AIG slide goes on; Lehman lower ahead of possible sale; selling hits Countrywide; Transocean edges up

By Rebecca Melvin

New York, Sept. 12 - Recent downward pressure on American International Group Inc. escalated on Friday amid mounting uncertainty about the largest U.S. insurer's stabilizing strategy and potential pitfalls such as its exposure to credit default swaps.

AIG's $75 par mandatory convertible equity units, which priced in May, slid from the mid 40s through the 30s over the last two days, market sources said.

Lehman Brothers Holdings Inc. convertible preferreds also ground lower again Friday as its shares tallied a fall of more than 70% for the week.

Convertibles players weighed news reports that suggested a potential combination of Lehman with Bank of America Corp. or another large-balance sheet bank could be announced as early as the weekend.

"I think forget Lehman. If BAC does anything, they buy an asset, not the company. There's no way they assume LEH debt and pfds," a New York-based sellside trader said via e-mail.

A second sellsider agreed: "I don't think BofA will buy LEH either. Probably more than a few shareholders [are] still unhappy about that CFC acquisition."

Still independent research firm CreditSights in a report Friday said that such a sale would be positive for credit instruments, and that the combination would "catapult the new firm to the top of the fixed income league tables."

Bank of America preferreds extended gains for a second day after losing ground earlier in the week after the Fannie Mae and Freddie Mac bailout by the Treasury.

Citigroup Inc. also regained its footing, its convertibles adding about 0.375 point on a dollar neutral basis on Friday. But Countrywide Financial was under selling pressure.

There were few if any bright spots in Friday's convert market, sources said. Among non-financials, Hologic Inc. moved up in line with its shares for a second consecutive day, and Transocean Inc. was up about 0.5 point along with its shares as energy-services names gained. But the convertibles situation overall has been weaker.

"Drilling down into convertibles, because of the macro, accounts may be losing money, or in the process of losing money, and there is pressure to sell," a West Coast-based convertibles trader said.

"Any decent bid gets hit; people take advantage of it, and lighten up a bit. They're not interested in buying back deltas. If you can't buy back your stock, you take out one of the legs out of the whole strategy," he said.

AIG slide continues

AIG's 8.5% mandatory equity units due May 2011 traded at 35 versus $14 mid-session Friday, compared to trades at 37.35 versus $14.75 on Thursday.

Shares of the New York-based financial services and insurance company (NYSE: AIG) closed lower than the levels at which those trades went off, down $5.41, or 31%, at $12.14. The AIG mandatories were indicated to close lower too, at 29.

AIG shares have lost 45% in the last week as investors signaled they don't want to wait until the end of September for word about what the company, which has posted $18 billion in losses over the last three quarters, has planned for stabilization in the future. The company has an analyst day scheduled for Sept. 25, but that call may be moved up.

Standard & Poor's said late Friday it placed its ratings on AIG (AA-/A-1+) and subsidiaries on CreditWatch with negative implications following a significant decline in AIG's share price and an increase in credit spreads on the company's debt.

S&P believes that AIG has sufficient capital and liquidity to meet its policy obligations and potential collateral requirements, which are significantly greater than the expected cash losses on the mortgage-related assets, but the agency said additional market value losses will place some strain on the company's resources.

Given the movement in the share price and credit spreads, S&P now believes AIG's potential access to the capital market may be more restricted in the short term.

Lehman remains a focus

Lehman Brothers' convertible preferreds, which were a major focus of trade virtually all week, were active again on Friday. The Lehman 8.75% mandatory convertible preferreds were at 200 versus a stock price of $3.75, compared with 207 bid at $4.50 on Thursday.

The older Lehman preferreds were at 33 versus $3.75. Lehman's shares (NYSE: LEH) extended losses, closing down $0.57, or 14% to $3.65 in heavy volume. The equity's 52-week high is $67.73.

Bank of America's 52-week high and low are $52.96 and $18.44.

