Convertibles remain volatile; Wachovia attracts possible buyers; EMC, Qwest Communications decline

By Rebecca Melvin

New York, Sept. 18 - The convertible bond market was volatile Thursday as uncertainty kept investors fearful early in the day, and word the U.S. government was considering a trust to buy bad debt that's hurting the financial markets sparked a sharp equities rally late in the session, traders said.

Also pulling equities higher in the session was short covering due to changes in rules that will require more disclosure about short positions, traders said.

Many financials were better, but overall there were still more sellers than buyers in the convertibles market, and names in many other sectors were called lower.

Wachovia Corp. found buyers as its shares gained even before the late-day rally. Reports about a potential link up with Morgan Stanley & Co. were viewed as positive for Wachovia no matter which way it went, somehow, a sellside trader said. After the word of a possible government trust, Wachovia steamed ahead even harder.

Washington Mutual Inc. was better early Thursday after the Seattle-based savings and loan said it was putting itself up for auction on Wednesday.

CIT Group Inc. convertibles were languishing early in the session after the New York-based finance company announced a $500 million credit facility agreement with Wells Fargo Bank, with which it plans to fund middle market term and revolving loans.

Elsewhere, selling hit EMC Corp. and Qwest Communications International Inc. amid no particular news, sources said.

"At least buyers could be found Thursday, and there was a little bit better activity than on Wednesday," a sellside trader said. Panic gripped the markets on Wednesday and credit market liquidity dried up following the bankruptcy of Lehman Brothers Holdings Inc. earlier in the week and the government bailout of American International Group Inc. late Tuesday.

Friday's session was expected to be volatile as well, as financial market turmoil is expected to continue, along with quadruple witching, which is the day that contracts for stock index futures, stock index options, stock options and single stock futures all expire.

Wachovia adds amid chatter

Wachovia's 7.5% convertible preferred traded at 48 versus a stock price of $10.50 during the session, but it was seen closing at 60 versus a stock price of $14.50. On Wednesday, the 7.5% preferreds were around the 42 mark.

Wachovia common stock (NYSE: WB) surged $5.38, or 59%, to $14.50 in extremely heavy volume.

Sources said they were not exactly sure why the Charlotte, N.C.-based commercial bank was in favor. The case could be made that if there was no Morgan Stanley deal, it was good for Wachovia, and if there was a deal, it would be good for Wachovia.

The thinking is "if it goes through, it's good, and if it doesn't, it's good that it won't saddle itself with someone else," a New York-based sellside trader said.

Short covering was also said to be behind the run up in stocks. And a change in regulations that could require more disclosure from hedge funds about their short positions drove that activity.

Nevertheless, it was comments that the Treasury is considering setting up a trust to buy bad mortgage-related debt that was most behind the rally, sources said. "Financials weren't going to disintegrate today," a New York-based sellside strategist said, also noting, "I think everyone got whiplash today."

A report that Treasury secretary Henry Paulson is considering the formation of a vehicle like the Resolution Trust Corp., which was set up during the savings and loan crisis of the late 1980s and early 1990s, sparked the sharp rally.

The intervention would help financials get bad mortgage debt off their books and stop the drain on capital that has led to the bailout of Fannie Mae and Freddie Mac, the government facilitated purchase of Bear Stearns Cos. by JPMorgan Chase & Co., the bankruptcy of Lehman Brothers and the government takeover of AIG.

Sources said they expected further news on such intervention to come more likely over the weekend rather than on Friday.

That seems to be the pattern, they said. "Although, I think Paulson and Bernanke need to take a weekend off," one sellside strategist quipped.

Friday already promises to be volatile with quadruple witching, which "means people will be moving things around and extending options out," he said.

Investors eye positive WaMu outcome

Washington Mutual's 7.75% series R non-cumulative perpetual convertible preferred shares were 19 bid, 20 offered near the close and reportedly traded as high as 22 versus a share price of $2.35 during the session.

The pricing near the close was versus a stock price of $2.25, and shares of the Seattle-based savings and loan (NYSE: WM) actually closed higher at $2.99, which was up 98 cents, or 49%.

The Washington Mutual 5.375% PIES due 2041 traded at 14 during the session versus a share price of $2.35.

Potential buyers of WaMu reportedly include JPMorgan Chase and Wells Fargo Bank, but neither has put up a formal bid. Other options are also being considered, including raising capital. The company hired Goldman Sachs and Morgan Stanley to run the auction.

EMC down 'pretty good'

EMC's shorter-dated 1.75% A tranche convertibles due 2011 traded down to about the 102 mark versus a closing stock price of $12.41, compared to a price of about 106 versus a share price of $12.84 on Wednesday.

The EMC 1.75% B tranche of convertibles due 2013 closed at 101, compared to 106 on Wednesday.

Shares of the Hopkinton, Mass.-based data-storage company closed down 43 cents, or 3.3%, to $12.41.

There was no overt news on the company, but the issues are large, liquid mainstays of the convertibles market and selling hit the name Thursday, perhaps having something to do with the borrow.

"EMC's down pretty good, pretty significantly," a sellside source said.

Qwest trades at 85

Qwest was another convert name that traded lower on Thursday amid no apparent company news.

One source said the bonds came in pretty well versus a smaller move in the stock. But another source said that there was only a one-off trade at lower levels due to one seller's rushed liquidation, and that the market rebounded up to the former level on a dollar neutral basis later in the day.

"There was one down print, really low that was a full point below where we were putting them," the sellsider said.

That low print of the Qwest 3.5% convertibles due 2025 was at 85 versus $3.33, compared to 86.5 bid, 88.5 offered versus a share price of $3.30 on Wednesday, he said.

Shares of the Denver-based communications company (NYSE: Q), which were slightly lower earlier in the day, rallied to the close, ending up 22 cents, or 6.6%, at $3.57.

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