Countrywide, BofA up on deal hopes; Excel down on merger; VMWare drops EMC; REIT strategy 'unwinding'

By Evan Weinberger

New York, Jan. 29 - Countrywide Financial Corp. convertibles and Bank of America Corp. preferreds were both up on reassurances that their merger would go through.

Excel Maritime Carriers Ltd. convertibles slipped on a merger.

EMC Corp. convertibles were down on a subsidiary's earnings.

And several real estate investment trusts - notably Home Properties Inc., Pennsylvania Real Estate Investment Trust and Equity Residential - have been active in recent days. A trader said it looked like an investment strategy was "unwinding."

No new deals hit the streets Tuesday, and none were announced as of press time.

Activity was relatively light in the secondary market as investors waited on the Federal Reserve's decision on interest rates Wednesday, traders said. "You see a lot of that, waiting around," a trader said.

Hopes for a further 50 basis point cut in the Federal Funds rate at the conclusion of the Fed's meeting Wednesday drove another day of gains on Wall Street Tuesday. An unexpected surge in durable goods orders in December didn't hurt, either.

The Dow Jones Industrial Average moved up 96.14 points, or 0.78%, to close at 12,480.30.

The Nasdaq gained 8.15 points, or 0.35%, to close at 2,358.06.

And the Standard & Poor's 500 closed at 1,362.30, a gain of 8.33 points, or 0.62%

Countrywide, BofA up on deal hopes

The $422 million fourth-quarter loss for Calabasas, Calif.-based Countrywide announced Tuesday isn't putting the brakes on Bank of America's takeover bid.

"At this point, everything is a go to complete this transaction," Bank of America CEO Kenneth Lewis told the Citigroup investors conference Tuesday, according to Bloomberg.

The statement came in the wake of Countrywide's announcement of its big fourth-quarter losses. There has been some uncertainty that the deal would go through ever since its announcement Jan. 11.

America's largest mortgage lender lost 79 cents per share in the last three months of 2007. In the same period in 2006, Countrywide posted a $622 million, or $1.01, profit.

A Thomson Financial poll of analysts predicted a loss of 30 cents per share for Countrywide. Reuters Estimates had pegged Countrywide for a loss of 32 cents per share.

Countrywide's fourth-quarter losses were about a third of the $1.2 billion it lost in the third quarter.

More than a third of subprime mortgage holders were behind on payments to Countrywide, the company announced in its earnings report, forcing it to set aside nearly $1 billion in reserves.

And Countrywide wrote down more than $830 million in prime mortgages for the quarter. There were also losses in the secondary mortgage market.

"While considerably improved from the previous quarter, Countrywide's results for the fourth quarter of 2007 were adversely impacted by further credit deterioration across the industry and continued illiquidity in the secondary mortgage markets," said Angelo R. Mozilo, Countrywide's chairman and CEO, in a news release.

Market watchers said that Countrywide was just laying the groundwork for Bank of America to save the day. The 15 cent dividend Countrywide announced goes a long way in that regard, one said.

"Countrywide's just taking the hits ahead of the deal as per [Bank of America] direction, so that when the deal closes [BofA] will report positive effects of the deal," a trader said. "The fact that they announced a dividend means all is rosy to that end."

For his part, Lewis told the Citigroup conference that Bank of America expected Countrywide's quarterly results, saying they were part of BofA's "due diligence" in the run-up to the deal.

"The week before, they might not have known," another trader said.

Lewis said that the improvements in loan issuance at Countrywide as the Federal Reserve has cut rates was more important to him than the quarterly loss, the Associated Press said. "Much more important to us is the dramatic improvement in the underlying fundamentals of the mortgage business," Lewis said.

Lewis' bullishness on the deal drove up Countrywide convertibles and stock Tuesday. Countrywide's Libor minus 350 basis point series A convertible senior debentures due April 15, 2037 closed Tuesday at 89 versus a closing stock price of $6.31. They closed Monday at 87.462 versus a stock price of $5.95.

Countrywide's Libor minus 225 bps series B convertible senior debentures due May 15, 2037 closed Tuesday at 85.75 versus a stock price of $6.31 after closing Monday at 83.97 versus a stock price of $5.95.

Countrywide stock (NYSE: CFC) picked up 36 cents, or 6.05%, on the day.

Bank of America's 7.25% non-cumulative perpetual convertible preferred stock, series L, closed Tuesday at 1,086.52 versus a closing stock price of $41.94. They closed Monday at 1,061.85 versus a stock price of $41.20.

Bank of America stock (NYSE: BAC) gained 74 cents, or 1.80%, Tuesday.

Excel down on merger

Excel Maritime and Quintana Maritime Ltd. announced that the two had agreed to a merger worth $2.45 billion Tuesday morning.

