Convertibles trading choppy as financials weigh on markets; Ambac, Stillwater flat

By Rebecca Melvin

New York, March 7 - As bonds were seen mostly coming in, trading in the convertibles market was choppy Friday, and little, if any, new issues changed hands on their release to the secondary market, market participants said.

Trading of new convertibles issued by Ambac Financial Group Inc. and Stillwater Mining Co. was complicated by a lack of borrow on the underlying shares, they said.

Ambac priced on the cheaps a downsized $250 million of 3.2-year mandatory convertible equity units to yield 9.5% with an initial conversion premium of 18%; and Stillwater priced aggressively $165 million of 20-year convertible senior notes to yield 1.875% with an initial conversion premium of 28%.

Both issues priced out of the gate at around par or a little higher, syndicate sources said. Later, the Ambacs were seen at slightly under par, or $49.75 bid, $50 offered, for the $50 equity units, according to one source.

Not surprisingly, given the overall financial markets, financial and energy services names were among the most actively traded on Friday. But surprisingly, prices were a little firmer for some issues compared to Thursday, according to a New York-based sellside desk analyst.

Obvious exceptions to firmness were the convertible preferreds of Thornburg Mortgage Inc., which have plumbed new depths as the mortgage company's viability as a going concern was cast into further doubt. Also lower was SLM Corp., better known as Sallie Mae.

Convertibles players were unwilling to offer up much color on the day, as if numbness among the walking wounded of the markets was setting in.

The Dow Jones Industrial Average broke below 12,000 and closed under that level, at 11,893.69, down 146.7 points, or 1.2%. "That's a psychological break point. At least in mid-January, it bounced back," a Connecticut-based sellside analyst said.

Thornburg scrapes bottom

The Thornburg 10% convertible preferred series F closed down 2.12 points to $3.35 versus a stock price of $1.79, compared to a close of $5.47 versus a stock price of $1.65 on Thursday.

The Santa Fe, N.M.-based mortgage lender said there was "substantial doubt" that it could continue as a going concern due to the unprecedented deterioration of prices of its mortgage-backed collateral and liquidity pressure stemming from margin calls.

The warning came about 1.30 p.m. ET, sending shares plunging. At one point, Thornburg's shares (NYSE: TMA) were as low as $1.08, compared to a price of more than $11 for most of last week.

The company said that it has received $1.78 billion in margin calls this year and met $1.17 billion of them. It also said it received a letter March 4 from its independent auditor, KPMG LLP, stating that the Feb. 27 audit report on which the company's 2007 annual report is based should no longer be relied upon, and therefore the financial statements for the year ended Dec. 31 should be restated.

In addition to not possibly continuing as a going concern, the company may not have the ability to hold certain of its purchased ARM assets to recovery and, accordingly, on March 5, it concluded that a $427.8 million charge for impairment on its purchased ARM assets is required as of Dec. 31.

Thornburg said, however, that based upon a review of credit ratings, delinquency data and other information, the company does not believe these unrealized losses, for the most part, are reflective of credit deterioration. But S&P said the company is under review for a possible downgrade.

Larry Goldstone, Thornburg president and chief executive, said, "Our portfolio of mortgage-backed securities has exhibited exceptional credit performance and comprises loans that are among the most solid in the industry. Quite simply, the panic that has gripped the mortgage financing market is irrational and has no basis in investment reality."

Ambac up for the count

The new three-year Ambac mandatories didn't trade, according to several market sources. But a syndicate source said the paper opened at par and remained at about that level, and other players said their modeling put the issue right at par.

Of course that modeling included inputs of as much as 1,000 basis points above Libor and a volatility spread between the two strike prices of 1%. A credit spread of that size would be considered appropriate for companies with CCC ratings.

"Technically this is a AA company, but Libor plus 1,000 indicates it's a CCC. It's what you believe," a sellside analyst said, when asked if he would use a spread that high.

Another source called the paper "toxic." But in fact Ambac's stock made something of a come back late in the day after sliding early in the session, indicating that some have kept the faith.

