Fannie, Freddie firm; Mesa Air slides; Metromedia preferred rockets; Ipsco weaker; SLM up

By Ronda Fears

Memphis, April 17 - As many had expected, government-backed mortgage finance companies Fannie Mae and Freddie Mac are moving in to pick up the slack in subprime business as they unveiled programs to help homeowners avoid foreclosure at a congressional hearing Tuesday. Both traded slightly higher but amid light volume.

"We have long-term players getting involved in Fannie and Freddie, but a lot of people are more focused on the short-term trade in the subprime sector; they are looking to turn a profit on buying at the trough and selling when the worm turns," said one trader.

Fannie (NYSE: FNM) gained a nickel to $56.97 on Tuesday while Freddie (NYSE: FRE) added 51 cents to $62.57.

Washington Mutual Inc. largely overshadowed any positive news in the subprime mortgage sector, one trader said. Before the company posted a 20% slide in profits and higher credit loss reserves after the close, he noted that a Wall Street Journal study released Tuesday put WaMu as the top domestic lender to investors and second-home buyers - which are considered riskier than loans to primary occupants.

While WaMu's results were not stellar, the trader said the company beat the Street's estimates, which was "encouraging," so there was some short covering in the stock in after-hours action. WaMu (NYSE: WM) closed with a loss of 60 cents on the day, or 1.47%, at $40.13, but at roughly 5:20 p.m. ET the stock was seen better by $1.36, or 3.39%, at $41.49.

Traders reported there was still hefty short selling in SLM Corp. - better known as Sallie Mae - even as the stock went higher in the wake of the $25 billion, or $60 per share, buyout by private equity firms J.C. Flowers & Co. and Freidman Fleischer & Lower and investment banks JPMorgan Chase & Co., and Bank of America Corp. The stock (NYSE: SLM) gained 95 cents, or 1.73%, to $56.

"It's very complex, with huge headline risk," said a buyside trader.

"We need to see the merger agreement, the MAC [material adverse change] clause" which have been termed escape clauses used to break merger pacts when a situation changes from the time the deal was inked and scheduled to be consummated.

Mesa maverick buys the dip

Airline shares were widely mixed Tuesday as oil prices waffled and the market looks ahead to earnings reports due this week. Amid the turmoil in that sector, however, Mesa Air Group Inc. shares were sharply lower on a downgrade to neutral from Calyon Securities, but one trader pointed to a maverick buyer on the decline as the Phoenix regional carrier expands into the Chinese air space.

Mesa (Nasdaq: MESA) lost 80 cents, or 10%, to close Tuesday at $7.20 after trading in a band of $7.18 to $7.89 amid volume of roughly 1.63 million shares versus the norm of 515,657 shares. In after-hours trade, the stock was moving higher.

Another trader cited recent news that Mesa is in talks to use a military base as it firms up plans to launch a joint venture with Shenzhen Airlines in September. The partnership was announced in December; Mesa's stake is 25%.

The first trader said there is a view that the Chinese deal could be a home run, and added that he has a client with a $17 target on Mesa shares.

Metromedia preferred eyed

A big jump was spotted in Metromedia International Group Inc.'s 7.25% preferred from buying mostly fueled by hope of a deal transaction getting revived in some fashion. One market source said the special situation investment has minimal downside and upside of about 40% to 50%, the catalyst being liquidation of Metromedia's remaining operating assets.

Metromedia's preferred (Pink Sheets: MTRMP) spiked up by $1.50 on Tuesday, or 3.13%, to $49.50.

This market source said the preferred has a current value in range of $70 to $76 - the $50 par value, plus accrued and unpaid dividends of around $26. The preferred is at a slight discount to par alone, and in the next 12 months another $5.50 will be added in accrued dividends.

In total there is $205 million face value and $107 million of unpaid dividends associated to the preferred, and he estimates the current value of the remaining assets of Metromedia to be in the range of $430 million to $500 million.

There is an element of risk, but not really, another market source said; it's more a matter of how much upside there will be.

In October 2006, Metromedia announced a deal to sell its 50.1% stake in Magticom and its ownership of other minor Georgian assets for $480 million to a group led by a Dubai investment firm and two other partners. Metromedia's plan was to liquidate after the sale, and it struck a deal with 80% of the preferred holders to pay them between $68 and $71 per share, depending on ultimate liquidation proceeds, which would be a discount to par plus the accrued dividends.

