NatCity, Countrywide, Sallie Mae lead financials higher; XM up on Justice OK; market awaits Thornburg

By Rebecca Melvin

New York, March 24 - Financial paper dominated the convertibles market again on Monday as players were cheered by news of J.P. Morgan Chase & Co.'s sweetened bid for Bear Stearns Cos. and existing-homes sales that gained for the first time in seven months.

The strength - although tapered by the end of the session - extended an improving credit picture that began to develop last week and a snapback in financials on Thursday. Financial markets were closed on Friday for the long Easter weekend.

"It's a good day," a New York-based sellside desk analyst said.

Other players concurred that market sentiment was a lot better; but volume was still thin and generating interest in names to trade took a lot of effort, sellsiders said.

"Trades are a week apart. People still don't want to buy. And it's hard to create a new buyer, and to make it appealing," a Connecticut-based sellsider said.

News that Bear Stearns will likely receive five times more per share than initially expected boosted the convertibles and common stock of Bank of America Corp., Citigroup Inc., Prudential Financial Inc. and others in early trading. SLM Corp., or Sallie Mae, was also better.

Cleveland, Ohio-based National City Corp., which saw its 4% convertibles jump 6 points to 10 points, was also helped by an upgrade by Friedman Billings Ramsey.

Mortgage lender Countrywide Financial Corp. and Washington Mutual Inc., which is also heavily exposed to home lending, were also seen higher after existing-home sales during February rose 2.9% to a 5.03 million annual rate, up from January's unrevised 4.89 million annual rate, according to the National Association of Realtors.

The convertibles of XM Satellite Radio Holding Inc. also moved higher along with their underlying shares after news surfaced late in the session that the U.S. Justice Department approved its merger with Sirius Satellite Radio Inc. The merger also requires approval from the Federal Communications Commission.

Meanwhile, it was unclear whether final pricing of Thornburg Mortgage Inc.'s $1 billion convertibles offering would occur on Monday. Syndicate sources said final pricing was "day-to-day," but a spokeswoman for the Santa Fe, New Mexico-based mortgage lender told Prospect News that she stood by an earlier statement that the process of talking with large investors had continued through the weekend, and pricing was expected on Monday.

Financials build on gains

The convertibles of financial names were active, with mortgage lenders solidly higher as the risk of negative headlines devastating markets seemed less likely, according to a source. "I think the worst is past."

The common shares of Bear Stearns surged 88.8% after J.P. Morgan agreed to increase its original bid to $10 a share from $2, a revision aimed at winning over Bear shareholders who said they would oppose the buyout otherwise.

Standard & Poor's raised its debt and counterparty credit ratings on Bear Stearns to AA-/A-1+ and removed it from CreditWatch developing where they were placed on March 17, a move that it said recognized the strengthened immediate guarantee by J.P. Morgan of all of Bear Stearns' counterparty obligations. The agency noted J.P. Morgan will also assume Bear Stearns' debt obligations upon completion of the acquisition.

Meanwhile, its rating on J.P. Morgan (AA-/stable/A-1+) will not be affected by the amended terms of its offer, it said.

Friedman Billings Ramsey boosted National City to "market perform" from "underperform," lifting the regional financial player even though S&P on Friday lowered its outlook on National City to negative from stable, citing concern regarding National City's exposure to the still challenged housing and mortgage markets.

Credit risk represents the greatest pressure on the current ratings, S&P said, adding that asset quality deteriorated materially during 2007 as a result of National City's concentration in housing and mortgage-related assets.

Nevertheless, National City's 4% convertible senior notes due 2011 jumped early in the session to trade at 89 versus a stock price of $12.

The notes subsequently fell back a little but still went home at 85.5, versus a stock price of $11.51 on Monday, compared to a close of 79, versus a stock price of $11 on Thursday. Shares of the regional financial player (NYSE: NCC) gained 4.6%.

Among other financial convertibles, Sallie Mae's convertibles firmed smartly. The 7.25% series C mandatory convertible preferred stock closed up Monday at 871.16, versus a closing stock price of $16.17, compared to a close of 833.88 on Thursday, versus a share price of $15.78. Shares of the Reston, Va.-based student lender (NYSE: SLM) gained 2.5% on the day.

Bank of America's 7.25% non-cumulative perpetual preferred series L shares closed up 1.2% at 1105.56, versus a closing stock price of $42.45 on Monday, compared to 1092.68, versus a closing stock price of $41.86 on Thursday. Shares of the Charlotte-N.C.-based diversified financial giant (NSYE: BAC) closed up 1.4% on the day.

Citigroup's 6.5% perpetual convertible preferred shares also closed about 1.2% higher at 23.6, versus a stock price of $23.27, compared to a close of 23.3, versus a stock price of $22.50 on Thursday. New York-based Citigroup shares (NYSE: C) closed up 3.4%.

Finally Prudential Financial's Libor minus 163 bps floating rate convertibles due 2037 traded at 94.5 early in the session, while the old convertibles traded at 97. The floaters closed at 94.3, versus a stock price of $78.09, compared to a close of 94, versus a stock price of $76.10 on Thursday, according to one source. Shares of the Newark, N.J.-based financial services company (NYSE: PRU) closed up $1.99, or 2.6%, at $78.09.

Mortgage lenders rally

Calabasas, Calif.-based mortgage lender Countrywide saw its Libor minus 350 bps series A convertible senior debentures due April 15, 2037 trade early at 87, well above the range last seen in the low 80s.

Countrywide's Libor minus 225 bps series B convertibles closed at 82.4 after trading earlier in the session at 83, compared to a price of 80 on Thursday.

Shares of Countrywide (NYSE: CFC) gained 6.2% on the day.

The Thornburg 10% convertible prefers series F surged 26%, to close up 8 cents at $4.28, versus a stock price of $1.27, compared to a close of $3.40, versus a stock price of $1.13 on Thursday.

The Santa Fe, N.M.-based mortgage lender had trading of its common shares suspended on the New York Stock Exchange because the price had sunk to as low as $1.05 a share. Now the shares will trade over the counter until they trade at at least $1.30 for a full trading day.

"Nothing should be holding at premium at this point," a sellside convertibles trader said of Thornburg. The troubled mortgage lender needs to price $1 billion of convertibles this week to stay in business.

"They have today and tomorrow to get this done," the trader said of the convertible new issue. "People are going to be selling stock if they can do $1 billion of convertibles."

Thornburg plans to price $1 billion of seven-year convertibles to yield a 12% coupon, with an initial conversion premium 75% below the closing price of Thornburg common shares on March 18. There is a greenshoe of $150 million.

Bookrunners are Friedman Billings Ramsey and UBS Investment Bank with Jefferies & Co., Inc., JMP Securities LLC and Keefe, Bruyette & Woods in the syndicate.

Under the agreement that Thornburg has struck with its repurchase agreement lenders, the lenders have agreed not to start selling the collateral for a year from now, but only on the condition that Thornburg can raise the convertible debt.

Thornburg is a single-family residential mortgage lender focused principally on prime and super-prime borrowers seeking jumbo and super-jumbo adjustable-rate mortgages.

XM spikes on regulatory news

The 1.75% convertibles of XM Satellite due 2009 traded in the range of 88.5 to 89 offered after news that an important regulatory hurdle had been cleared so that New York-based Sirius and Washington, D.C.-based XM can merge. Shares of XM (Nasdaq: XMSR) surged 15.5% to $13.79.

The XM 1.75% convertibles were said to close on Thursday at a price of 86.7, versus a share price of $11.94.

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