Convertibles under selling pressure; ProLogis added to banned list; Vornado softens; Nabors lower

By Rebecca Melvin

New York, Sept. 23 - Tempered by the emergency ban on the short-selling of financials, the convertibles market saw continued selling pressure Tuesday with mostly investment-grade names in trade again, market players said.

"Everything is under pressure, and there's not much liquidity, with hedge funds facing redemptions or liquidations, and dealers not stepping up to buy convertible paper," a New York-based buysider said.

The technical pressure on the market isn't going to change soon, the buysider said, but it will turn around eventually, and then people will rush in to buy.

In the meantime, a handful of real estate investment trusts were added Tuesday to the list of names that cannot be sold short, sources said. The list was initially unveiled Friday.

ProLogis was added, and those convertibles were quiet Tuesday despite a bounce in their underlying shares.

"That got added to the list," a New York-based sellside trader said of ProLogis, "and any liquidity is going to be on an outright basis, and that's going to be priced in."

Vornado Realty Trust, which wasn't added to the list - not yet anyway, one buysider quipped - saw its convertibles soften as well.

Elsewhere, Nabors Industries Ltd. was lower as crude oil futures fell on profit taking following Monday's price spike.

Among commodities enjoying a rebound was natural gas, and Chesapeake Energy Corp. was mentioned as a name to watch after the Oklahoma City-based natural gas producer announced after the close Monday that it was cutting production and capital expenditures due to low natural gas prices.

Vornado softens

Vornado's 3.875% exchangeables due 2025 traded at 109 versus a stock price of $94.00 on Tuesday. Shares of the New York-based REIT (NYSE: VNO) were volatile, jumping in early trade but ending close to their lows for the day at $92.74, which was down 71 cents, or 0.76%.

Some of the early strength in equity markets was attributed to early strength in REITS like Vornado, one sellsider said.

"They were overdone," he said about the jump. Investors have been speculating that thinner ranks of New York City's financial services industry might hurt the New York-based office real estate investment trust. So today there were buyers in that name on the equity side, he said.

Still most players are "sitting and watching and marking down," a Connecticut-based buyside source said.

People are waiting for the dust to settle and pinning hopes at least in the near term on a government plan to relieve financials of the toxic debt on their books that has caused the credit markets to seize up, he said.

"The market seems to be following expectations on whether that will get done, and how quickly," the buysider said.

Treasury secretary Henry Paulson, Federal Reserve chairman Ben Bernanke and Securities and Exchange Commission chairman Christopher Cox updated Congress on Tuesday about their efforts to work out a $700 billion financial rescue plan, and while it was the opinion of some that lawmakers asked good questions, the convertible buysider said: "I wanted to throw something at that guy when he said Wall Street owed America an apology."

Meanwhile liquidity in the ProLogis convertibles dried up after trades in the names Monday and last week.

"There may have been some trade today, but at much lower prices," a sellside trader said.

Prologis' 2.625% convertibles due 2038, which was an upsized $500 million convertible senior notes placement priced May 1, traded at 66 versus a share price of $41.50 on Tuesday.

But the older ProLogis 2.25% convertible due 2037, which priced in March 2007, were seen at 76.890 versus a share price of $41.50, compared with a trade on Monday at 75 versus a share price of $40.00.

Shares of the Denver-based industrial REIT (NYSE: PLD) jumped $2.24, or 6%, to $49.49.

ProLogis said Monday that will develop a large new distribution facility for British retailer Marks & Spencer. Marks & Spencer's new state-of-the-art facility will be a flagship development for ProLogis in the United Kingdom.

Nabors lower, Chesapeake steady

Nabors' 0.94% convertible due 2011 traded down to 91 versus a share price of $26.41, compared to a trade early Tuesday at 93 versus a share price of $26.00.

That compared to 95.88 versus a share price of $28.66 on Monday.

Shares of the Hamilton, Bermuda-based land drilling contractor (NYSE: NBR) fell $2.70, or 9%, to $25.96 as oil services companies led declines in the energy sector amid a dip in oil prices.

Crude oil fell $2.76 to settle at $106.61 a barrel.

But natural gas futures advanced amid concern that supplies may be less than expected for the upcoming cold winter months following the hurricanes disrupted output and reports from Chesapeake Energy that it is curtailing production for the remainder of the year and reducing capital expenditures until 2010 due to low prices.

Natural gas for October delivery rose 3.6% to settle at $7.931 per million British thermal units on the New York Mercantile Exchange. But prices are down some 50% since June 30.

"Commodities are enjoying a nice rebound, but I don't know how long that will last," a New York based buysider said, citing Chesapeake Energy as a beneficiary of higher prices.

"Chesapeake has basically shut in its supply, which is positive for natural gas," he said.

Chesapeake stock edged up only 5 cents to $40.94 after the company said it's reducing its drilling capital expenditure budget for the rest of 2008 through the end of 2010 by $3.2 billion, or 17%, because of falling natural gas prices.

The company also reduced its full-year 2008 production growth estimate to 18% from 21% and its anticipated annual production growth forecasts in 2009 and 2010 to 16% from 19%.

Chesapeake's 2.75% convertibles due 2035 (Cusip: 165167BW6) was last at 121.142 versus a closing stock price of $40.94.

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