"Lehman believed that the markets would give the company a few months or so to make progress on the issues; the timeframe for a resolution now appears to have shortened dramatically," CreditSights said in its report.

"In our view, with Lehman now trading like a 'stub stock' with a closing price close to $4, the company's options have narrowed. At this point we think all bets are off for the key facets of the strategic plan as outlined by Lehman including a majority sale of Neuberger and a spin off problem real estate assets. Instead we feel the more probable solution is that Lehman will need to find a suitor to buy the entire company or make a major strategic investment within the next few days or weeks. Any likely buyer for Lehman would probably be a large financial services player, presumably with higher ratings than Lehman," CreditSights said.

"For Lehman shareholders, we cannot rule out a take-under scenario at lower than current market price. That said, possibly a bidder would be willing to pay a small premium such as $5 to $8 in order to gain the whole franchise," according to the report.

BofA, Citi better

Bank of America and Citigroup convertible preferred shares were both a little better on Friday after stumbling earlier in the week - a stumble suffered by almost the whole asset class after the Treasury's moves regarding Fannie and Freddie.

"How are people are going to issue new preferreds? They will have to be virtual bonds, but then they won't be tier one," a sellside trader said of the situation earlier in the week. "Nobody wants this paper; it can be offered all day."

But on Friday, the Citigroup 6.5% convertible preferreds were quoted at 39.75 bid, 40 offered near the close, versus a share price of $18.50. On Thursday, they opened up about 39 versus $18.05. That was up about 0.375 point after losing several points at the beginning of the week.

Countrywide moves a little lower

Countrywide Financial's floating-rate series A convertibles traded at 97.75 on Friday, compared to 97.75 bid, 98.125 offered on Thursday. The Countrywide series B paper traded at 93.75, after not having traded on Thursday, sources said.

Some accounts were shorting the Countrywide paper, one sellside trading source said Friday, amid uncertainty about whether Bank of America, which hasn't officially guaranteed the paper, will cover their upcoming puts.

The trader suggested that Bank of America's Countrywide subsidiary responsible for the paper may file for bankruptcy. But other convertibles players disagreed: "...I do not see them filing the sub. They went through with this deal for a reason," a Connecticut-based sellside trader said, suggesting the bank's reputation was on the line.

"And how could they even attempt to buy Lehman if they were to file this sub. It would be a non-starter. These bonds have an ugly history, trading into the 60s, and I know that people are on pins and needles with the structure, but they will get paid off. Upside versus downside does not look good which is why people are selling but in my opinion I don't see a way where they do not get paid off," he said.

A third sellside source, based in New York, said it wasn't obvious which way the Countrywide convertible puts would go.

"I think it's most likely that BAC would prefer to extend both the A's and the B's. Can they let it fail? I think FNM/FRE changed the landscape. There's no way BAC cuts the deal they did with CFC had the Treasury move on FNM/FRE occurred prior to the CFC/BAC deal. There are CFC preferreds out-trading FNM/FRE preferreds. There's no way BAC would buy the stock. No way, they assume the few preferreds," he said.

"In today's market, they grossly overpaid for CFC. I think they play hardball. They will tell the holders, 'we'll sweeten the paper, you'll give us more time.' This was structured to put CFC debt holders behind the eight ball. I think that's a card BAC could very well play," he said.

While Bank of America may want to extend the puts on the bonds, some agreed: "They will have to make it worth more than par so you make out better anyway," the Connecticut-based sellsider said.

"I think people are looking into this way too much.... They [BAC] are not going to play hardball with anyone. The convert holders are their clients," the trader said.

"This is a bank with a market cap of $150 billion. Yes, they may have overpaid given what is going on in the market now, but there is no upside in filing the sub. It would be a huge nightmare. They paid off other CFC bonds just in the last week or so. Why not this one? I don't know what the big deal is. I guess we will find out soon enough," he said.

The put on the series A convertibles is Oct. 15.

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