Wachovia, Bank of America end higher outright; UAL jumps; Chesapeake, Transocean slip with oil prices

By Kenneth Lim

Boston, July 22 - Wachovia Corp. sparked an afternoon rally for the banks Tuesday after the company said it had sufficient capital despite reporting a second-quarter loss.

Wachovia's convertible preferred gained outright with the underlying stock, as did the preferreds of Bank of America Corp., although spreads widened across the board.

UAL Corp. also took off after the airline announced a deal to boost liquidity, even though the company also reported a second-quarter loss.

Energy sector names were weaker as oil prices dropped again on Tuesday. Chesapeake Energy Corp.'s movements continued to reflect changes in the price of crude, while Transocean, Inc. also slipped but held up slightly better.

The convertible market in general had another subdued session Tuesday as investors remained under a cloud of uncertainty, market sources said. A trader said much of the attention was drawn to Assured Guaranty Ltd., even though the company does not have an outstanding convertible.

"Oil was down a little bit," the convertible trader said. "Bonds are still selling off. Other than that, in convertible names, not much. I guess the important name was AGO, which doesn't have a bond, but the stock was as low as $8 today, and it closed yesterday at $18.50."

Assured, a Hamilton, Bermuda-headquartered bond insurer, took a hit on Tuesday after Moody's Investors Service put the company's Aaa credit rating on review for a possible downgrade.

Wachovia gains after results

Wachovia's 7.5% convertible preferred jumped about 3 points outright on the back of the company's earnings announcement.

The preferred traded at 77.625 with the stock at $14 late Tuesday. Wachovia common stock (NYSE: WB) closed at $16.83, up by 27.69% or $3.65.

"Wachovia was up a few points, worse dollar-neutral," a sellside convertible analyst said. "They were up because the company said it wasn't going to sell any more stock, so guys on the equity side were happy about that, I guess. But spreads widened, so it wasn't good for a lot of convert guys."

Charlotte, N.C.-based Wachovia on Tuesday reported a second-quarter loss of $8.86 billion, or about $4.20 per share. Excluding items, the bank had a loss of about $1.27 per share, slightly less than the $1.30 that analysts had been expecting.

Wachovia also cut its common dividend $0.05 per share from $0.375 per share, explaining that the move would save about $700 million per quarter. The bank also said it will cut 6,350 jobs, and it plans to sell at least $20 billion of loans and securities by the end of 2008. For 2009, the bank aims to reduce expense growth in 2009 by $1.5 billion.

Wachovia also said it had a Tier 1 capital ratio of 8%, more than the minimum required by regulators, and the company does not intend to sell stock to raise capital.

Following its results announcement, all three credit rating agencies cut Wachovia by one notch. Moody's and Fitch Ratings have a negative outlook on Wachovia's credit rating, while Standard & Poor's has a stable outlook.

"However you look at it, it was a pretty bad quarter," the analyst said. "They're still having to make writedowns, their consumer business is down, they're losing money."

The analyst said there may also be concern about Wachovia deciding not to pay the dividend on the preferreds.

"Dividends are a quick way to save capital if you don't want to sell stock," the analyst said.

The analyst said it remains to be seen whether Wachovia's attempts to improve its balance sheet will work.

"I think the gist of their plan is to cut jobs, cut dividends and sell assets that they don't want to be involved in anymore," the analyst said. "All those will definitely be positive for their balance sheet, but the issue anytime someone sells assets to improve their balance sheet is what are they left with? Revenue's probably going to go down. I don't think there's that much comfort for preferred holders who are so low on the ladder."

Bank of America keeps climbing

Bank of America's 7.25% convertible preferred was flat early Tuesday but finished about a point better at 94 against a stock price of $31.625 as investors saw the company as a possible refuge in the banking sector.

Bank of America common stock (NYSE: BAC) closed at $32.35 on Tuesday, higher by 13.27% or $3.79.

