Lehman adds; other financials mixed, KKR Financial lower, Sallie Mae strengthens

By Rebecca Melvin

New York, April 4 - News that monthly U.S. payrolls fell and unemployment moved sharply higher had an unexpectedly salubrious effect on stocks, spurring them modestly higher mid-session Friday and promoting some healthy activity in convertibles, market players said.

"I've not seen any discernible weakening or strengthening of paper on a relative basis. If anything, they should improve a little on the prospect of lower [interest] rates," a Connecticut-based convertibles sellside trader said via e-mail early Friday.

Lehman Brothers Holding Inc.'s new 7.25% series P convertible preferred stock traded actively, closing up about a point to 1,119.5 versus a share price of $44.05, according to a syndicate source. A second source put the Lehman close lower at 1,117.

The convertibles of Countrywide Financial Corp. and KKR Financial Holdings LLC were also active, trading down slightly, but the Countrywide convertibles were higher compared to their underlying shares.

The convertible preferreds of SLM Corp., known as Sallie Mae, seemed to gain strength amid moves on Capital Hill that appear favorable to the student lender's business.

Nonfarm payrolls fell 80,000 in March, the biggest decline in five years, after falling by a revised 76,000 in both January and February, the Labor Department said Friday. Meanwhile, the unemployment rate moved sharply higher to 5.1%.

The third straight drop in U.S. payrolls presages lower future GDP; nevertheless, the market's reaction was "perhaps reflective to the belief that a 'bottoming out' is underway," a New York-based sellside analyst said.

Convertibles players unanimously looked to the Lehman Brothers $4 billion convertibles offering earlier this week as a turning point that raised confidence as it demonstrated continued investor demand.

Lehman loves you

The 7.25% Lehman preferreds traded actively Friday, with one source quoting them pretty low at 1,111.5 bid, 1,112.5 offered around midday. But a syndicate source said they closed higher at 1,119.5.

"They will trade like the proverbial 'May wheat,' day in, day out for quite some time, months at least," a Connecticut sellsider said.

The embattled New York investment bank priced an upsized $4 billion offering of perpetual convertible preferred stock before the market opened Tuesday. The original size of the deal was $3 billion with an over-allotment option for an additional $450 million, which was exercised immediately.

"After the Lehman liquidity raise and, on the same day, the announcement by UBS, it seemed like a turning point in that there was a greater sense of comfort in the market. It signaled that companies can raise capital and there is demand for it," a New York-based sellsider said.

"March was an extremely turbulent month. There was a flight to quality, to investment grade and there were big events. But since the Fed intervention in Bear [Stearns] and the big capital raise by Lehman, there has been an improvement in CDS and credit market conditions are better," the analyst said.

"Don't forget, we've had this turmoil since last summer. It's gone on for seven or eight months, much longer than expected, and it may go on for another seven or eight months," he said.

"There was a bounce back and improved comfort level, and everything is working together so that the market is cautiously optimistic, but not out of the woods," he said.

"As for the real economy - that's still wide open, but the market shows they are not factoring in the worst-case scenario. It's more reflective of a comfort level with the bottoming-out process."

Lehman shares (NYSE: LEH) closed up 73 cents, or 1.69%, at $44.05 on Friday.

KKR moves lower this week

KKR Financial was cited in trade this week several times. The San Francisco-based real estate investment trust and specialty finance company said this week that it plans to sell 30 million common shares with an over-allotment of up to 4.5 million shares, and the proceeds will be used to repay short-term debt and fund corporate debt instruments

KKR's 7% convertible senior notes due 2012 traded at 86 versus a stock price of $12 on Wednesday and at 84 versus the same stock price on Thursday.

On Friday it was seen lower again versus a share price that was down to $11.70.

KKR invests in residential mortgage loans and mortgage-backed securities; corporate loans and debt securities; commercial real estate loans and debt securities; asset-backed securities, and equity securities.

Shares of KKR (NYSE: KFN) closed down in active trade Friday at $11.70, down 18 cents, or 1.5%.

Countrywide retraces some gains

The floating-rate convertibles of Countrywide Financial, which trade actively, lost about a point on Friday, retracing a portion of gains they made this week, while its underlying shares fell 7.2%.

Moody's Investors Service left the mortgage lender's unsecured rating unchanged but downgraded the bank's financial strength to D on Friday, citing substantial liquidity issues that the bank faces.

"Although we do consider Countrywide Bank's ability to fund a significant deposit withdrawal to be high, a substantial decline in deposits would have an impact on the bank's ability to fund loans and could result in significant franchise impairment," Moody's said.

The agency also warned that if the proposed acquisition by Bank of America Corp. isn't completed, the troubled lender could undergo a "severe" ratings transition.

Countrywide's three-month Libor minus 350 basis point series A convertible senior debentures due April 15, 2037 closed Friday at 90.2 versus a closing stock price of $5.90. That's down from a close of 91.2 versus a stock price of $6.36 on Thursday.

Countrywide's three-month Libor minus 225 bps series B convertible senior debentures also due April 15, 2037 also traded lower, closing the day at 88.2 versus the $5.90 stock price.

Shares of the Calabasas, Calif.-based company (NYSE: CFC) traded down through the session, losing 46 cents, or 7.2%.

Sallie Mae strengthens

Recent action that has helped Sallie Mae is related to legislation introduced in the Senate aimed at ensuring loan availability, a New York-based convertibles buyside analyst said. The bills would mandate a sharply higher level of federal involvement and are in response to disruption of the normal market for student loans, which was precipitated by the credit crisis.

"We were looking at Sallie Mae," the analyst said Friday.

Sallie Mae's 7.25% series C mandatory convertible preferred stock due 2010 closed at 987.13 versus a stock price of $18.49. Their close on Thursday was 943 versus a share price of $19.20.

Shares of the Washington, D.C. firm (NYSE: SLM) closed down 3.70%.

Globalstar not on radar yet

Globalstar Inc., the Milpitas, Calif.-based provider of satellite voice and data services, which plans to price $135 million of 20-year convertible senior notes next week, wasn't yet the focus of convertibles players on Friday.

"I haven't yet gotten through the financials," a Connecticut-based sellside analyst said when asked about valuation.

The bonds were talked at a coupon of 5.25% to 5.75% and an initial conversion premium of 45% to 50%. Merrill Lynch and Deutsche Bank are bookrunners for the registered shelf offering.

"But what a lousy company," the sellsider said. "Their launched satellites have started to degrade, and by the end of 2008 they are going to lose all two-way communications."

There's a secondary "spot" business related to satellite global positioning that Globalstar is starting, but it seems inadequate as a source of free cash flow given the magnitude of the rebuilding process that the company has before it, the analyst said.

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