CompuCredit falls on sector troubles; Amgen gains on upgrade; EMC drops with stock; Barnes plans deal

By Kenneth Lim

Boston, March 5 - CompuCredit Corp. fell outright on Monday as new regulatory scrutiny and major losses rattled investors in the sub-prime lending sector.

Amgen Inc. rose following a stock upgrade and continued interest in investment-grade names.

In the primary market, Barnes Group Inc. announced plans for $85 million of 20-year convertible senior subordinated notes, which are expected to price Tuesday after the market closes.

The market in general was active on Monday as equity markets fell after a tumultuous preceding week. The Dow Jones Industrial Average fell 63.69 points, or 0.53%, to 12,050.41, while the Standard & Poor's 500 index lost 13.05 points, or 0.94%, to close at 1,374.12.

EMC Corp.'s 1.75% convertible due 2011 slipped ¾ point to trade at 106.625 against a stock price of $13.45, while its 1.75% convertible due 2013 changed hands at 106.9 versus the same stock price. EMC stock (NYSE: EMC) closed at $13.39, down by 1.25% or 17 cents.

EMC is a Hopkinton, Mass.-based provider of information infrastructure technologies and solutions.

"We're seeing lots of high-grade or investment-grade vega names," a buyside convertible trader said. "Lots of EMCs, some Amgens. The regular culprits...They're still a little better to buy."

CompuCredit falls with sector

CompuCredit's 5.875% convertible due 2035 fell about 4 points outright from week-ago levels after the stock tumbled along with other names in the sub-prime sector.

The convertible traded at 88.25 against a stock price of $29. CompuCredit stock (Nasdaq: CCRT) fell 6.85% or $2.07 to close at $28.16.

"The sub-prime names were getting whacked," a convertible trader said.

Regulators on Friday proposed stricter guidelines for sub-prime home mortgage loans. Sub-prime home mortgage lenders should assess the ability of borrowers to cope with higher interest rates rather than just the marketed rates, the regulators said.

The proposed guidance came after troubles at two major lenders. New Century Financial Corp. said it is under a criminal probe into its accounts and trading in its stock, while Fremont General Corp. said it may sell its sub-prime business after receiving a cease-and-desist order from the Federal Deposit Insurance Corp. over alleged violations.

Neither New Century nor Fremont have outstanding convertibles, and the impact on the convertible universe should be limited, a sellside convertible analyst said.

"In converts there's not really much that's pure sub-prime [mortgage] lending," the analyst said. "It tends to be in a different way...They're all down across the board and it's kind of messy, but in terms of the ones that are going to have huge exposure, it's really limited to the New Centuries and outfits like that."

The analyst said that although CompuCredit lends money to sub-prime borrowers, its focus is not on mortgages and it charges high enough rates to cover the risks.

"They've been down too, but their whole business model has been on unsecured credit and like in CompuCredit's case, it's a lower quality borrower than even those in sub-prime," the analyst said. "Their business model is really based on the lowest of lowest quality borrowers. But they charge enormous spreads on their portfolios."

"I think the reason why sub-prime is having a problem that the rest aren't is, if you're giving someone a secured loan on an inflated property valuation on low interest rates and the value of the property drops and/or the rate on their loans reset and they can't refinance anymore because the loan payments will be too high, that creates a problem that's different from like CompuCredit," the analyst explained. "They're lending people a few hundred bucks. A lot of their customers weren't even in a position to buy a house. They shouldn't be squeezed the same way. Because they loan really small amounts of money at exorbitant margins, they have a relatively high level of default built in."

Regardless of the limited exposure, CompuCredit has taken a hit with the rest of the sector.

"This was a $40 stock back at the end of the year," the analyst said. "They've definitely been hit hard, so probably that's something that's going to take the bonds down as well just on the stock price...I think right now what's happening is there are some holders who just don't want to wait around to find out how long this will last, or they've made their money and they're just going to close it out, like if you hedged it when it was $40."

It will take some time for the dust to settle, the analyst said.

"I think the best that can be said is that you'll have some additional volatility for a while," the analyst said.

But the analyst added that there is a chance that CompuCredit's slide is overdone.

"I don't think people have thought enough or believe enough to know when it's going to stop," the analyst said. "They're going to look at any company that's exposed to a low-quality borrower and they're going to be tough on it. It doesn't take more than a mention in the same article to take a name down...Now it's all sort of snowballing, and it will probably get overdone at some point. The problem with these things is the market reaction is sometimes harsher than what you really need to solve the problem."

Amgen gains on upgrade

Amgen was higher outright after the stock was upgraded by a Credit Suisse equity analyst.

The Amgen 0.125% convertible due 2011 gained ¼ point to trade at 96.75 against a stock price of $62.875. The 0.375% convertible due 2013 was also higher by ¼ point at 96.5 versus a stock price of $62. Amgen stock (Nasdaq: AMGN) ended at $62.16, up by 0.66% or 41 cents.

"Amgen was up slightly, which was decent today," a sellside convertible trader said. "They got an upgrade at Credit Suisse."

Credit Suisse analyst Michael Aberman raised Amgen's rating to neutral from outperform, saying that the stock's decline over the past months have brought valuations down to more palatable levels. Amgen faces upside if a new rival anemia drug by Roche does not make it to market, Aberman wrote. But success by Roche's drug could pull the stock even lower than current levels, Aberman wrote. Aberman has a $63 target on the stock.

"We remain sellers on strength above our target but would consider buying stock as the stock hits the $50s," Aberman added.

Barnes launches deal

Barnes Group announced an $85 million offering of 20-year convertible senior subordinated notes that is expected to price Tuesday after the market closes.

The notes, which will be offered at par, are talked at a coupon of 3.125% to 3.625% and an initial conversion premium of 32.5% to 37.5%.

There is an over-allotment option for a further $15 million.

Banc of America is the bookrunner for the Rule 144A offering.

Barnes, a Bristol, Conn.-based maker of aerospace and industrial products, said it will use the proceeds of the deal to repay an outstanding revolving debt.

Barnes stock (NYSE: B) slipped 2.53% or 53 cents to $20.42 in after-hours trading following the announcement of the deal.

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