Financials weaken; Ford languishes; Countrywide higher on debt guarantee; AMD adds on asset sale

By Rebecca Melvin

New York, Oct. 7 - Much financial convertible paper was weaker Tuesday and names in other sectors were mostly languishing, but there were a couple of bright spots in the market - if only from an outright perspective, players said.

Bank of America Corp. convertible preferreds were lower, weighed down by a 26% plunge in its shares, amid concerns about capital brought to the fore by the bank's third-quarter earnings reported late Monday.

Legg Mason Inc. convertibles traded lower in line with a 15% stock drop and regional bank KeyCorp convertibles were lower on a 10% stock drop, both also in light volume.

Ford Motor Co. tanked. The Ford 4.25% convertible bonds ending the day at 39.7.

But Countrywide Financial traded higher early in the session, buoyed by word that Bank of America guaranteed to pay the upcoming put on the series A floating-rate convertibles.

And Advanced Micro Devices Inc. gained on news the Sunnyvale, Calif.-based chip-maker is spinning off its expensive fabricating plants to focus on designing and developing chips.

Developments stemming in the financial crisis continue to flow fast and furiously. But nothing seemed to assuage the markets.

The Federal Reserve announced Tuesday it would give companies a new place to get cash by buying massive amounts of commercial paper that money market mutual funds, pension funds and other investors have been shunning.

The CME Group and hedge fund Citadel Investment Group said they plan to launch a joint venture electronic trading platform to act as a central counterparty clearing facility for credit default swaps.

And the short-sale ban on financial stocks is set to expire late Wednesday, freeing up the convertibles market a bit for Thursday's session hopefully. But some market players were downbeat even about that amid continued uncertainty.

"Fidelity, one of the biggest owners of equities, has said it doesn't intend to lend out its securities," a New York-based sellside desk analyst noted.

Others said expiry should provide a little bit of relief for convertibles because on a day like Tuesday when AMD and Ford were moving, convertible arbitrage players were sitting out because their stocks couldn't be shorted.

Equities markets closed down again, leaving the S&P 500 index down 5.8% to below 1,000.

"I did nothing. I was literally watching screens, and trying not to cry," a West Coast-based buyside trader said.

"I don't know what it's going to take," he said. "I'm really getting punch drunk speculating all day trying to figure it out. All I can say is you better make sure you have a strong conviction for what it is you have on."

B of A slides on earnings

Bank of America's 7.25% series L convertible preferreds traded at 770 versus a share price of $28.00 before noon ET but was seen closing lower at 730 versus a share price of $23.77 on Tuesday, compared with 822 versus a share price of $32.22 on Monday.

Shares of the Charlotte, N.C.-based bank plunged 26%.

Bank of America plans to assume the outstanding debt of Countrywide Financial totaling about $21 billion, Bank of America chief financial officer Joe Price said during an earnings conference call on Monday.

The weak earnings coupled with extra capital needed to absorb the losses and charges of Countrywide and now Merrill Lynch & Co. left investors nervous.

The Legg 7% mandatories changed hands at 30 versus a share price of $33.50, and KeyCorp traded at 84 versus a share price of $10.75.

Wachovia, Ford slide

Wachovia's 7.5% series L perpetual convertible preferred traded at 588 but was indicated to close at 520, compared to 550 on Monday.

Wachovia common stock closed down 53 cents, or 9%, at $5.25.

Ford's 4.25% convertibles due 2036 traded at 44 versus a share price of $3.375 but closed lower at 39.7 versus a share price of $2.92. Shares of the Dearborn, Mich.-based automaker fell 21%.

The Wachovia deal was negotiated in private Tuesday after the parties agreed to a hiatus in duking it out in court.

According to reports, Wells Fargo & Co. was looking at taking a majority, or 75% to 80%, of the banking operations, leaving Citigroup with 20%. But there was no talk about what would become of the securities or investment banking divisions.

"Citi doesn't need it and Wells Fargo doesn't need it. It's not their business," a New York-based sellsider said about the Wachovia securities and investment banking pieces.

With the two parties talking, it looked like whatever happens, it would be better than the original Citi deal, but not as attractive as the Wells Fargo deal, assuming that parties keep talking. But the longer Wachovia remains in limbo, the more uncertainty reigns in the situation, putting Wachovia deposits, talent pool and other assets at risk.

Countrywide, AMD better

Countrywide Financial's floating-rate series A convertibles traded early at 99 bid, 99.875 offered, compared to levels in the 98 area on Monday.

The Countrywide series B paper traded up 3 points to the 94 to 95 context, a sellside trader said.

Investors have been jittery about whether this paper would be honored by Bank of America since the North Carolina-based behemoth refused to officially guarantee the paper. But most felt that it could do nothing but honor the upcoming puts as it was somewhat an issue of reputation.

AMD's 5.75% and 6% convertibles strengthened on news that the company is spinning out its capital-intensive fabricating business.

The AMD 5.75s started the day in the mid 50s and got as high as 60 to 61, before returning to the mid 50 level. But that was still up from about 45 a few days ago, a sellside trader said.

"It's credit positive," the sellsider said. "Even though there is an analysts' meeting in November and they put off giving all the details like cash flow guidance, it's credit positive."

Mentioned in this article:

Bank of America Corp. NYSE: BAC

Legg Mason Inc. NYSE: LM

KeyCorp NYSE: KEY

Wachovia Corp. NYSE: WB

Ford Motor Co. NYSE: F

Advanced Micro Devices Inc. NYSE: AMD

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