Convertibles strengthen, especially high-grade names; Nabors up in active trade; financials benefit

By Rebecca Melvin

New York, March 23 - Convertible bonds strengthened Monday as equities rallied on the latest installment of the government's plan to stabilize the financial system.

"It was a lift-a-thon," a New York-based sellsider said of the convertible market, adding that investment-grade names strengthened most notably.

He judged that investment grade was up about 0.5 point across the board. "It was definitely better to buy; everybody's coming back," the sellsider said.

The U.S. Treasury Department outlined plans to buy $500 billion to $1 trillion of troubled assets from major banks through a public-private partnership. In addition, housing data showed an unexpected 5.1% jump in existing home sales in February that cheered markets.

The investor-friendly plan sparked equities, but many remained skeptical of the plan and the rally.

The Dow Jones Industrial Average surged nearly 500 points, or 6.84%, to 7,775.86; the S&P 500 index jumped 54.38 points, or 7.1%, to 822.92; and the Nasdaq climbed 98.5 points, or 6.8%, to 822.92.

"The S&P is up a massive 7%; that's a substantial move," a sellsider said. "But how could anyone partner with the government when they can change anything, at any time? I'm not in a position to do this, but I would have to be skeptical."

The move in equities helped lift crude oil to its highest level in almost four months, and that in turn spurred energy-sector convertibles.

Investment-grade land-drilling contractor Nabors Industries Ltd. was up in active trade, as was natural gas producer Chesapeake Energy Corp., which is non-investment grade.

Financials were also higher in active trade. Bank of America Corp. was considerably stronger. Houston-based real estate investment trust Weingarten Realty Investors was higher in active trade.

But not all rallying stocks prompted convertibles trade. BankUnited Financial Corp.'s convertibles weren't heard in trade, although the underlying stock jumped.

"This company is probably going to be closed by Feds very shortly," a convertibles sellsider said of BankUnited.

Energy names gain

Nabors' 0.94 convertibles due May 2011 traded as high as 89 on Monday, compared to recent levels at 86 bid, 87 offered.

Common stock of the Bermuda-based land drilling contractor gained $1.16, or 11.2%, to $11.49.

The name is fairly liquid in the convertible market in general and it was among the top volume names in trade on Monday, according to a sellsider.

The convertibles of Chesapeake Energy were also among the top five volume names.

Chesapeake has numerous convertible issues but has not been a name in the market for several months as the economic downturn is seen depressing performance of the Oklahoma City-based natural gas producer. But fixing the financial system is expected to pave the way to economic growth, benefiting energy producers, convertibles players believe.

Financials rally

Bank of America's 7.25% convertible preferred shares traded up to 436 compared to 388 on Friday. Shares of the Charlotte, N.C.-based lender opened significantly stronger Monday and only strengthened, settling up $1.61, or 26%, at $7.80.

Financials rallied on expectations that the sector will benefit from the Treasury Department's long-awaited plan to alleviate the banks of toxic assets weighing down their balances sheets.

Convertibles players remained skeptical however.

"As for whether banks will sell or not, we'll see," a Connecticut-based buysider said.

Questions were raised about proposed changes in mark-to-market accounting rules.

If mark-to-market rules are changed, then how much incentive will banks have to sell off their toxic assets?" one sellsider asked.

Several sources agreed that the banks were likely to want to sell at least some of these assets regardless of mark-to-market rules.

"They generally want to move loans off the balance sheet as soon as possible anyway because credit losses build as loans season, and they need to free up capital to bolster their tangible common equity ratios and/or to make new loans at more attractive spreads," the buysider said.

And any easing of mark-to-market rules helps the banks because it will ease capital raising pressures going forward, he added.

Heavy volume in Weingarten

Weingarten's 3.95% convertibles due 2026 were seen settling Monday at 74 bid, 75 offered, after trading as high as 75.10, and compared to 72 bid, 73 offered at the start of the day.

The issue was among the top two volume names of the day but it wasn't clear what was prompting trade in the Houston-based shopping center and industrial REIT.

Weingarten's common stock jumped $1.40, or 16.7%, to $9.81 in heavy volume as well.

"Nobody seems to know what's going on. There must have been a rumor. There are cross-over buyers ... it could have also been a good spread trade," said a convertibles sellsider, who focuses on REITS, among other names.

REITs also need better liquidity in the credit markets that these government initiatives are attempting to improve.

"The question is do you believe in the rally. There are a lot of non-believers. You didn't get a big enough move in Treasuries," the sellsider said.

"It's difficult to know. It's probably a combination of new cash coming back, speculation, and short covering," the sellsider said.

Mentioned in this article:

Bank of America Corp. NYSE: BAC

BankUnited Financial Corp. Nasdaq: BKUNA

Chesapeake Energy Corp. NYSE: CHK

Nabors Industries Ltd. NYSE: NBR

Weingarten Realty Investors NYSE: WRI

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