Ambac announced that it has raised $1.5 billion in capital, of which $250 million was 3.2-year mandatory convertible equity units, which were priced to yield 9.5% with an initial conversion premium of 18%.

The coupon was upped and the amount halved from initial talk.

Price talk was for a coupon of 8% to 8.5% and for the initial conversion premium of 18% to 22%. The mandatory convertible offering was downsized from a size initially expected to be $500 million.

A concurrent offering of common stock was upsized to $1.155 billion. Ambac also placed 14.07 million shares of common stock in a private placement for $95 million with two financial institutions.

Ambac has granted the underwriters a 13-day option to purchase up to an additional 750,000 equity units to cover over-allotments, if any.

Credit Suisse Securities (USA) LLC, Citigroup Global Markets, UBS Securities LLC and Banc of America Securities LLC were joint bookrunners of the equity units offering; and Keefe, Bruyette & Woods, Inc. was acting as a co-manager.

Ambac intends to contribute the net proceeds from these offerings to its insurance subsidiary to increase its capital position, less about $100 million that it intends to retain at Ambac to provide incremental holding company liquidity, to pay principal and interest on its debt, to pay its operating expenses and to pay dividends.

It will use proceeds from the settlement of the purchase contracts forming a part of the equity units in May 2011 to repay $142.5 million of the company's debt maturing in August 2011 to the extent that the cash proceeds of such settlement are sufficient for such repayment.

In addition to raising capital, Ambac is taking other capital strengthening actions and risk management initiatives that will allow its Ambac Assurance subsidiary to maintain its AAA ratings with Moody's and S&P, the company said in its release.

The New York-based bond insurer's shares (NYSE: ABK) closed up $2.08, or 28%, at $9.50.

Sallie Mae down, Countrywide adds

Sallie Mae's convertibles lost ground, even as its shares gyrated to a higher close. The 7.25% series C mandatory convertible preferred stock closed down Friday at 939.87 versus a closing stock price of $18.43. That compared to a close of 948 on Thursday versus a share price of $17.76.

There was no apparent news Friday on the Washington, D.C.-based student lending firm. Earlier in the week, S&P had taken the company's credit rating off a negative credit watch and assigned the rating a stable outlook.

In a reverse move, Countrywide Financial Corp. convertibles appeared to strengthen maybe half a point as its underlying shares slipped.

The Countrywide Libor minus 350 basis point series A convertibles closed at 81.6 versus a stock price of $5.07. That compared a Thursday close at 81.2 versus a stock price of $5.202.

The Countrywide's Libor minus 225 bps series B convertibles closed at 78.9 Friday compared to 78.5 on Thursday.

The bonds can be put back to the company in October, and a source said the stock price relative to the convertibles price isn't that relevant any more.

The chief executive of the Calabasas, Calif.-based mortgage lender, Angelo Mozilo, was defending his compensation along with other subprime lender executives before the House of Representatives Oversight and Government Operations Committee on Friday.

Stillwater debut is still

The new 1.875% Stillwater convertibles were 100.25 bid, 100.50 offered on the open Friday, according to a syndicate source. But market players queried didn't see them in play.

In fact, the Rule 144A deal, sold via Deutsche Bank, was on the small side, and MMC Norilsk Nickel and its subsidiaries bought nearly half, or $80 million, of the offering.

The company priced $165 million of 20-year convertible senior notes on the rich end of talk. Talk for the coupon was 1.875% to 2.375%, and talk for the initial conversion premium was 22.5% to 27.5%.

There is an over-allotment option for a further $16.5 million.

The notes are non-callable for five years and have puts in years five, 10 and 15.

They feature dividend and takeover protection, as well as contingent conversion.

The Billings, Mont.-based producer of palladium and platinum intends to use proceeds to repay debt under its outstanding credit facility and for general corporate purposes.

Shares (NYSE: SWC) closed at $17.10, down $1.27, or 6.9%.

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