Countrywide, KKR Financial fall; VeriSign starts strong; Amgen slips; wider markets fall on news

By Evan Weinberger

New York, Aug. 15 - Tumbles in Countrywide Financial Corp. and KKR Financial Corp. convertibles and stock highlighted a day of steep drops on Wall Street Wednesday.

Amgen Inc. also saw its convertibles fall Wednesday and followed up a down day overall with a conference call distributing bad news.

While many investors stayed on the sidelines, as they have in recent days, one analyst said that there are signs that the convertibles market may pick up. "There were some bids out there," he said. "I think some people are starting to see there's some significant value out there."

One bright spot did emerge on the market as VeriSign, Inc. brought out its $1.1 billion in junior subordinated convertible debentures on the cheap end. The debentures, which have a $200 million greenshoe, carry a 3.25% coupon and an initial conversion premium of 20%. They were talked at a coupon of 2.75% to 3.25% and an initial conversion premium of 20% to 22.5%.

Despite dire predictions based on the length of the deal - a 30-year maturity with 10-year call protection but without any puts - the first bid out of the shoot on the debentures, which priced at par, was 99.75. But by the end of the day, the convertibles recouped some value and then some.

The company plans to use the proceeds to fund a stock repurchase.

That's more than can be said for the equities markets Wednesday. The Dow Jones Industrial Average held steady for most of the morning but eventually dropped heavily again. The index lost 167.45 points, or 1.29%, closing at 12,861.47.

The Nasdaq and the Standard & Poor's 500 followed the Dow's lead and then some. The Nasdaq gave back 40.29 points, or 1.61%, closing at 2,458.83. Both the Dow and the Nasdaq are at four-month lows.

But they're still doing better than the S&P 500, which is now down for the year. The index lost 19.84 points, or 1.39%, to close at 1,406.70.

The losses were due, in large part, to a Merrill Lynch report that downgraded Countrywide, America's largest mortgage lender, to "sell" - it had been a buy - and mentioned the "b" word - bankruptcy. Also, KKR Financial, the mortgage lending arm of private equity firm Kohlberg Kravis Roberts & Co., announced that it lost $40 million after buying back $5.1 billion in mortgages. There was also a down housing report from the National Association of Realtors, which said that sales of existing homes were down in 41 states for the third quarter.

"If anyone looks at anything cross-eyed, the market loses 50 points," one analyst said.

Countrywide stumbles

The two notable loss leaders on the New York Stock Exchange and the convertibles market were Countrywide and KKR Financial.

Calabasas, Calif.-based Countrywide was downgraded to sell from buy in a report released Wednesday by a Merrill Lynch analyst who had previously been backing the company. "It's a real about-face for this guy, who was really kind of bullish," a sellside analyst said.

The analyst said that the company risks serious problems if creditors make it sell assets on the cheap to repay debt or investor confidence is shaken in the company.

"If liquidations occur in a weak market, then it is possible for CFC to go bankrupt," the report says.

But market watchers note that the company is diversified - along with issuing somewhere around 20% of new mortgage loans, it has a private bank with $90 billion in assets - and that its mortgage debts qualify to be bought by Fannie Mae and Freddie Mac.

"They have other ways to generate capital to keep the business going," another analyst said.

In the end, the bankruptcy word grabbed all the headlines and caused investors to run away from Countrywide convertibles and stock.

"CFC converts have an appealing yield but an unattractive risk profile given the current liquidity crisis," a fund manager said.

The company's Libor plus 350 basis point series A convertible senior debentures due April 15, 2037 closed Wednesday at 85 versus a closing stock price of $21.29. That's down from a close of 89.5 versus a stock price of $24.46 on Tuesday.

Countrywide's Libor plus 225 bps series B convertible senior debentures also due April 15, 2037 also traded lower, closing the day at 82.5 versus a $21.29 stock price.

Countrywide stock (NYSE: CFC) sunk most of Wednesday before staging a mini rally. The stock closed down $3.17, or 12.96%. The stock was trading as low as around $19 early in the day.

KKR Financial tumbles

News that KKR Financial, an arm of private equity firm Kohlberg Kravis Roberts & Co. that specializes mainly in mortgage lending, sold off $5.1 billion worth of mortgages and lost $40 million on the deal made edgy investors scared.

Despite reassurances that the company is getting out of residential lending - it still holds about $58 billion in mortgages.

"In light of the level of disruption and volatility in commercial paper and broader credit markets, estimates of potential exposure are necessarily subject to future revision," KKR Financial said in a statement released Wednesday.

That sent investors to the exits. "They are very reliant on short-term financing to run their business," a convertibles analyst said.

But the actions announced by San Francisco-based KKR Financial, including the sale of nearly half the mortgages it owns, could lead to improvements, another analyst added.

"Based on what they did today, that's a step toward resolving the whole thing," he said.

KKR Financial's 7% convertible senior notes due 2015 were down big, one analyst said. The convertibles closed at 76 versus a closing stock price of $10.52.

The company's stock (NYSE: KFN) nosedived Wednesday, dropping $4.75, or 31.11%, on the day.

VeriSign provides bright spot

Being far away from the mortgage and financial sector probably helped the debut of VeriSign's 3.25% in junior subordinated convertible debentures, which hit the market Wednesday. The debentures came in at the cheap end, which probably didn't hurt either.

All of that balanced out the bad taste the lack of puts on a 30-year note left in many investors' mouths. That, and the chance for solid growth, sparked the rise. The question remains, however, how this convertible will trade in the future.

"As it has a high delta and came on partial hedge I am sure some hedgies made money," one fund manager who did not buy in on the deal said in an e-mail. "I do not see this bond doing much - large time value should (will?) make gamma trading this one a little difficult."

The debentures closed their first day of trading at 103.25 versus a closing stock price of $29.51.

The Mountain View, Calif.-based voice and data network services provider saw its stock (Nasdaq: VRSN) pick up 87 cents, or 3.04%, on the day.

Bad news from Amgen

The hits kept on coming for Thousand Oaks, Calif.-based pharmaceuticals maker Amgen.

The company's 0.125% convertible senior notes due Feb. 1, 2011 closed at 88.75 versus a closing stock price of $50.59. Those convertibles closed at 89.625 versus a stock price of $51.32 on Tuesday.

The series B tranche, with a coupon of 0.375% on convertible senior notes due Feb. 1, 2013, closed Wednesday at 86 versus a stock price of $50.59. They closed Tuesday at 86.75 versus a $51.32 stock price.

Amgen stock (Nasdaq: AMGN) closed down 73 cents, or 1.42%, on Wednesday.

In a conference call after market close, Amgen announced that it was laying off up to 2,600 workers, up to 14% of the workforce, and cut its earnings guidance because of a serious decline in sales of two of its anemia drugs.

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