AIG weakens, but Lehman moves higher, as financials capture focus of quiet session

By Rebecca Melvin

New York, June 16 - Although it was a generally quiet session Monday, a fresh batch of news from the financial sector directed the convertible bond market's attention once again to that space.

American International Group Inc.'s mandatory convertibles weakened along with its underlying shares after the world's largest insurer announced that its chief executive was stepping down to be replaced by board chairman Robert Willumstad, a former Citigroup executive.

Lehman Brothers Holdings Inc.'s convertible preferred stock was higher, also in line with its shares, after the New York investment bank hit its pre-announced loss of $2.8 billion for its fiscal second quarter ended May 31 related to write downs and trading and hedging losses.

Questions remained regarding whether financial services companies face further layoffs, asset sales, and rounds of capital raising, but on Monday investors seemed to take some comfort from the fact that Lehman met its latest forecast.

Of course, it wasn't wholehearted comfort, one convertibles sellside trader pointed out: "Consider the stock is now $27.30, the secondary came at $28, if there was real comfort, I'd like to think it would be back over the $28 price."

Among other financials, KeyCorp's new 7.75% perpetual convertible preferreds traded up to 101.5 versus a share price of $11.90 and Countrywide Financial Corp.'s floating-rate convertibles gained on a 3.3% rise in their underlying shares.

Meanwhile XM Satellite Radio Holdings Inc.'s convertibles appeared to remain unfazed by reports that its $5 billion merger with Sirius Satellite Radio Inc. looks more likely to happen given that the chairman of the Federal Communications Commission is expected to recommend approving the combination.

Activity overall was muted, however, and if the truth be told, the U.S. Open was the real focus of Monday's session. "Lots of people are watching golf," the New York-based sellsider said.

In the primary arena, price talk emerged on Energy Conversion Devices Inc.'s planned $225 million of convertibles senior notes. The five-year bullets pricing Wednesday after the market close are expected to yield 3% to 3.5% with an initial conversion premium of 27.5% to 32.5%.

Also PFF Bancorp Inc. canceled $460 million of proposed offerings of convertible senior secured notes and common stock in connection with its merger agreement with FBOP Corp. The proposed Rule 144A deal was announced June 5.

AIG continues to weaken

AIG's 8.5% mandatory equity units due 2011 traded Monday at 70.875 versus a stock price of $33.60, compared to 74.85 versus $36.50 on June 4 and compared with 75.5 versus a stock price of $37.00 on May 27.

Although the shares of the New York-based insurer (NYSE: AIG) closed down only 17 cents, or 0.5%, at $34.01, the trend for the last few months has been downward. On May 14, the AIG mandatories traded at 78.64 versus a stock price of $39.44.

"AIG scares me," a New York-based buyside financials analyst said. "I'm not sure what Willumstad can do and [I] don't think it's going to get any better until they can take care of the super senior CDS issue."

On Sunday, AIG named Willumstad, 62, to replace Martin Sullivan, 53, effective immediately. Stephen Bollenbach, the former chief executive of Hilton Hotels Corp., will be named AIG's lead director.

In a conference call on Monday, Willumstad said that in reviewing businesses, there would be no "sacred cows" but that he didn't anticipate breaking the company apart. He did warn however that the problems in the credit market that led to Sullivan's departure still pose a threat.

A priority, he said, is hiring a new chief financial officer. AIG has $1.05 trillion in assets and lost $7.8 billion in the first quarter due to investments and contracts tied to bad loans.

Lehman extends gains

The Lehman 8.75% series Q mandatory convertible preferreds, which priced a week ago, traded early Monday at 1,012.5 versus a stock price of $26.875. That compared with Friday's close at 944.9 versus a shares price of $25.81.

The Lehman 7.25% series P convertible preferreds traded at 9,312.5 versus a stock price of $26.875. That compared to 9,103.9 versus a share price of $28.81 on Friday.

The Wall Street bank reported its first loss as a public company, saying that results deteriorated across all its divisions. But the result was in line with the company's pre-announced results last week. "Results were driven primarily by a significant decrease in fixed income capital markets, largely related to write-downs in real estate related securities as well as hedge losses," according to independent research firm CreditSights.

Capital markets reported a loss of $2.4 billion, with fixed income the major culprit within the segment, with negative revenue of $3 billion, representing a swing of $4.9 billion from the year-ago quarter, the CreditSights report stated.

"Equities capital markets fell due to principal investments losses and lower volatility revenues. The other major segments of the company were flat to slightly down with investment banking, flattish with the linked quarter, but down sharply from the prior year," the report said.

"Investment management was lower on lower gains from third-party alternative investments, while core assets under management were flattish," the report stated.

Last week, the company drew fire and ultimately ousted its chief financial officer and chief operating officer after it sold additional stock and the mandatory convertibles contrary to previous assurances that it had sufficient capital and had marked its mortgages portfolio and other deteriorating assets to correct values.

Goldman Sachs is scheduled to report results on Tuesday, followed by Morgan Stanley on Wednesday. The trend in brokers is weak overall, a New York-based financials analyst said.

"How weak we shall see better when the Goldmine reports as they ought to have less 'noise' so we can see the trends underlying," the analyst said.

Shares of Lehman (NYSE: LEH) closed up $1.39, or 5.4%, at $27.20.

XM unchanged on report

XM Satellite Radio's 1.75% convertible senior notes due December 2009 were seen at 90 versus a share price of $11.30, unchanged from Friday versus a $10.87 share price.

Shares of the Washington-based satellite radio service company (Nasdaq: XMSR) closed up 43 cents, or 4%.

FCC chairman Kevin Martin said he would support the merger in exchange for certain concessions, including an agreement from the companies to turn over 24 channels to noncommercial and minority programming, according to reports.

The transaction was announced more than a year ago and received Justice Department approval in March.

But when the FCC gave licenses to XM and Sirius in 1997, it was on condition that the two satellite companies would not merge, and much controversy has surrounded the potential combination, particularly coming from land-based radio companies. But the company says the merger will create significant cost saving that will ultimately benefit customers.

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