CIT, Countrywide convertibles edge downward; CapitalSource drops harder, but National City gains

By Rebecca Melvin

New York, Oct. 2 - The convertible bond market was weak Thursday, with financial paper in play and mostly drifting lower, as economic data pointed more insistently to further weakening in the U.S. economy and as the government rescue plan's outcome remained in question.

Late Wednesday, the U.S. Senate passed its version of a $700 billion asset purchase plan and the Securities and Exchange Commission extended a short-sale ban on financials until Oct. 17, or until three days after a financial package is passed.

Traders spoke of equity players coming into the convertibles market and "poking around." But overall it was "another bad day," with lots of sell interest and not many buyers, a New York-based sellside desk analyst said.

The day offered little in the way of data to encourage investors. Jobless claims for the week ended Sept. 27 increased to their highest level since after the Sept. 11 terrorist attacks, with the Labor Department attributing the rise to a weakening economy and the impact of Hurricanes Ike and Gustav.

August factory orders declined a steeper-than-expected 4%, led by declines in aircraft orders and autos, the Commerce Department said.

In addition, the Institute for Supply Management on Wednesday revealed a troubling drop in new orders, with the index of manufacturing activity falling to 43.5 in September from 49.9 in August. The Street had expected a reading of 49.5.

CIT Group Inc.'s convertible preferreds were in trade and down about 0.125 point as the overall financial sector succumbed to selling pressure once again.

The mandatory preferreds of asset manager Legg Mason Inc. also eased, as did the floating-rate convertible bonds of Countrywide Financial Corp.

But CapitalSource Inc. was down a more substantial amount as shares of the Chevy Chase, Md.-based specialty finance company dropped nearly 13%.

National City Corp. bucked the overall sector trend, however, and continued to recover ground lost in a steep sell-off that began last week.

CIT, Legg, Countrywide ease

Outright, nontraditional players, like equity-market participants, have entered the convertible market to consider paper like CIT Group's 8.75% perpetual convertible preferreds, sources said.

The 8.75s closed at 35.84 versus a share price of $7.09, which was down about 0.125 point from Wednesday, a sellside trader said.

There was a low trade reported Wednesday at 30 versus a share price of $7.00, but it may have been a one-off, below-market trade that is commonplace in the current market.

"Equity people are responding: they can buy CIT at a 50% yield to maturity. The senior debt is similar to equity returns," an East Coast-based sellsider said.

New York-based CIT common stock (NYSE: CIT) closed down 39 cents, or 5%, in light volume.

Legg Mason's 7% mandatory convertible equity units due 2011 changed hands at 32.5 versus a stock price of $35.00, compared to 35 versus a stock price of $38.00 on Wednesday.

Shares of the Baltimore-based asset manager (NYSE: LM) fell $1.73, or 4.8%, to $34.17. When the equity units were priced in early May at a par of $50, the stock was $56.00.

Countrywide Financial's floating-rate convertibles, commonly traded issues ahead of the A tranche's Oct. 15 put date, were weaker on Thursday.

The Countrywide Libor minus 350 basis point convertible due April 2037 (or tranche A) slipped to 97.75 compared to 98 on Wednesday.

The longer-dated B tranche was at 91.25 compared to 92 on Wednesday.

Countrywide is a Calabasas, Calif.-based home loan provider that was taken over by Bank of America Corp. last summer.

The market continues to speculate about whether Bank of America will cover the put or not. Many come down on the side of Bank of America making good on the debt, but there are others who believe the banking giant will "let it go."

"At 98, you could make 2 points or lose 50," a sellsider said, noting that MBIA is suing over CFC mortgages they guaranteed, claiming fraud because applications were below standard.

Sources agree some kind of announcement would be welcome. On Tuesday, when the CFC series A tranche traded at 98 bid, 98.25 offered, with a put in 15 days, there was a 49% yield to put. The Bs at 91 represented only a 15.82% yield to put.

CapitalSource slumps

CapitalSource's 4% convertibles due 2034 traded at 70 versus a share price of $11.50 on Thursday, according to one market source. And the paper was indicated to close at 70.37 versus a share price of $10.93, compared to 80.79 versus a share price of $12.51 on Wednesday.

CapitalSource's 7.25% convertibles due 2037 traded at 71 versus the same $11.50 share price on Thursday; and they were indicated to close at 71.8, compared to 73.6.

Earlier this week, the 7.25% convertibles traded well at 73.5 bid, 74.232 offered, against a stock price of $13.76 on a 50 delta, according to one sellsider.

Shares of the financial services firm for small- and medium-size businesses (NYSE: CSE) dropped sharply early in the session and languished at their lows for much of the day.

NatCity regains 2 points

National City's 4% convertible notes due February 2011 ended at about 58.5 versus a share price of $3.14, compared to about 56 versus a share price of $2.89 on Wednesday. On Monday, the National City paper was much lower at 42.5.

The Cleveland-based regional bank saw its shares (NYSE: NCC) climb another 9% on Thursday after surging on Wednesday.

The huge swing was the result of people over-reacting, a sellsider said. Speculation has been rife over whether the lender, which has significant exposure to mortgage debt in particularly hard-hit markets, will be able to ride out the current financial storm.

But with the prospect of a government financial plan closer at hand to help financial institutions such as this one, others have looked and considered that National City does not have the huge exposure to sub-par mortgages like that of companies such as Wachovia Corp. Also it records more than $11 billion in cash and more than $7 billion in operating cash flows. Its chances of revival, they think, are good, especially in light of an industry rescue package.

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