Countrywide moves up on cash injection; Anthracite could be case study; Yahoo! slips; market pulls back

By Evan Weinberger

New York, Aug. 23 - Countrywide Financial Corp. was the markets' engine again Thursday, but the engines stalled as the day wore on. Countrywide announced late Wednesday that Bank of America was injecting $2 billion into the struggling mortgage giant in a private placement deal.

That announcement sent the market, and Countrywide's stocks and convertibles, up early, although the market and Countrywide gave back their gains as the day wore on.

The Dow Jones industrial average closed trading Thursday down a negligible 0.25 points, or 0.00%, at 13,235.88, after opening higher, then spending much of the late morning and early afternoon hovering between 30 and 50 points below the break-even mark.

The Nasdaq and Standard & Poor's 500 were similarly docile Thursday. The Nasdaq closed at 2,541.70, slithering down 11.10 points, or 0.43%.

The S&P 500 slipped 1.57 points, or 0.11%, to 1,462.50.

Market watchers said that continued trepidation held back growth after Wednesday's significant rise. "The reality is there are already 40,000 jobs lost in the mortgage market alone," said one trader.

An analyst added that just because one mortgage lender had received a second significant influx of cash, it doesn't mean investors are going to lose their worries. "I think we're far from out of the woods," he said.

Another analyst said that the recent pattern of profit taking took hold as the day progressed. "I think the consistent theme over the last three weeks has been to sell on any strength, so I think that has been a way to make money," he said.

In somewhat of an upset, Anthracite Capital, Inc., a New York-based real estate investment trust focused mainly on commercial real estate, announced that it would price $100 million of convertible senior notes due Sept. 1, 2027 Thursday after market close. There is a $25 million greenshoe. The convertibles are talked to carry a 10.75% to 11.75% coupon and an initial conversion premium of 17.5% to 22.5%.

Anthracite intends to use the proceeds to repurchase existing stock and to execute its commercial real estate strategies.

The new deal breaks a string of about a week without a new deal and will begin trading on a Friday in August - thus the upset. But more importantly, although many players said that no one was paying much attention to the new deal, others said that the Anthracite offering would provide an interesting canary in the coal mine of REITs.

In other trading Thursday, Yahoo! Inc.'s 0% convertible senior notes due April 1, 2008 closed trading at 118.25 versus a closing stock price of $23.13. They closed Wednesday at 118.625 versus a stock price of $23.23.

The Sunnyvale, Calif.-based internet service provider saw its stock (Nasdaq: YHOO) slip 10 cents, or 0.43%, in trading Thursday.

At the other end of the technology spectrum, St. Louis-based coal mining firm Peabody Energy Corp.'s 4.75% convertible junior subordinated debentures due Dec. 15, 2066 finished trading Thursday at 97.63 versus a closing stock price of $42.55. They rose from Wednesday's close of 96.5 versus a closing stock price of $41.76.

Peabody stock (NYSE: BTU) closed 79 cents, or 1.89%, higher Thursday.

Both convertibles issued by South Jordan, Utah-based Headwaters Inc. sank in trading on Thursday. The energy and construction materials producer saw its 2.5% convertible senior subordinated notes due Feb. 1, 2014 slip to 80.5 versus a closing stock price of $15.80 on Thursday. The convertibles closed Wednesday at 80.75 versus a stock price of $15.99.

Headwaters' 2.875% convertible senior subordinated notes due June 1, 2016 closed Thursday at 87.13 versus a stock price of $15.80 Thursday. They finished trading Wednesday at 89.125 versus a $15.99 stock price.

Headwaters stock (NYSE: HW) slipped 19 cents, or 1.19%, Thursday.

Countrywide circles on BofA infusion

The announcement late Wednesday that Bank of America was investing $2 billion in Countrywide in what essentially is a private placement of convertible preferred stock initially buoyed investors in Countrywide, and the markets in general, Thursday morning.

"It's almost like having a guarantor on your lease when you rent your apartment in college," was how one trader described the deal.

Countrywide stock (NYSE: CFC) shot up more than 6% in early morning trading, and the Dow Jones industrial average followed suit, although a slightly smaller one. Countrywide's two convertibles also leaped.

The company's Libor minus 350 basis points series A convertible senior debentures due April 15, 2037 were trading as high as 94 after finishing Wednesday at 89 versus a stock price of $21.82.

The Libor minus 225 bps series B convertible senior debentures due April 15, 2037 traded at around 92.5 early after closing Wednesday at 86 versus a $21.82 share price.

The investment appears to be a sweetheart deal for Bank of America, market watchers said. The preferred stock, if it is all converted, could give Bank of America a 16% to 17% share of America's largest mortgage lender, sparking some buyout talk. There's also a 7.25% yield on the convertibles. The convertibles were convertible at $18 when the stock was trading at around $20, one analyst pointed out. "It was already in the money at the time of the issue," he said.

But then something - market watchers aren't necessarily sure what - set in, bringing Countrywide stock, the company's convertibles and the broader markets down by the end of the day.

One thing that might have put a damper on the deal was Countrywide chief executive officer Angelo Mozilo warning CNBC Thursday that the crisis in the mortgage industry could lead to an economy-wide recession. "Those comments don't help [the stock]," one trader said, although he didn't totally disagree with the premise.

One other factor may have been that investors and market watchers didn't think the new money, on top of Countrywide tapping $11.5 billion from a pre-existing credit facility last week, would help save the company. Neither Fitch Ratings nor Standard & Poor's removed Countrywide from their negative watch list, although Fitch did say Countrywide's position was evolving.

No matter the reason, the series A convertible debentures gave back some of their early gains from Thursday, closing at 93 versus a stock price of $22.02. They closed Wednesday at 89 versus a stock price of $21.82.

The series B convertible debentures also slipped from their high of early in the day to close at 91.5 versus a $22.02 share price. They finished Wednesday at 86 versus a $21.82 stock price.

Stock in Calabasas, Calif.-based Countrywide closed up 20 cents, or 0.92%, giving back most of its early Thursday gains.

Anthracite a potential market setter

Although several observers contacted by Prospect News were alternately surprised, indifferent and "shocked" that Anthracite Capital, a commercial REIT and subsidiary of BlackRock, Inc., would bring a $100 million convertible offering due Sept. 1, 2027 to market Thursday night, others said that it would be a good test case for how investors perceive the financial and mortgage industry.

"It'll be interesting to see what the reception is for this piece of paper," one analyst said.

Although Anthracite doesn't deal largely in mortgages or the subprime sector in particular, the intrigued analysts said that the large coupon, talked at 10.75% to 11.75%, should draw some serious interest. "It's a real deal. It should trade actively," one said.

The analyst pointed to the company's positioning in the market as one positive, although Anthracite stock (NYSE: AHR) is down 25% on the year. The company is fairly reliant on short-term financing, which is falling out of favor in the current credit climate.

"The carry doesn't look the most attractive," the analyst said. "The common yield is larger than the convert. It's more commercial focused. It's still the same structure that has really gotten hurt over the last couple of months."

The real test, according to another sellside analyst, is whether value hunters will find the value for which they search in the real estate and financial sectors. Those two have been hit hardest during the current market wobbliness.

"Obviously we're going to get to a point at some point where there's some real value there," he said. "It'll be interesting to see if we're there yet."

Anthracite stock tumbled 37 cents, or 3.87%, Thursday to $9.18.

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