Fannie Mae sinks on Lehman report; GM ends mixed; Chesapeake, Penn Virginia see interest

By Rebecca Melvin

New York, July 7 - The convertible bond market was described as a little weaker in mostly quiet trade Monday even through the equities markets whipsawed in reaction to things like Lehman Brothers' GSEs report, which outlined potential hazards for Fannie Mae and Freddie Mac related to proposed accounting rules changes, sources said.

Fannie Mae's mandatory and perpetual convertible preferreds sunk along with a 16% slide in their common stock after Lehman outlined the severe undercapitalization that would result if its off balance sheet securitizations were brought on balance sheet as a result of the proposed changes.

The warning weakened the whole financial sector as shaky investors lack confidence in the prospects for U.S. financials. American International Group Inc.'s mandatories slipped about 0.25 point on a 1% decline in their underlying shares.

General Motors Corp. convertible bonds ended mixed, however, despite a lower start amid headlines that the Detroit auto giant is contemplating more cost-cutting initiatives.

Chesapeake Energy Corp. was slightly better on a dollar-neutral basis amid lower natural gas and oil prices that contributed to lower shares for the natural gas company.

Penn Virginia Corp., another natural gas company, also held up in "good two-way trade" as investors appear more confident to buy on the pullbacks in names like Chesapeake and other energy stalwarts, a New York-based sellside trader noted.

After the close, Goodrich Petroleum Corp. announced that it began a common stock offering of 3 million shares, with a portion of the proceeds earmarked to pay off the outstanding balance of its senior revolving credit facility and the remainder for general corporate purposes.

The announcement might have been a disappointment for convertibles players looking for capital raises in the form of convertible paper, but "it will help the credit," a sellsider said.

Fannie Mae gets clobbered

The Fannie Mae 8.75% mandatory convertible preferred shares were seen closing down nearly 4 points at $32.98 versus a closing share price of $15.74 on Monday. That compared to $36.84 versus a share price of $18.78 on Thursday, the last session before the July 4 holiday weekend.

The mandatories were issued in May with a par value of $50.

The older Fannie Mae 5.375% perpetual preferred stock was seen down at 58,009, compared to 59,892.8.

Washington, D.C.-based Fannie Mae shares (NYSE: FNM) dropped $3.04, or 16%, to $15.74.

The drubbing was attributed to a Lehman equity research report that aimed to outline the risk, rewards and imperatives of GSEs.

"The GSEs' stocks have been extremely weak along with other financial stocks in recent weeks. Observers have cited a variety of reasons for this, not the least of which is the continued barrage of deteriorating credit data," the report began.

"One issue we want to focus on ... is a pending FASB rule change, the outcome of which could be so contrary to all other current capital ratios and policy initiatives that we cannot imagine such an outcome occurring," the report, published by analysts Bruce Harting and Mark DeVries, stated.

The analysts said that at the end of the first quarter of this year, Fannie Mae had nearly $43 billion of core capital, which is now roughly $49 billion after its $6.5 billion capital raise, giving it $13 billion of excess capital net of its $36 billion minimum capital requirement.

If the GSEs were forced to bring all securitizations on balance sheet, then they would swing from having a nice surplus to having a large capital deficit, the report stated, and Fannie Mae's minimum capital requirements could increase by more than $46 billion.

The need for that much more capital would be challenging, to say the least, and severely undercapitalized GSEs "could possibly topple the already fragile capital markets;" so for that reason Lehman went onto say it didn't think that the capital requirements of GSEs would be pushed to those levels.

The midsession reverse course in equities, however, was attributed to the Lehman report, according to one source, who noted that in convertibles most names were unchanged in the morning and weaker in the afternoon.

AIG 8.5% mandatory convertible equity units due May 2011 were seen at around 58.75, 59, edging down by about 0.125 point, while shares of the New York-based financial services giant closed at $25.94, down 1%, and only up slightly from its 52-week low of $25.70 hit July 1.

The mandatories have a par value of $75.

GM ends mixed

GM's 6.25% convertibles due 2933 (NYSE: GPM) closed down by about 0.75% to 12.01 in heavy volume. But the GM 5.25% convertibles due 2032 (NYSE: GBM), with its 10-year put, turned positive during the session, ending up nearly 0.5% to 12.91 in thin volume.

Meanwhile the GM 1.5% convertibles due June 2009 (NYSE: GRM), which mature in less than a year, closed up about 0.25% at 21.05 in healthier-than-average volume.

GM is considering shedding white collar jobs and selling some brands. But the prospects of selling those brands, like Buick, Saturn and Hummer, might be difficult in light of the U.S. sales downturn brought on by high gas prices and a slowing economy.

Chesapeake, Penn Virginia find buyers

Chesapeake's 2.25% convertible senior notes due 2038 (Cusip: 165167CB1) ended Monday at 113.879 versus a share price of $64.34, compared to 117 versus a share price of $66.78 on Thursday.

The 3-point decline in the notes compared to a 3.7% drop in shares, which ended off their lows in better-than-average volume.

Chesapeake (NYSE: CHK) is an Oklahoma City-based natural gas company.

Radnor, Pa.-based Penn Virginia saw its 4.5% convertible senior subordinated notes due 2012 trade at 146. Penn Virginia shares (NYSE: PVA) ended down $2.40, or 3.3%, at $69.96.

There were buyers of Penn Virginia, a New York-based sellside trader said. "What I heard last week and what I saw today, was that on the pullbacks in energy, outrights in particular are interested in adding to and getting into Chesapeake and other names."

There was a lot of interest, which marks a change from recent months when outrights were scared off by the big moves, the trader explained.

Natural gas for August delivery fell 60 cents, or 4.4%, to settle at $12.977 per million British thermal units at 3 p.m. on the New York Mercantile Exchange. Crude oil for August delivery slid $3.92, or 2.7%, to settle at $141.37 a barrel in New York.

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