Legg Mason, B of A, Prudential rise on rate cut; Transocean, Nabors edge up before OPEC decision

By Kenneth Lim

Boston, Dec. 16 - The convertible markets rallied Tuesday as the Federal Reserve cut its Fed Funds target rate to a record low.

Trading volumes nevertheless remained thin with activity centered on the usual suspects.

Financial names Legg Mason Inc., Bank of America Corp. and Prudential Financial Inc. were better in line with their stocks on the rate cut.

The energy sector was slightly positive, with Transocean Inc. and Nabors Industries Ltd. gaining amid expectations that oil exporting countries will cut production levels this week.

Rate cut positive

The Fed on Tuesday cut the Fed Funds target rate to between zero and 25 basis points from the previous target of 100 bps in an attempt to contain the financial crisis.

The move was seen as a largely positive development, although market sources said it was not a surprise.

"No surprise," a sellside convertible trader said. "The market's been expecting this. This is a serious crisis we're facing and the regulators need to take drastic measures to avoid a bigger disaster, and I think they know this and everybody knows this."

The cut, which brings the target rate to the lowest ever, could help to free up the credit markets, the trader said.

"I think the hope is that this will help to unfreeze the credit markets, make people more willing to lend money and to make investments," the trader said. "I'm hopeful but cautious. I have no idea if this will work, but I hope that it does. Will this take away some of the fear in the market? Maybe."

A convertible desk analyst noted that the market shot up when the Fed announced the rate cut, then eased in the afternoon before picking up again near the close.

The rate cut could persuade investors to venture beyond the safe haven of Treasury bonds, the analyst said.

"I think that the intention is that people, if nothing else, will look beyond Treasuries because they'll get next to nothing with Treasuries," the analyst said. "If I'm an investor, I might as well put that money somewhere else. If that's the intended effect, it's going to be positive for all the debt and equity markets. People are going to say, well, I just gotta move a little bit out on the risk curve."

The hope is that the move will also help to revive the primary market for convertibles.

"That would be the next step, right?" the analyst said. "Because if valuations improve in the secondary, companies that need to raise capital will see this as a viable market again. But right now I don't see anyone willing to issue convertibles because the valuations are so bad."

The Fed's move was also significant because it did not leave much more room for cutting rates further, the analyst said.

"It's kind of interesting because they're out of ammo with this gun," the analyst said. "There's not much else they can do over there."

Financials gain on cut

Legg Mason's 7% mandatory convertible gained about 1.5 points outright on rate cut-related optimism.

The convertible was seen at 20.5 against a common stock price of $20.125. Legg Mason, a Baltimore-based asset management company, saw its common stock gain 11.69%, or $2.24, to close at $21.40.

Bank of America's 7.25% convertible preferred also rose about 2.75 points outright to trade at 60, while the common stock closed at $15.10. The common stock climbed 7.02%, or 99 cents, over the day.

Bank of America is a Charlotte, N.C.-based bank holding company.

Prudential's floating-rate convertible due 2037, which may be put in June 2009, was flat to slightly better at 94.75.

Prudential common stock closed at $29.80 on Tuesday after climbing 21.09%, or $5.19. The Newark, N.J.-based company is a life insurer and financial services company.

"People are hoping that the lower interest rates will help to free up liquidity in the markets, which is really what's killing a lot of the financials," a convertible trader said. "If nobody's making any investments and nobody wants to buy anything and nobody wants to lend money or do any deals, the banks and the insurers can't make money. I think the cut was lower than what some people were expecting, so maybe that's why there was that bounce, but otherwise people were expecting a cut."

Prudential also had a sizable rebound as its common stock recovered from recent pessimism over the outlook for life insurers, the trader said.

"Prudential was down earlier because there was some research that said there was a risk of downgrades," the trader said. "I think there's probably some bargain hunting today."

Energy gets boost

Energy names had a slightly positive session amid expectations that the Organization of Petroleum Exporting Countries will cut production on Wednesday.

Transocean's series C 1.5% convertible due 2037 was up by about 1 point outright to trade at 75 versus a common stock price of $57.00. Transocean common stock ended the day at $57.09, lower by 0.23% or 13 cents.

Transocean is a Houston-based offshore drilling contractor.

The Nabors 0.94% convertible due 2011 also rose by a point to change hands at 81 versus a $12.95 common stock price.

Common shares of Nabors, a Hamilton, Bermuda, incorporated land drilling contractor, gained 3.9%, or 49 cents, to close at $13.04.

"The oil and gas guys have been pretty much day to day just reflecting where oil prices are on that day," a sellside analyst said. "I think in the long term people expect oil prices to go up again, but there's no certainty about when the turnaround is going to take place. People expect OPEC's going to cut production, but I think some of that may have been priced in already. Unless they make a pretty significant cut, you probably won't see a huge jump."

Mentioned in this article:

Bank of America Corp. NYSE: BAC

Legg Mason Inc. NYSE: LM

Nabors Industries Ltd. NYSE: NBR

Prudential Financial Inc. NYSE: PRU

Transocean Inc. NYSE: RIG

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