Convertibles stymied by short-sale ban, redemptions; Chesapeake, NII weaker, but Wachovia improves

By Rebecca Melvin

New York, Sept. 30 - The convertible bond market was quieter-than-usual for the last day of the quarter Tuesday and despite a snapback rally in stocks, but there was more activity than in recent sessions, players said.

Trading was primarily outright as the short-sale ban continued to squelch demand, and redemptions, or fear of redemptions, have also had a paralyzing effect, sources said.

"Across the board, it's pretty quiet, a New York-based sellside trader said.

The short-sale ban, which is widely expected to be extended Thursday when the initial 10-day ban expires, has been like the government "dropping the bomb on convertibles," a second New York-based sellsider said.

Redemptions have also been detrimental, with brokers seeing clients liquidate positions at extremely low prices at times. These levels can be as much as 5 points to 10 points below market, sources said.

Chesapeake Energy Corp. convertibles were up on an outright basis, but lower if they were on hedge, compared to a 10% climb in their underlying shares Tuesday. The underlying common shares were recovering from a new 52-week low hit Monday when the stock markets sold off sharply after the U.S. House of Representatives defeated a government financial rescue plan.

Similarly, NII Holdings Inc. saw trading in its 3.125% convertibles at levels that didn't keep pace with their underlying shares, which jumped 11.6% on Tuesday.

The Liberty Media Corp./Time Warner Inc. 3.125% exchangeables were also weaker.

There were pockets of strength or stabilization seen in the market, especially among investment-grade names. Wachovia Corp. convertible preferreds recovered a bit after weakening Monday on news that its banking assets were going to be acquired by Citigroup Inc.

Chesapeake, NII mostly flat

Chesapeake Energy's 2.25% convertible senior notes due 2038 traded at 66.25 into the bid against a share price of $33.80.

Shares of the Oklahoma City-based natural gas producer (NYSE: CHK) closed higher at $35.86, up $3.26, or 10%.

For the most part, moves were not seen as fundamental, but simply responses to volatility that has rattled the markets of late.

"There are no research-driven ideas because the ground underneath your feet is shaking around, and to get one foot, or hand hold on something, is very difficult," a Connecticut-based sellside analyst said.

"I'm looking primarily at yield to put or yield to maturity - things that are money good and will pay off - and so it doesn't matter what happens in the interim," the analyst said.

Others noted that they weren't sad to turn another calendar page on Wednesday.

"It's been an interesting quarter, and I'm glad to be done with it," a New York-based sellside trader said.

Whether the fourth quarter would bring better things remains to be seen, and while there wasn't a whole lot of optimism, some expect a revote on the government package to help to alleviate the frozen credit markets. They are counting on other dynamics to play a role at helping markets recover as well.

One trader speculated that perhaps retail customers will re-enter the convertible space, a market from which they were all but banned due to the dominance of institutional investors. The draw for individuals would be the strong yields that can be found among many convertible names, the trader said.

NII Holdings' 3.125% busted convertibles traded inside the 73.5 bid, 74.5 offered range, according to one source, while a separate sellsider said they were within the 74 bid, 75 offered range.

Still, those levels weren't enough to keep up with an 11.6% jump in their underlying shares.

The Reston, Va.-based wireless services provider's shares (NYSE: NIHD) climbed $3.94 to $37.92.

Meanwhile, Liberty/Time Warner 3.125% convertibles traded at 88.50 bid, 90.50 offered versus a share price of $12.90, compared to 94.658 versus a share price of $14.06 on Friday.

The underlying shares of Time Warner, a New York-based media company, (NYSE: TWX) added 21 cents, or 1.6%, to $13.11 on Tuesday.

Wachovia regains ground

Wachovia's 7.5% convertible preferreds traded between 360 and 385 on Tuesday, compared to about 315 on Monday.

Shares of the Charlotte, N.C.-based financial company (NYSE: WB), which will now be composed of its securities and asset management businesses, gained $1.66 to close at $3.50, which was nearly double their Monday price.

Wachovia shares dropped Monday on the news that Citigroup was buying Wachovia's retail bank and corporate and investment bank and wealth management business for $2.16 billion. Wachovia will retain its Wachovia Securities, the nation's third-largest brokerage, and Evergreen Asset Management.

On Tuesday, trading in Wachovia was very active, a New York-based sellside trader said. It's trading pari passu to the Wachovia 7.98% paper.

Many things were weighing on the markets. President George Bush spoke early Tuesday, saying that if the nation continues on its present course, the consequences will be devastating and long-lasting.

He said that Monday's stock market losses represented $1 trillion of losses, and that the choice is action on behalf of congress and the "real prospect of economic hardship for millions of Americans."

Congress was out of session for the Jewish holiday, but another crack at the legislation is anticipated Thursday.

Meanwhile people "are holding their breath" about redemptions. They want their money back today. We hear about them single by single. But it's a big day for them," a sellsider said of quarter's end.

We're only dealing with the bond floor, and nobody wants to deal with that," he said.

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