Financial rout broadens, but Bank of America holds up; Oscient Pharma weakens after exchange news

By Rebecca Melvin

New York, Sept. 11 - The rout in financials continued Thursday, with convertible paper in the sector weaker almost across the board. Showing strength, however, was Bank of America Corp., which was named in reports after the market close as being in talks to potentially acquire the languishing Lehman Brothers Holdings Inc.

Selling pressure seemed to spill over into other sectors, but trading volumes were light, market players said.

"It was a lot like yesterday," a New York-based sellside desk analyst said of Thursday's session.

American International Group Inc. became a notable casualty in the list of names beaten up since the markets were rattled by the Treasury's bailout of Fannie Mae and Freddie Mac over the weekend and amid speculation about a possible collapse or sale of Lehman.

"Financials are obviously weaker, but some of the better credits are holding up," a New York-based sellside trader said. "Countrywide Financial, which is Bank of America paper, but not guaranteed by Bank of America, has been coming in as well, so it's pretty much across the board."

Elsewhere, Oscient Pharmaceuticals Corp. was much lower bid, and its underlying shares tumbled after the Waltham, Mass.-based biopharmaceutical company said it was proposing to exchange its $226 million of 3.5% convertible senior notes due 2011 for $67.7 million of 12.5% convertible senior notes due 2011 plus stock.

Among new issues priced late Tuesday, Mylan Inc. traded at 103 versus a share price of $11.50. Its shares edged higher through much of the session but pulled back toward the end of the day to end up only 1%.

Homebuilder NVR Inc. withdrew its planned offering of $325 million of convertibles due to market conditions, according to a news release Thursday. The deal, which was being sold under a shelf registration via underwriter Credit Suisse Securities (USA) LLC, had been expected to price after the close Tuesday.

B of A steady

Bank of America's 7.25% series L convertible preferreds were seen closing up at 890 versus a share price of $33.06 on Thursday, compared to 870 versus a share price of $32.40 on Wednesday.

Shares of the Charlotte, N.C.-based bank (NYSE: BAC) ended up 66 cents, or 2%, at $33.06, overcoming initial weakness.

Bank of America was one of the few stronger names in financials Thursday, and after the market close, reports surfaced that it is in talks as a potential acquirer of Lehman.

In general, people are watching the preferreds," a Connecticut-based sellside trader said, referring to the large pool of convertible preferred paper in the financial sector.

AIG, Wachovia weaker

AIG, which has significant headline risk of late, was notably weaker. Its 8.5% mandatory equity units due May 2011 traded at 37.25 versus a share price of $14.75 early Thursday, compared with trades at 44 versus a share price of $18.25 on Wednesday.

But shares of the New York-based financial services and insurance company (NYSE: AIG) edged higher toward the close, to end lower by only 5 cents, or 0.29%, on the day.

"There's no real conviction in the marketplace. They're all sellers and then all buyers. AIG started to come back, but Lehman began selling off again to its lows," a sellside trader said.

"The resilience of the broader market is remarkable, however. The Dow is up, Nasdaq is up, but it feels like it should be down 300 points," the trader said.

Wachovia's 7.5% series L convertible perpetual preferred traded at 680 versus a share price of $14.00, compared to a market at around 750 in the previous session.

Shares of the Charlotte, N.C.-based bank (NYSE: WB) ended down 80 cents, or 5%, at $14.28.

Countrywide's floating-rate series A convertibles traded in a touch and were quoted at 97.75 bid, 98.125 offered. The series B floaters didn't trade, a sellsider said.

Lehman sinks further

Bank of America was said to be in talks to buy Lehman, the Wall Street Journal reported, citing unnamed sources. Lehman declined to comment on the reports.

During the session, Citigroup downgraded Lehman to "hold" from "buy," citing damage to investor confidence and perception.

"More importantly though, management did not successfully put to rest the issues that had been pressuring the stock, and with significant uncertainty remaining about the firm's future initiatives, we moved to a Neutral rating."

Meanwhile, Goldman Sachs removed the firm from its Americas Buy list, downgrading it to "neutral," citing Lehman's third-quarter loss of $5.92 as much worse than its $2.75 loss estimate.

"Since we added Lehman to the Americas Buy List on 3/18, the stock has fallen 84% vs S&P down 7.4% and a 3% decline for our coverage universe. Over the past 12-m LEH is down 87% versus a 15% decline in the S&P 500," the Goldman report stated.

Lehman Brothers' 8.75% mandatory convertible preferreds were at 207 bid versus a stock price of $4.50 at midday and were indicated to close at 181 versus a stock price of $4.22. That compared to an indicated close of 309 versus a stock price of $7.25 on Wednesday.

Lehman's common stock (NYSE: LEH) also extended losses, closing down $3.03, or 42%, in heavy volume, after ending lower on Wednesday and plunging 45% on Tuesday.

Oscient proposes exchange

Oscient Pharmaceuticals is proposing to exchange its 3.5% convertible senior notes due 2011 for $67.7 million of new 12.5% convertible senior notes due 2011 and shares of common stock for up to all of the $225.7 million.

Onlookers were divided on whether holders would agree or not.

"It's $0.30 on the dollar and it would be hard to monetize the $0.20 of stock, "so it will never fly," one source said.

A Connecticut-based sellsider suggested that the company's banker, Lazard Capital Markets, (MTS Securities is another dealer manager) could probably get the pricing right, and get the exchange done, however.

The new bonds' coupons can also be PIKs at the company's option, which is referred to by some as a "death structure," since more and more paper can get thrown at the situation.

"I don't know what choices you really have in this company," another New York-based sellside trader said. "The balance sheet is upside down, and they are going to have a hard time raising capital. You don't know what they're going to do."

The 3.5% convertible exchange is only part of the solution, the Connecticut-based sellside analyst agreed. "You get this stock, and then what do you do. People are evaluating it as a going-out-of-business concern."

The company also has a couple other pieces of financing that have to be dealt with, including $13 million of 5% convertibles and $20 million of 12% secured debt, he said.

"It could survive, and grow eventually, if they restructure everything. But this is one of several steps that they have to make," he said.

The Oscient 3.5s were said to be 17.5 bid on Thursday, compared to levels on Wednesday that were first at 25.75 and then 24.75.

Shares of Oscient (Nasdaq: OSCI) ended down 20 cents, or 22%, at $0.72.

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