Financials in focus, Lehman, Wachovia up, Countrywide loses; Chesapeake adds; ProLogis quiet on debut

By Rebecca Melvin

New York, May 2 - Convertibles in the financial sector gave back about half their early gains after an initial rally Friday; but they were still the session's major feature after a surprisingly good jobs report lifted markets overall, convertibles players said.

News that the Federal Reserve will work with European central banks to help loosen tight credit markets also helped lift markets initially.

The convertible preferreds of Lehman Brothers Holdings Inc. and Wachovia Corp. led the sector upward, followed by Bank of America Corp. and Citigroup Inc.

"I'd say financials were up about a point on the day, dollar neutral, but they came back about half a point in the afternoon," a Boston-based buyside trader said

A notable exception to the upward move was Countrywide Financial Corp., which wavered and then lost ground after news - or some would say non-news - regarding Bank of America's intentions about honoring the ailing mortgage lender's debt.

"They haven't reacted strongly to the 'quote, unquote' news," a New York-based sellside desk analyst said, regarding early trading of the Countrywide's two floating-rate convertible debentures.

"But then I was shocked by the S&P news that they downgraded CFC based on the financial filing," he said. "They're saying nothing that they haven't already been saying for months. It's almost idiotic."

Energy names also gained on Friday for the first time in about a week as oil prices bounced. One buysider said he used it as an opportunity to do some trimming of energy names in his portfolio, which is about 20% energy and materials and 80% other sectors.

"I sold into strength," the New York-based buysider said.

Resuscitated energy names included Nabors Industries Inc, and Transocean Inc., which gained outright with higher oil. Chesapeake Energy Corp. also saw gains after the natural gas-play reported strong earnings.

Energy's move was also attributed at least partly to the Labor Department's non-farm payrolls report, which showed fewer then expected jobs were lost in April and the jobless rate fell to 5% from 5.1% in March, indicating that energy demand may remain stronger than previously thought if the U.S. economy doesn't slow that much, as the latest data suggested might be the case.

Meanwhile the new ProLogis 2.625% convertibles, which were offered at a discount of 99, weren't seen in trade on their release to the secondary market, according to trading sources. But a syndicate source said that the bonds were trading early at 99.75 bid, 100.25 offered, versus a share price of $62.97.

ProLogis priced an upsized $500 million of 30-year convertible senior notes after the market close on Thursday.

The offering, which was initially expected to be for $350 million, priced toward the cheap end of talk for the coupon, which was for 2.25% to 2.75%, and toward the cheap end of talk for the initial conversion premium, which was 20% to 25%.

Financials better

Lehman Brothers' 7.25% series P convertible preferred stock was active, cited as high as 1,270 versus a share price of $47.50 earlier Friday. Investment banks rose as a sector amid favorable jobs data and news of another move by the Federal Reserve to further help loosen tight credit markets.

The preferreds closed off their highs, however, at about 1,255.19 versus a share price of $47.02 Friday, compared to a close of 1,245.26 versus a share price of $46.93 on Thursday.

Shares of the New York-based investment bank (NYSE: LEH) ended flat on the day.

The Wachovia 7.5% series L perpetual convertible preferreds ended a bit better at 1,168.5 versus a share price of $30.08 on Friday, compared with a price of 1,167 versus a share price of $30.04 on Thursday.

Shares of the Charlotte, N.C.-based bank (NYSE: WB) also ended flat on the day.

Bank of America's 7.25% series L perpetual convertible preferred closed at 1,081 versus a share price of $39.79, compared with 1,071 versus a share price of $39.39 on Thursday.

Shares of the Charlotte, N.C.-based bank (NYSE: BAC) added 1% for the day.

"Wachovia, Lehman were about a point better. It's a good market, with credit tightening," a buysider said.

"Spreads are coming back, and if there's continued volatility, it's setting up to be a profitable year in convertibles," a Connecticut-based sellside analyst said. "If you kept your dry powder, if you have your money in, it looks like it's setting up to be a convert kind of market."

Other financial names in trade on Friday were the convertible preferred shares of SLM Corp., better known as Sallie Mae, which traded at 1,070, versus a share price of $21, and iStar Financial Inc., which traded at 86 versus $22.

The CIT Group Inc. 8.75% perpetual convertible preferreds traded at 64.5 versus a share price of $12.96, and the older, out of the money, CIT mandatory series Z convertibles were at 11.75. The older paper was issued when the stock much higher.

Countrywide moves wide

Countrywide's convertibles wavered, then moved lower on Friday after Bank of America said in a filing it may not guarantee Countrywide's debt after taking over the mortgage lender. Later Standard & Poor's downgraded Countrywide, marking a reversal from earlier in the week when the rating agency indicated it might raise Countrywide's rating to match Bank of America's.

"There was no assurance that any such debt would be redeemed, assumed or guaranteed," the bank's April 30 regulatory filing stated.

"That, to me, is the exact same thing as from the get-go," a convertibles analyst said after reading the wording of the statement.

"There is no way that they can basically assume the assets of this company without the liabilities, and let them founder and the people who are holding them get nothing," he said.

"What S&P did is utterly senseless...and I think the Bloomberg article this morning was way off base. In fact, if anything, you could turn this on its side, and this increases the likelihood that the deal gets done."

A second New York-based sellside analyst pointed out that the credit default swaps for Countrywide pushed out about 80 bps, much wider than those for Bank of America, indicating the expectation is that Bank of America might not guarantee the debt. The option adjusted spread on the Countrywide A convertibles was 1,300 bps over, he said.

A New York-buysider said he sold his Countrywide convertible bonds early Friday on the basis that Bank of America might not be supporting the debt.

"The asymmetry is very poor," he said, referring to more downside potential than upside.

The Countrywide Libor minus 350 basis points series A convertible debentures due 2037 closed at about 91 versus $5.98, compared to 94 versus a share price of $6.05 on Thursday. A second source called the A series bonds 92.5 at about 3 p.m.

The Countrywide Libor minus 225 basis points series B convertibles closed at 90.5 versus the same share price on Friday, compared with 93.4 on Thursday.

Shares of the Calabasas, Calif.-based lender (NYSE: CFC) closed off its lows, down 7 cents, or 1.2%.

Chesapeake reverts to gains

The convertibles Chesapeake Energy added about 5 points outright on Friday after the Oklahoma City-based natural gas company reported strong earnings.

The Chesapeake 2.75% convertible senior notes due 3036 closed at 148.5, versus a share price of $52.67, compared to 142.5 versus a share price of $50.93 on Thursday.

Chesapeake, which has been trending up since the beginning of the year, was lower the last few days, and popped up again Friday. The shares (NYSE: CHK) gained $1.74, or 3.4%.

"I sold Nabors Industries and Superior Energy, but I didn't sell any Chesapeake," a buysider said, citing a positive look for natural gas.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.