Convertibles mixed as rally gives way to profit taking; Newmont, Freeport-McMoRan mostly lower

By Rebecca Melvin

New York, Oct. 14 - Financial convertibles moved higher early Tuesday after more details of the U.S. government's financial rescue plan were unveiled, including an initiative to buy $250 billion of preferred stock in U.S. financial institutions.

Although liquidity improved, the market was mixed overall, and once a rally in stocks faded, sellers stepped in aggressively.

"It hit everywhere," a New York-based sellside trader said. "Selling was led by the loan market and trickled down to corporates....Things were moving."

Bank of America Corp., which is among nine major banks kicking off the government stock purchase program, jumped in early trade, then retraced some gains but still ended better on the day.

Sovereign Bancorp Inc. convertible preferreds jumped to $25 per share after news that Banco Santander SA had bought out the Pennsylvania-based thrift, as expected.

Santander's $1.9 billion in stock takeover was disappointing for convertibles players, compared to a cash deal, which would have triggered a change-of-control put at $50 per preferred.

XL Capital Ltd. didn't zoom up with its underlying shares early Tuesday but was a little higher at 17, compared to a recent level of 13.

The Bermuda-based insurance company said it expects a quarterly loss of $1.65 billion to $1.67 billion and said that its chairman had to sell about 80% of his common shares involuntarily last week to meet a margin loan call.

Mining companies were active. Freeport-McMoRan Copper & Gold Inc. was down from Monday but was better than last week; and Newmont Mining Corp. convertible issues were mixed.

B of A moves higher

Bank of America's 7.25% series L convertible preferreds traded at 800 versus a share price of $25.75 early in the session. Shares climbed another 78 cents from that trade to end up $3.74, or 16%, to $26.53. In the middle of last week, the B of A convertible preferreds were at 700 versus a $22.00 stock handle.

Financials were described as soaring early in the session by a New York-based buysider.

Bank of America is one of nine banks in which the government is set to buy preferred shares. Government officials said that they didn't want to get involved in owning pieces of banks but that it was necessary to ensure that Americans have access to financing. A big fear is that if small businesses don't have access to credit, they will shut their doors, contributing to rising unemployment.

The Treasury Department said under the program participating financial institutions will be subject to more stringent executive compensation rules for the period during which Treasury holds equity.

Banks must elect to participate before Nov. 14, and nine "healthy" financial institutions have already agreed to the program, Treasury secretary Hank Paulson said Tuesday.

Other initial banks include Goldman Sachs, Morgan Stanley, Citigroup, JPMorgan Chase, Wells Fargo, State Street and Bank of New York Mellon

The preferred shares will have a dividend of 5% that rises to 9% after five years, thereby encouraging the banks to buy back the shares and limiting the program.

Other measures that were more fully outlined include government guarantees of new bank debt and expanded insurance for non-interest-bearing accounts. The government also unveiled details on a plan to backstop the commercial paper market.

Sovereign jumps on Santander deal

Sovereign's 4.375% Trust Piers (preferred income equity redeemable securities) due 2034 jumped to 25 versus a share price of $3.70 on Tuesday, compared to 14.5 versus a share price of $3.68 on Monday.

Shares of the Wyomissing, Pa.-based savings and loan ended lower by 23 cents, or 6%, at $3.45.

"With Santander yielding in the 8s, that's about where it's at," a New York-based sellside desk analyst said about the Sovereign paper trading at $25.

Santander agreed to take over the 76% of Sovereign that it didn't already own for $1.9 billion in stock. Sovereign is concentrated in the mid-Atlantic and northeastern United States, with $79 billion in assets and 750 branches.

For the quarter ended Sept. 30, Sovereign had a net loss of $982 million, or $1.48 per share. Included in this loss was the previously announced impairment charge on Sovereign's Fannie Mae and Freddie Mac perpetual preferred stock of $575 million and a loss of $602 million related to the sale of its entire portfolio of collateralized debt obligations.

Excluding the after-tax impact of the aforementioned investment losses, Sovereign still generated net income of $41.3 million even after recording a provision for credit losses of $304 million, an increase of $141.5 million from the same period a year ago. This compares to net income of $58.2 million, or 11 cents per diluted share, in the third quarter of 2007.

Moody's Investors Service placed Sovereign's debt and deposit ratings under review for possible upgrade. And Fitch Ratings placed its long-term and short-term issuer default ratings on rating watch positive following the deal.

Moody's also changed the direction of its review of Sovereign Bank's C- bank financial strength rating to direction uncertain, the agency said, adding that on Sept. 30, the bank strength had been placed on review for possible downgrade.

XL mandatories edge higher

XL Capital's 10.75% mandatory due August 2011, which priced on July 29 at par of $25, traded at $17 versus a share price of $11.00 on Tuesday, compared to recent trades of about $13.

The XL Capital 7% equity units due February 2009 weren't heard in trade Tuesday but were indicated at 4.59 versus 3.45. Last Thursday, the 7s were at 1.70.

"Why did XL tumble? Could it have been the margin calls that forced chairman Brian M. O'Hara to sell?" a New York-based buysider said.

"I had pledged those shares as collateral to secure a personal loan used to fund purchases of XL shares in order to avoid the expiration of certain options. The forced sale was due to the precipitous drop in XL's share price last week," the chairman said in a statement Tuesday.

XL Capital estimated a third-quarter net loss of $6.08 to $6.17 per share, compared with a net income of $1.82 per share in the year-earlier quarter. But excluding one-time items, the company's estimated income is better than analysts' estimates.

Standard & Poor's Equity Research raised XL Capital to "buy" from "hold" saying the insurer was trading at around 70% of its estimated 2008 book value, a discount compared to peers.

Shares of XL Capital surged $4.11, or 55%, to $11.54.

Freeport, Newmont trade mixed

Freeport-McMoRan's 6.75% mandatory convertible preferred due May 2010, which was being quoted in points over parity, was plus 5 points, or about 64, versus a share price of $43.00 on Tuesday.

That compared to a pre-open quote Friday at 59 bid, 60 offered versus a share price of $38.41.

Shares of the copper and gold producer fell $4.43, or nearly 10%, to $40.94 on Tuesday.

Newmont Mining's 1.25% convertible due 2014 traded at 88 versus a share price of $32.00 on Tuesday.

Newmont Mining's 1.625% convertible senior notes due 2017 traded at 82, also versus the $32.00 share price. On Friday, the 1.625% notes traded at 79.181 versus a share price of $30.19.

Shares of the Denver-based gold mining company ended up 2.5% at $31.87 for the day.

Mentioned in this article:

Bank of America Corp. NYSE: BAC

Sovereign Bancorp Inc. NYSE: SOV

XL Capital Ltd. NYSE: XL

Freeport-McMoRan Copper & Gold Inc. NYSE: FCX

Newmont Mining Corp. NYSE: NEM

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