Bank of America rallies on earnings; Countrywide firms as puts approach; Medtronic, Chesapeake gain

By Kenneth Lim

Boston, July 21 - Bank of America Corp. was a positive standout in an otherwise slow session for the convertible market on Monday.

Bank of America was higher after the company reported better than expected results. A conference call between the bank and investors also helped Countrywide Financial Corp.'s convertibles that are puttable in 2009 to improve slightly.

Medtronic Inc. gained slightly in the morning after news of Roche Holdings AG's acquisition of Genentech Inc. gave a boost to the biotech sector.

The convertible market in general had a sluggish outing to start the week.

"It was real busy in the morning, but just slowed down in the afternoon," a sellside desk analyst said. "Typical Monday afternoon in the summer, I guess."

Chesapeake Energy Corp.'s 2.25% convertible due 2038 continued to be active, and gained about 2 points outright as oil prices during the day.

"Chesapeake was mixed," the analyst said. "It's always an active name. Started out probably weaker in the morning, but ended up better as the day went on."

The Chesapeake convertible traded at 102.75 versus a stock price of $55.625 on Monday. Chesapeake common stock (NYSE: CHK) closed at $55.84, up by 2.78% or $1.51.

Chesapeake is an Oklahoma City-based natural gas production company.

Bank of America up on earnings

Bank of America's 7.25% convertible preferred gained 3 points outright on Monday after the company beat analysts' estimates in the second quarter.

The preferred traded at 93 against a stock price of $30, while Bank of America common stock (NYSE: BAC) closed at $28.52, a 3.75% or $1.03 improvement.

"The credit was a little better," a convertible analyst said. "The equities didn't do as well, but they were a little better again today."

Bank of America on Monday reported second-quarter net income of $3.41 billion, or 72 cents per share, a 41% year-on-year decline. But the figure beat targets set by analysts, who were expecting income of about 54 cents per share.

Bank of America is a Charlotte, N.C.-based bank.

In a conference call with analysts, Bank of America chief executive Kenneth Lewis on Monday said "credit costs are going up, but from what we see today, they are manageable."

Lewis also said he expects the U.S. economy to stabilize later in 2008 and to recover in 2009.

A sellside convertible trader said the news was not a big surprise but still helped to lift the mood on the Street.

"The other banks have also been reporting better than expected earnings, so I think a lot of guys were already half-expecting them to give pretty good numbers," the trader said. "It's definitely good news. It's comforting news. But it's gone up a lot, not just BAC, but a lot of the other banks especially after last week, and I'm not sure how long the rally's going to last. I'm not sure we're going to see last week happen again."

A sellside convertible analyst said the results helped to ease concerns about the bank's business, but the outlook remained challenging.

"I think the takeaway is that some of their problems may not be as big as thought, while others are still around," the analyst said.

"Countrywide doesn't seem to be as big of a problem now, mostly because most of the expected damage may have already been factored in, and they were guiding for some optimism on the consumer side, although the timeline on that looks like it's more for 2009 than this year.

"I think I'm more hopeful now that there won't be anymore big, bad surprises this year. It's still going to be a challenging year, but it sounds like there's a better chance now that there won't be anything people aren't already expecting anyway."

Countrywide get's slight boost

Investors were also hoping to get more clarity from Bank of America on whether it will guarantee Countrywide's convertible obligations, and the company on Monday maintained its slightly ambiguous position on the issue.

"We don't intend to guarantee the public debt but we do understand the ramifications of not paying that maturity," Bank of America chief financial officer Joe Price said Monday.

Bank of America acquired Countrywide on July 1, and the bank has consistently stopped short of guaranteeing Countrywide's debt issues.

Countrywide has two floating-rate convertible debentures outstanding. The series A convertible due April 2037, which pays a coupon of Libor minus 350 basis points, was seen at 97.25 on Monday, while the series B convertible due May 2037, which pays a coupon of Libor minus 225 bps, traded at 94.

The series A convertible may be put on Oct. 15, 2008, while the B series may be put on May 15, 2009. Holders of both notes will likely put the convertible back to the company because the conversion prices are too high.

"Anyone who isn't going to put them back...must have been on a drug binge," a convertible analyst quipped.

Despite Bank of America's ambiguous stance, the market generally believes that the bank will honor the puts, the analyst said.

"The company on the conference call still refused to say that they were guaranteeing the debt, but I think the general consensus is their position is unchanged," the analyst said.

"The feeling to this point has and continues to be that they will backstop the debt. If people aren't thinking that the bonds would be 40 to 50 points lower...My understanding is that, our fixed income guys looked at this and there's really no change. They find it a little curious that they haven't been more forceful in their language, but they will honor their obligations."

Another analyst agreed that Bank of America will likely pay up if the convertibles are put.

"I hear the semantics of them not fully guaranteeing the debt... but whether they say it or not, they own the company," the analyst said. "I don't see a realistic scenario where they don't pay it off. For the longer term securities it might make a difference, but especially the short ones, they'll pay them off."

Medtronic better with sector

Medtronic's convertibles were about ¼ point better early Monday as the biotech and healthcare sectors gained following Roche's offer to buy Genentech.

Medtronic's 1.5% convertible due 2011 traded at 108 against a stock price of $53.40 on Monday, while its 1.625% convertible due 2013 was seen at 108.75 versus the same stock price. Medtronic common stock (NYSE: MDT) slipped 0.24% or $0.13 to close at $53.30.

Medtronic is a Minneapolis-based maker of medical devices.

"Healthcare was a little more active in the light of the DNA [Genentech] deal, probably a little firmer," a convertible analyst said.

Roche offered $43.7 billion to buy up all the shares of Genentech that it does not already own, about $89 per Genentech share. Genentech does not have any convertibles outstanding, but the deal triggered optimism in the sector because of "just kind of what it means," the analyst said.

"It's just a positive data point," the analyst said. "Although Roche already owns a big portion, it's still a pretty sizable proposition."

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