Financials mostly steady as equities sink, then rally; Penn Virginia, energy names mostly weaker

By Rebecca Melvin

New York, Feb. 12 - Convertible bond prices mostly "held in" Thursday in light volume as equities sagged but then rallied late in the session after Reuters reported the Obama administration is considering a program to subsidize mortgage payments for homeowners at risk of foreclosure.

Financials were in focus, but not much was trading, sources said. The bonds of Prudential Financial Inc. and PNC Financial Services Group Inc. held gains, a New York-based sellside trader said.

Energy names were also in focus as oil prices continued to weaken and after independent natural gas and oil company Penn Virginia Corp. posted a very weak fourth quarter. Penn Virginia also has coal operations.

Crude oil for March delivery fell $1.97, or 5.5%, to $33.97 a barrel on the New York Mercantile Exchange.

Otherwise "it is deadly quiet," a New York-based sellside trader said during the session. Another trader complained of being bored.

PRU, PNC hold gains

The Prudential's floating-rate convertibles due 2037 were steady at 96.75 to 96.875.

Shares of the Newark, N.J.-based financial services and insurance company gyrated but then rallied to the close, ending up 86 cents, or 3.3%, to $26.76.

The 4% convertibles of PNC Financial, formerly of National City Corp., were steady at 93.5 mid-session. Shares of the Pittsburgh-based bank fell $1.87, or 7%, to $31.07.

The Bank of America Corp. convertible preferred shares were seen lower at about 360 compared to 378 on Wednesday. Meanwhile shares of the Charlotte, N.C.-based bank fell 20 cents, or 3.3%, to $5.87.

The Citigroup 6.5% convertible preferreds were seen settling around 12.15 on Thursday, from 13.2 on Wednesday, according to a pricing source. Shares of the New York-based financial services company settled 8 cents lower, or down 2%, at $3.61.

Uncertainty clouding the financial services sector has dominated sentiment of late. Players don't trust the balance sheets of the banks and are worried about the changing regulatory landscape. Many wonder how much more toxic waste is out there.

Niall Ferguson, a professor of Harvard and Oxford and an investment management consultant of GLG Investment Management, cites Nouriel Roubini, who puts U.S. banks' projected losses at $1.8 trillion.

"Even if that estimate is 40% too high, the banks' capital will still be wiped out. A Bad Bank could therefore represent another hole in U.S. public finances more than twice the size of the TARP. And all this is before any account is taken of the unfunded liabilities of the Medicare and Social Security systems, the net present value of which is estimated at around $60 trillion to $70 trillion," Ferguson said in a paper entitled, "Beyond the Age of Leverage: Alternative Cures for the Global Financial Crisis."

"With the economy contracting at a rate (excluding inventory accumulation) of minus 5%, we are on the eve of a public debt explosion which the CBO's forecast - $4 trillion over the next 10 years, but peaking at just 54% of GDP - surely understates. The fact that so many other countries are adopting comparable measures means that a flood of new issuance is about to hit national and international bond markets," Ferguson wrote.

Energy, coal paper mostly weaker

With weak earnings reports and crude oil hitting a three-week low in New York after a U.S. government report showed a bigger-than-expected increase in inventories, there was little to buoy energy convertibles on Thursday. But Peabody Energy Corp. looked a little better and Massey Energy Co. was flat.

Penn Virginia 4.5% convertibles due 2012 traded down to 69.9 after earlier having traded at 70 and as high as 71.5. Shares ended $2.19, or 10.3%, lower at $19.04.

The Radnor, Pa.-based energy company said its operating loss was $31.9 million, which was $77 million, or 171% lower than the $45.1 million of operating income in the fourth quarter of 2007, according to a release.

The decrease in operating income, excluding $51.8 million of non-cash impairments, was comprised of a $23.1 million decrease in oil and gas segment operating income and a $17.6 million decrease in natural gas midstream segment. The loss was offset in part by a $12.8 million increase in operating income from the coal and natural resource management segment, the company said.

The oil and gas segment operating income decreased by $43.1 million, including a $20 million impairment charge to an operating loss of $24.5 million in the fourth quarter of 2008.

Excluding the impairment charge, the segment operating loss was $4.5 million, or 124%, lower than the $18.6 million of segment operating income in the prior year quarter.

This decrease was due primarily to a $13.8 million, or 26%, increase in operating expenses and a $17.7 million increase in exploration expense.

Other energy paper, including the coal companies, of the convertibles universe, weren't demonstrating strength.

Alpha Natural Resources Inc. convertibles weren't seen in trade. International Coal Group Inc. was lower. Massey was flat, but Peabody was a little higher.

Alpha Natural's 2.375% convertible senior notes due April 2015 were last seen as 70.25 on Wednesday. Shares of the Abingdon, Va.-based coal company started the day lower but ended higher by $1.14, or 5.5%, at $22.06.

Massey Energy's 3.25% convertibles due 2015 were seen settling around 65. Shares of the Richmond, Va.-based coal producer gyrated but ended up by 1.6% to $14.42.

Higher in the coal sector were Peabody Energy's 4.75% convertible junior subordinated debentures due 2066, which were seen closing at 72.9 on Thursday, compared to 71.4 on Wednesday, according to a pricing source.

St. Louis-based Peabody shares closed up $1.03, or nearly 4%, at $28.41.

Mentioned in this article:

Alpha Natural Resources Inc. NYSE: ANR

Bank of America Corp. NYSE: BAC

Citigroup Inc. NYSE: C

International Coal Group Inc. NYSE: ICO

Massey Energy Co. NYSE: MEE

Peabody Energy Corp. NYSE: BTU

Penn Virginia Corp. NYSE: PVA

PNC Financial Services Group Inc. NYSE: PNC

Prudential Financial Inc. NYSE: PRU

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