Common holders were estimated to receive $1.58 to $1.63 per share after estimated liquidation costs of $24 million. Metromedia common shares (Pink Sheets: MTRM) on Tuesday slipped by 2 cents to $1.56.

But in December 2006, the buyer elected to cancel the contract.

During the period when the assets were under contract, common holders Black Horse Capital, D.E. Shaw, Esopus Creek Value LP and Mellon HBV Alternative Strategies staged a proxy battle for a shareholder vote on the transaction because they were not happy with the deal. It became a moot point with the deal falling through, but the market source noted that hedge funds also own most of the preferred, led by Farallon Capital Management among others, so preferred holders are well-represented and as a class have elected two board members to consider their interests.

Ipsco wait getting tiresome

Traders said players are getting tired of waiting on news about sale negotiations from steel concern Ipsco Inc., and nervous about the stock price getting ahead of itself while the company is in such talks. Meanwhile, an executive at steel manufacturer Steel Dynamics Inc. on Tuesday said during a conference call to discuss its first-quarter results that it has the means to accomplish such a deal.

"It is not something I think they [Steel Dynamics] are involved with but it made headlines," said one trader.

"Ipsco is easing back because people are nervous that the price, if there is a deal announced, will not be in the same ballpark as where they have traded up the stock. Steel Dynamics is a separate story, I think."

Ipsco (NYSE: IPS) lost 38 cents on the day, or 0.25%, to settle at $150.31. Last week, the company acknowledged that it was in discussions with a third party that could lead to a sale of the company and the stock shot up, but traders said there also was immediate concern that nothing may come of the talks.

The market had already been jittery because a similar set of events regarding Algoma Steel Inc. over the course of a month, beginning in mid-February, ended without a deal signed.

Steel Dynamics (Nasdaq: STLD) on Tuesday lost 65 cents, or 1.41%, to close at $45.32 after reporting first-quarter results.

On the Steel Dynamics earnings calls, an analyst asked chief executive Keith Busse about the Ipsco situation and he replied, "Ipsco? I am not sure at this time if we will get involved with that transaction. We may or we may not; but the valuations there are fairly rich."

Busse specifically noted that Ipsco shares have risen more than 90% since last September.

Asked whether Steel Dynamics had the financial strength to make a large acquisition, Busse said: "Our debt capability is absolutely huge. We'd not have any trouble getting our hands around $12 billion if we needed it. I do not see us leveraging this company to the hilt. We'd have to balance it with equity."

For first quarter, Steel Dynamics reported net income increased to $102.2 million, or $1.01 per share, from $76 million, or 76 cents per share, a year ago while revenue grew 30% to $865.7 million from $665.9 million.

Sea Containers lifted

Bermuda maritime concern Sea Containers Ltd. announced plans Tuesday to bring AlixPartners on board to provide turnaround management as it steers through bankruptcy. Whether related or not to the news, a distressed stock trader said he was a small buyer picking up the stock, buoyed by where the associated bonds have been trading of late.

Sea Containers shares (Pink Sheets: SCRA) added 5 cents, or 4.72%, to close at $1.11.

"I own some shares but have to admit I have not done a lot of financial analysis on Sea Containers. But with the bonds back into the 80s, that says to me that the bond market thinks there is a good chance of full recovery for the creditors. You don't buy a defaulted bond for 85 thinking you'll get back 90 cents on the dollar," the trader said.

"So if the creditors get paid, then clearly the shareholders have a chance to keep equity in the company."

As Sea Containers and subsidiaries enter the next phase of the Chapter 11 process, preparatory to achieving an inter-creditor settlement and further progress on non-core asset sales, the company said there is a growing emphasis on simplifying the corporate structure. The company filed bankruptcy in October 2006.

Moreover, the company said these activities require more technical restructuring skills than its current management has, and for this reason it is looking to hire AlixPartners, a prominent financial advisory firm specializing in corporate restructuring. This engagement will result in a number of senior management changes at Sea Containers.

The trader said he has heard rumblings of a potential buyout of Sea Containers, but nothing recently.

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