AIG future hangs in the balance; Wachovia retraces some losses; Amgen convertibles up on drug data

By Rebecca Melvin

New York, Sept. 16 - The convertible bond market remained under pressure Tuesday, with sellers mostly prevailing, but with a few nibblers feeding on cheap paper as the future of American International Group Inc. hung in the balance and a day after the fate of Lehman Brothers Holdings Inc. was sealed through bankruptcy.

"There was a little bit of nibbling from outrights; there's been a little of that, and my hope is that there will be a little more of that," a Connecticut-based buysider said, referring not only to weakened financials, but also to technology and other sectors as well.

AIG remained a definite focus, with market participants responding to every whiff of news through the day. The mandatory convertibles closed up from their parity plus 1 midsession level, according to an East Coast-based sellside trader.

But they would have been weighed down, along with their underlying shares, after the close when reports hit the wires that the government was considering a conservatorship for the giant insurance company, although it has no legal authority for such an arrangement.

The beleaguered financial sector rallied late in the session amid speculation that the Fed would backstop an AIG loan package. Also after 2 p.m. ET, the Federal Open Market Committee stood pat on interest rates, leaving its target Federal Funds rate steady at 2%.

Wachovia Corp. convertible preferreds whipped around, trading down about 10 points early in the session but later retracing those losses as investors continue to weigh the fourth-largest U.S. bank's prospects.

Outside financials, Amgen Inc. convertibles traded higher mostly in line with the company's underlying shares in decent volume after the Thousand Oaks, Calif.-based biotechnology giant reported strong results from a trial of its experimental osteoporosis drug denosumab.

Overall, trading remained depressed. "It's only headache stuff" that people are looking at, a sellsider said.

AIG remains a focus

AIG's 8.5% mandatory convertible equity units due 2011 closed Tuesday at 9.7 versus a share price of $3.75, compared to Monday's 14 versus a share price of $4.76.

That compared to last Tuesday's 50.75 trades versus a stock price of $22.00. The units have a par price of $75.

Shares of New York-based AIG (NYSE: AIG) opened at $1.25 Tuesday and closed down $1.01, or 21%, at the $3.75.

Federal and Treasury officials continued to attempt to broker a deal that would shore up the foundering insurance giant. Meetings were underway at the Federal Reserve Bank of New York over whether $75 billion to $100 billion of loans could be secured to capitalize its books.

Whether a solution could be hammered out to keep the behemoth out of bankruptcy was debated, but two sources believed a pact in some form would be achieved.

"So far Mr. Paulson has been extremely creative. He will be able to figure a way to mitigate the impact on the financial system," a sellsider said.

A Connecticut-based buysider said "It's difficult to guess at, but I would believe there will be some level of governmental involvement. But what that will leave the preferred holder with is difficult to ascertain."

"It can't be analyzed with any fundamental work: that's not what drove AIG to this point. It's the market panic, and the spiral that's taken out almost every casualty so far," the buysider said.

"In some cases there's been reward and in others a virtual wipe out," he said, referring to Lehman and Fannie preferreds. On Tuesday, Fannie Mae was trading between 50 to 80 cents.

There's usually some value of residual trading, but in the case of Lehman and Fannie, it's virtually nothing, he said.

"The psychology has evolved over the past couple of months regarding these financial preferreds from the point that some of these institutions were too big to fail, and that analysis works at any point in the capital structure, to now, where they are getting a harder look, and people are differentiating between different points in the capital structure," the buysider said.

"Some have been beaten up so badly that they are worth a look. The risk reward is favorable, but there will be no big bets," he said.

Wachovia retraces some losses

Wachovia's 7.5% convertible perpetual preferred shares were at 47 bid during the session and was seen closing at 52 compared to 48 Monday.

Shares of the Charlotte, N.C.-based commercial bank ended higher by 80 cents, or 7.5%.

"In general, there is an awareness that they don't have the most problem-free balance sheet and they have become one of the institutions that has come under scrutiny despite the fact that it is a depository institution and a pretty large regional bank," a buysider said.

"With the variety of treatments that the preferreds have gotten, once you get the sense that it's going to go through with the workouts - people don't want to bet that they will be the target in any kind of takeout," he said.

In a CreditSights report published last month, analysts said a strategic merger would be a favorable outcome for Wachovia stock investors, whose holdings have been severely reduced in the year to date.

On Tuesday, Washington Mutual Inc. also went up with things in general, a sellsider said. And Citigroup Inc., which was down 0.50 point to 0.75 point during the session, trading at 34 versus a share price of $15.60, finished a little stronger.

Bank of America Corp. was pretty close to unchanged during the session and ended up 4.25 points to 522.44, a sellsider said.

Amgen gains on drug data

Amgen's 0.125% convertibles due 2011 (A tranche) closed at 98.8 versus a share price of $65.89, compared to 97.5 versus a share price of $62.19 on Monday.

The Amgen 0.375% convertibles due 2013 (B tranche) were seen trading around 95.5.

Shares of Amgen (Nasdaq: AMGN) closed up $3.70, or 6%, to $65.89.

Investors hope denosumab, which reduced the risk of spine fractures by 68% in a trial of 7,800 post menopausal women, could turn into a blockbuster and help offset declining sales of its flagship anemia drugs, which saw sales slump last year when studies showed a link to certain health risks.

© 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.