"I think Bank of America's done well since last week," a convertible analyst said. "They've got a balanced business so I think the feeling is that they're more likely than some of the other banks to survive what's going on right now, and their results exceeded expectations, so that adds to it."

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

UAL jumps on earnings

United Airlines parent UAL Corp. got a big boost after the company announced a deal to improve liquidity, despite reporting a loss in its second quarter.

The UAL 4.5% convertible due 2021 traded at 47.5 versus a stock price of $7.50 on Tuesday. UAL common stock (Nasdaq: UAUA) surged 68.54% or $3.42 to close at $8.41.

"They're pretty much busted now," a sellside convertible trader said. "They're going to trade pretty close to the stock until maybe a couple of years when the put comes."

UAL on Tuesday posted a net loss of $2.73 billion, or $21.47 per share, for the second quarter. The Chicago-based airline said it plans to cut almost 7,000 jobs by the end of 2009, and also announced a deal with JPMorgan Chase & Co. to boost its cash.

The deal, which will add $1.7 billion to UAL's long-term cash balance, chiefly involves credit card agreements with JPMorgan's Chase Bank. Chase will accelerate payment of $600 million to UAL, while a new credit card processing deal will free up about $350 million. UAL also plans to raise $330 million in the third quarter.

But the news did little to improve excitement about the convertibles, the trader said.

"Most guys I know got out of airlines a while back," the trader said. "The whole industry's a mess. They say they're getting, what, $1 billion in cash? That's half of what they lost last quarter."

Energy drops with oil

Chesapeake Energy's 2.25% convertible due 2038 fell about 3 points outright to trade at 98 versus a stock price of $51.50 as oil prices continued to retreat.

Chesapeake common stock (NYSE: CHK) closed 8.49% or $4.74 lower at $51.10.

Chesapeake is an Oklahoma City-based natural gas producer.

Meanwhile, Transocean's convertibles held but better, but still eased as with the price of oil. The Transocean series A 1.625% convertible due 2037 lost about a point outright to trade at 109.5 versus a stock price of $145.50, while the series B 1.5% convertible due 2037 also slipped a point to change hands at 109.625 versus the same stock price. The series C 1.5% convertible due 2037 was down by ½ point at 110 against the same stock price.

Houston-based Transocean (NYSE: RIG) an offshore drilling contractor, saw its common stock decline by 0.87% or $1.29 to close at $146.68.

Oil prices dropped on Tuesday, with light, sweet crude for August delivery easing $4.89 to close at $126.15 per barrel on the New York Mercantile Exchange.

"It's painful," a buyside convertible analyst said. "We have an overweight in the energy space, but it's more geared toward service names than producers. Whilst we enjoyed the nice run-up in the second quarter, this quarter so far has been in a correction, the stocks have been coming down."

Credit spreads across the overall market have also been expanding.

"I think there's been pressure on the convertible market in general," the analyst said. "I think generally convertibles have come in against stocks. If you're neutral, I don't know if you made money."

Oil prices are likely to be high, although a short term correction could be in the works, the analyst said.

"The technical direction of oil prices appear to be lower, and you know there is demand at high prices," the analyst said. "I think the supply demand equation is in favor of still relatively high prices, but I don't know if they should be $150 or $120 or $100."

Despite confidence that long-term oil prices will remain high, the analyst said the current market movements may not necessarily yield attractive bargains.

"It kind of depends on your timeframe, what level of exposure you already have," the analyst said. "If oil goes to $100, oil stocks will go lower. The ironic thing is the analysts who cover the stocks they're using much lower prices for oil anyway, so the earnings estimates shouldn't go lower."

And declines in oil may benefit the non-oil portions of portfolios, the analyst noted.

"If 20% of my portfolio is in energy names, 80% of my portfolio is in non-energy names, if my energy names don't do well, maybe the non-energy names will do well," the analyst said. "It seems to be for the short term that oil prices maybe head lower and stocks therefore go up."

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