Convertibles mostly lower; National Retail edges below par; Thornburg, Nextel drop

By Rebecca Melvin

New York, Feb. 28 - The convertible bond market ended quiet and mostly lower Thursday after a flurry of early activity related mostly to the release for secondary trading of National Retail Properties Inc.'s new convertible, market participants said.

The new 5.125% National Retail convertible moved higher right out of the gate, with trades seen as high as 101.25. But by early afternoon, it dipped below par and closed there, with one source putting the close at 99.397, and another at 99.75.

The convertible preferred shares of Thornburg Mortgage Inc. plunged in active dealings after the mortgage originator said it has had to meet margin calls due to a suddenly worsening market for mortgage-backed securities.

Meanwhile, the 5.25% convertible bonds of Sprint Nextel Corp. fell amid a raft of bad news, including lower guidance followed by ratings downgrades.

Mylan Inc. and Teva Pharmaceuticals Inc. - regulars in trading this week - were also active again.

Thornburg margin calls causes plummet

Thornburg's 10% series F convertible preferred shares ended down 11% versus a 15% drop in the common stock. The common plummeted as much as 22% during the session, before regaining ground.

The Santa Fe, N.M.-based mortgage lender, specializing in jumbo and super-jumbo adjustable-rate mortgages, said in a filing with the Securities and Exchange Commission that its liquidity was suffering and it may be required to sell assets if margin calls, which began Feb. 14, continue.

In the filing, the company said the mortgage industry remained under pressure as the value of mortgage assets held by banks and broker-dealers continued to deteriorate. It also cited downgrades by rating agencies and the reluctance of banks to finance mortgage securities in the reverse repurchase agreement and other mortgage financing markets was hurting the sector.

During the fourth quarter of 2007 and into 2008, Thornburg faced declines in the value of its securities that were at or below the levels experienced in August, when the subprime melt-down first hit the credit markets.

Beginning on Feb. 14, a sudden adverse change in mortgage market conditions including the valuations of mortgage securities backed by Alt-A mortgage loan collateral, caused the company to have to make margin calls of more than $300 million on reverse repurchase agreements.

Alt-A mortgages carry higher interest rates, but don't require borrowers to provide a lot of documentation, making them attractive to those flipping properties in a bet that the boom in real estate would continue.

The 10% convertible preferred shares, which had an add-on in January, closed down 11% at 23.45, versus a stock price of $9.76, compared to a close on Tuesday of 26.03, versus a share price of $11.54.

The add-on was an upsized $156 million addition to the existing 10% Fs issued last year.

Thornburg shares (NYSE: TMA) lost 15.4%.

In related trade, convertibles of Countrywide Financial Corp. seemed to hold up despite a 5% drop in their underlying shares.

The Countrywide Financial Libor minus 350 series A convertibles closed at 87.88 versus a share price of $6.64, compared to 88, versus a share price of $6.98 on Tuesday.

Elsewhere in financials, Washington Mutual Inc.'s 7.75% series R non-cumulative perpetual convertible preferred stock closed Thursday at 976.27 versus a closing stock price of $15.73. They closed Wednesday at 1045 versus a stock price of $16.68. Washington Mutual shares (NYSE: WM) lost 6%.

Sprint bonds drop

The Sprint Nextel 5.25% convertible senior notes due 2010 closed at 95 versus a share price of $8.09, compared to 99.14 versus a share price of $8.95 on Wednesday.

The credit default looked to have blown out about 200 basis points to Libor plus 580 bps to 600 bps.

The No. 3 U.S. mobile phone service, based in Overland Park, Kansas, posted a quarterly loss of almost $30 billion and gave a bleak forecast.

"The company drew down $2.25 billion on their credit facility, stopped their dividend, are closing stores and took down first quarter EBITDA guidance pretty substantially," said one New York-based sellside trader. "The bonds are a pure yield play."

The news was followed up by ratings agencies' actions. Fitch Ratings downgraded and placed on Rating Watch negative Sprint's issuer default rating and senior unsecured notes to BB+ from BBB- and its short-term issuer default rating to B from F3 and commercial paper to B from F3.

The agency also lowered Sprint Capital Corp.'s issuer default rating to BB+ from BBB- and senior unsecured notes to BB+ from BBB-; and Nextel Communications Inc.'s issuer default rating to BB+ from BBB- and senior unsecured notes to BB+ from BBB-.

Fitch said the downgrade reflected expectations that the company's financial metrics and operating results for 2008 will be much worse than expected

Meanwhile Moody's Investors Service changed its rating outlook on Sprint Nextel to negative, from stable, meaning a rating downgrade may be likely in the next 12 to 18 months. Moody's said operational weakness (generally resulting from poor customer service) will persist longer and be more pronounced than previously expected causing subscriber losses to increase.

However, Moody's affirmed Sprint's Baa3 senior unsecured rating.

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