The deal will make the combined Excel one of the largest dry bulk shipping fleets in the world.

Both maritime shippers are based in Greece - Excel in Athens and Quintana in Glyfada.

Quintana stockholders will receive $13 and 0.4084 share of Excel stock for their shares. That translates to a price of $33.80 for each share of Quintana stock, a 57% premium on Quintana's closing stock price Monday and a 34% premium to company's average close for the last 30 days.

If Excel shares move higher than $45, then the company will change the stock ratio it will give as part of the deal to maintain the $33.80-per-share price.

The deal is expected to close in the second quarter of this year.

Excel calls the deal a "transformational transaction." When the deal is completed, Excel will operate a fleet of 47 ships with a 3.7 million dry weight ton carrying capacity. Excel said a further eight ships will sail under its name by the end of 2010, bringing its total shipping capacity to 5.2 million DWT.

The company's fleet will average 8.1 years in service, making it one of the youngest in the world, Excel and Quintana said in their statement. The shipping company will transport goods for several blue chip companies, including Bunge Ltd., BHP Billiton Ltd. and Cargill Inc.

Excel Maritime's 1.875% convertible senior notes due Oct. 15, 2027 closed Tuesday at 73.5485 versus a closing stock price of $31.78. They closed Monday at 76.5385 versus a stock price of $33.00.

The company's stock (NYSE: EXM) sank $1.22, or 3.70%, on the news.

VMWare downs EMC

Hopkinton, Mass.-based computer storage maker EMC posted solid fourth-quarter earnings and an encouraging outlook for 2008. But disappointing earnings from its VMWare subsidiary smashed EMC's stock and convertibles.

EMC posted a profit of $525.7 million, or 24 cents per share, for the last three months of 2007. That was a rise from a profit of $388.8 million, or 18 cents per share, from the same period in the previous year.

A poll of analysts by Reuters Estimates had EMC's fourth-quarter profits pegged at 22 cents per share.

For 2008, EMC said it expects $15 billion in revenues for 2008, again topping Wall Street estimates.

The problem for EMC came from VMWare, the Palo Alto, Calif.-based business software maker that EMC spun off in August.

Among the disappointments, VMWare said it expected revenue growth to slow to 50% for 2008 from 88% last year.

The rout was on from there. EMC convertibles were "trading like water" during the morning, one trader said, and not in a direction the company wanted to see.

EMC's 1.75% convertible senior notes due Dec. 1, 2011 closed Tuesday at 126.116 versus a closing stock price of $15.89. They closed Monday at 130.633 versus a stock price of $16.91.

EMC's 1.75% convertible senior notes due Dec. 1, 2013 closed Tuesday at 127.182 versus a stock price of $15.89 after finishing Monday at 132.7 versus a stock price of $16.91.

EMC stock (NYSE: EMC) dropped $1.02, or 6.03%, on the day. The stock had been trading more than 7% lower earlier in the day.

A strategy unwinds

A trader said Tuesday that in the past few days, he's seen a relatively large number of REIT convertibles for sale.

He didn't necessarily see many actual sales. "No, I see them being shopped around on the street," he said.

The trader said that the number of REIT convertibles for sale likely means that investors who got in on them when they were cheap at the beginning of the subprime mortgage meltdown had had enough.

"I would say that a good strategy six, seven months ago would have been to buy into these things on the prospect that the dividend might be cut," he said. "Now you're just trying to get out of it. The common is outweighing some of the paper. It just feels like the unwinding of a strategy."

On Tuesday, two of the big issues he saw for sale were issued by Rochester, N.Y.-based apartment REIT Home Properties and Philadelphia-based strip mall operator Pennsylvania REIT.

Home Properties' 4.125% exchangeable senior notes due Nov. 1, 2026 closed Tuesday at 91.71 versus a closing stock price of $48.84. They closed Monday at 91.553 versus a stock price of $49.08.

Home Properties stock (NYSE: HME) slipped 24 cents, or 0.49%, on the day.

PREIT's 4% exchangeable senior notes due June 1, 2012 closed Tuesday at 78.54 versus a closing stock price of $25.16. They closed Monday at 77.876 versus a stock price of $24.37.

PREIT stock (NYSE: PEI) gained 79 cents, or 3.24%.

The trader said one of the more active REITs Monday was Chicago-based apartment REIT Equity Residential.

On Tuesday, its 3.85% exchangeable senior notes due Aug. 15, 2026 closed at 94.72 versus a stock price of $37.76. They closed Monday at 93.8 versus a stock price of $37.74.

Equity Residential stock (NYSE: EQR) inched up 2 cents, or 0.05%, on the day.

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