Sirius' new 3.25% convertible gained 1 to 2 points on Friday, a sellside trader said. The issue closed Friday at 106 bid, 107 offered, as the stock rose 7 cents, or 1.82%, to $3.91.

Volatility plays increase on dip

Even with volatility remaining historically low, overall, Lehman Brothers convertible analysts are finding an increasing number of opportunities for vol plays. On Friday market volatility rose but remains historically very low. The VIX market volatility index was at 15.15 and the Nasdaq volatility index at 21.11. Both indexes were up about 4% on Friday.

With volatility running below average, if one has a positive outlook on the underlying stock, the analysts suggested buying calls if holding the Cox Communications 0.43% due 2020, American Express 1.85% due 2033, SLM Corp. 1.61% due 2035, Franklin Resources 0% due 2031, Verizon. 0.11% due 2021, Carnival 2% due 2021, Carnival 0% due 2021, Carnival 1.13% due 2033, Costco 0% due 2017, Wells Fargo 1.44% due 2033, Masco 0% due 2031, Centurytel 4.75% due 2032, CSX Corp. 0% due 2021, Liberty Media/Sprint 4.57% due 2029, Liberty Media/Sprint 4.17% due 2030, Tyco 2.75% due 2018 or Tyco 3.125% due 2023.

If one has a negative outlook on the underlying stock, with volatility running below average, the analysts suggested buying puts if holding the Costco 0% due 2017, Lowe's 0% due 2021, Lowe's 0.86% due 2021 or Dominion Resources 2.125% due 2023.

With volatility running above average, if one has a negative outlook on the underlying stock, the analysts suggested selling calls if holding any of the three Chiron convertibles - the 2.75% due 2034, 1.625% due 2033 and 0% due 2031.

If one has a positive outlook on the underlying stock, with volatility running above average, the analysts suggested selling puts if holding either of the Devon Energy exchangeables into ChevronTexaco stock - the 4.90% due 2008 or 4.95% due 2008.

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