Convertible bonds weaken; Countrywide down 3 points; Level 3, Merrill active

By Rebecca Melvin

New York, March 10 - The convertibles market was hit on Monday by another dose of fear, which brought further deleveraging and took bond prices down, practically across the board, market participants said.

"Paper was decaying. There were not any huge sellers," a Connecticut-based sellside head trader said, describing the action as a general decline, which he attributed to "pricing in of inflation expectations."

It wasn't just financials, "everything was weighing down everything," he said.

On trading desks, bids were scare. Among the day's losers were Countrywide Financial Corp., which dropped 3 points, and Level 3 Communications Inc., down about 2 points, both on management-related news.

Players were sellers of EMC Corp., but Wells Fargo & Co. and Amgen were cited as examples of issues that remained somewhat firm.

The convertible preferreds of Bank of America Corp. were in play amid expectations that the bank will remain committed to its plan to acquire Countrywide, players said. The 7.25% preferreds traded at 99.5, versus a share price of $35.50, according to a New York-based sellside desk analyst.

And the Merrill Lynch & Co. Inc. 0% convertibles were still trading in the aftermath of a sweetener that the company added to the issue last week to help keep the paper outstanding.

Countrywide drops on news of FBI probe

The convertible paper of Countrywide dropped into the 70s, as its underlying shares plunged 14%, following news that the mortgage giant is under investigation by the FBI for potential securities fraud.

News broke over the weekend that the Calabasas, Calif.-based housing lender, which is already the subject of a number of lawsuits and regulatory inquiries into its mortgage practices, is being probed by the FBI about whether it reported accurately its financial condition and the quality of its loans.

The Countrywide A tranche, or the Libor minus 350 basis points convertibles due 2037, were reported trading during the morning session at 79. The paper closed at 77.24, versus a stock price of $4.36, compared to a close of 81.58, versus a stock price of $5.07 on Friday.

The Countrywide B tranche, or the Libor minus 225 bps paper due 2037, traded in the first half of the session at 76, and closed at 76.85, compared to a close of 78.87 on Friday.

Shares of Countrywide (NYSE: CFC) sank 71 cents, or 14%, to $4.36.

Level 3 loses 2 points

Two convertibles of Level 3, one carrying at 6% coupon due in 2009, and the other also 6%, but due 2010, were lower after the surprise that Kevin O'Hara, president and chief operating officer of the internet network provider, was resigning. O'Hara is also a co-founder of the Broomfield, Colo.-based company.

The telecom has been having difficulty integrating recent acquisitions, and its liquidity situation and refinancing risk were of concern. A source recently said that there had also been concern over provisioning, which caused the company to lower 2007 and 2008 guidance.

"Management said they had fixed things when they reported Dec. Q numbers, but people are still worried that LVLT is having issues there," he said.

The 6s due 2009 were seen at about 90.5, versus Level 3's stock close of $1.87. The 6s due 2010 were seen at 83, versus the same stock price, compared to about 84.5 to 85, previously.

Level 3 shares (Nasdaq: LVLT) closed down 31 cents, or 14%, to $1.87.

Merrill 0s trading

Merrill Lynch's 0s closed at 109.2, versus a share price of $42.84, compared to a close of 110.69 on Friday, versus a share price of $45.19.

Last week the investment bank amended the terms of its Exchange Liquid Yield Option Notes due 2032 to increase the conversion rate to 16.5 from 14.0915 and to add Sept. 13, 2010 and March 13, 2014 as additional put dates.

Despite a drop in the price of the underlying shares, one source said the sweetener still had value. The principal accretes on this bond, he said. "The next put is in two years. Between now and then, you're going to have a higher price. The put is probably at 110 or 111, compared to the last put price of 105.5. They are offering you the chance that it could really take off."

Merrill shares (NYSE: MER) closed down 5.20%.

Amgen bonds holds in

The convertibles of Amgen were firm Monday even amid expectations that there will be headlines this week swirling around the Thousand Oaks, Calif.-based biotechnology giant.

Already on Monday the Food and Drug Administration raised concerns about the safety of its Nplate drug, aimed at treating a disorder that causes the body to attack its own platelets. Also this week, Amgen is expected to appear before an FDA Advisory Committee about the side effects of Aranesp.

Amgen's 0.125% convertible senior notes due Feb. 1, 2011 closed Monday at 91.978 versus a closing stock price of $44.68. They closed Friday at 92.21 versus a stock price of $44.18.

Amgen's 0.375% convertible senior notes due Feb. 1, 2013 closed Monday at 87.669, versus the same stock price, compared to Friday when they were 87.246.

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