Convertibles trade mixed; Teva, Fannie Mae active; National Retail prices upsized notes

By Rebecca Melvin

New York, Feb. 27 - The convertible bond market was mixed Wednesday in patchy trading that gathered steam during the afternoon. Trading volumes overall were seen at about the same levels as those on Tuesday, however, market participants said.

Names among real estate investment trusts traded a little weaker, including those of Vornado Realty Trust; but the existing convertibles of National Retail Properties Inc. were better, ahead of pricing expected after the close of a second convertibles issue from the Florida-based REIT, according to one trader.

A handful of health care names were active, but mostly flat, including Teva Pharmaceutical Industries Ltd. and Mylan Inc., sources said.

The new issue from National Retail was up in the gray market, seen initially at 100.25, while others said it was higher at 100.5 to 101.5.

"We had sporadic trading, with pockets of activity throughout the day," a New York-based sellside trader said.

News swirling around the Federal National Mortgage Association, better known as Fannie Mae, spurred heavy trading of its stock on the New York Stock Exchange, as well as trades in its convertible preferred.

There was also a rumor in the convertibles market that the U.S. mortgage firm was going to price a new convertible or straight preferred issue. "Fannie Mae did say on a conference call that it didn't have a ton of cash and might need to raise more money," but the rumor about a convertible appeared to be unfounded, a source said.

The convertibles of EMC Corp. and Nortel Networks Corp. were also cited as actively traded.

National Retail up in the gray

Despite a lower stock price, the existing convertibles of National Retail were "a little better" ahead of pricing of a new issue after the close.

The new bonds are longer dated, and the older bonds were perceived as being a little better, a New York-based sellside trader said.

Even so, the new bonds, of which National Retail sold an upsized $220 million, were looking fairly strong in the gray market. Originally the company planned to sell only $200 million. A syndicate source said the issue was oversubscribed.

The retail REIT is optimistic about growth in 2008, citing long-term leases covering a wide geography as factors helping it weather economic slowing.

It priced 20-year convertibles at par to yield to yield 5.125%, with an initial conversion premium of 16%, a little better than the midpoint of price talk, which was for a yield of between 4.875% and 5.375% and an initial conversion premium of 13% to 17%.

Citigroup Global Markets Inc., Banc of America Securities LLC and Wachovia Securities were joint bookrunners for the issue.

The notes, for which there is a $33 million greenshoe, are non-callable for five years, with puts in years five, 10 and 15. They also feature contingent conversion, subject to a 130% handle, as well as an acquisition make-whole provision and full dividend protection.

A New York buysider, who would have liked to see even more yield, said, "There are two problems with a REIT: they have a higher yielding common and lower volatility," which make them less appealing to convertibles players.

Proceeds of the issue are expected to be used to repay borrowings under National Retail's credit facility, with the remainder to fund acquisitions and for general corporate purposes.

The existing 3.95% convertibles closed at about 102 versus a share price of $21.91, compared to 104.8 versus a share price of $23.02 on Tuesday.

Shares of National Retail (NYSE: NNN) slipped $1.11, or almost 5%, on Wednesday.

In related trade, the convertibles of Vornado Realty Trust and Essex Property Trust Inc. were flat to a little down.

Orlando, Fla.-based National Retail operates, acquires and develops retail properties leased primarily under long-term net leases.

Fannie Mae

The Fannie Mae 5.375% convertible preferreds closed at 77,860 versus a share price of $27.27. The pricing source said the convertibles price was a "new level," with no basis for comparison.

As a point of reference, the Fannie Mae preferreds traded in mid-December at 80,058.5 versus a closing stock price of $34.29.

On Wednesday, shares of Fannie Mae (NYSE: FNM) zoomed up to as high at $31.58, before retracing the majority of those gains to close the day up just $0.30, or 1.1%, at $27.27.

The moves were sparked by news that the regulator for Fannie Mae and the other mortgage-finance giant, Freddie Mac, will lift the cap on the companies' investment portfolios beginning March 1, freeing up capital for the companies to put to use in the mortgage market, and marking an improvement in the relationship between the regulator and the mortgage companies, which was strained by those firms' previous accounting problems.

The regulator said both companies have made substantial progress in fixing their internal controls and accounting systems.

Putting a damper on the shares was weaker-than-expected fourth-quarter and full-year 2007 results posted Wednesday and testimony by Federal Reserve chairman Ben Bernanke that economic slowing will spur further interest rate cuts.

The Washington, D.C.-based company reported a fourth-quarter net loss of $3.80 a share compared to net income of 49 cents a share a year ago. Revenue dropped 15.5% to $1.14 billion.

A sellside convertible trader called the Fed's effort to bolster to U.S. economy by dropping interest rates, like "pushing on a string."

The problems are deeper, he said, and it's going to take a lot more than interest rates to clear up the problem. In the meantime, he said cutting rates was detrimental to the dollar and certain credit markets.

Teva shares trade flat

The four convertible issues of Teva Pharmaceuticals traded fairly actively Wednesday, but little changed, on a share price that was also flat but near a 52-week high.

The Teva 0.25% Bs closed at 144.97, compared to 145.09 on Tuesday. Teva shares (Nasdaq: TEVA) closed at $49.58, down 7 cents.

Lehman Brothers convertibles analysts said in a report Wednesday that investors should sell Teva's A and C convertibles to buy Teva Bs, or the 0.25% convertibles due Feb. 1, 2024.

The D issue should also be sold into strength given its rich valuation.

There are strong fundamentals driving Teva stock, and from a convertible perspective swapping out of the 0.5% convertible A tranche due Feb. 1, 2024 and the 0.25% convertible C tranche due Feb. 1, 2026 makes sense because the Bs mitigate call risk, or 2.26 points of premium, related to the Cs, and offer better relative value compared to the As, the Lehman analysts said.

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