Convertibles market firmer; bargain hunters boost UAL, Fifth Third Bancorp, Freeport-McMoRan

By Rebecca Melvin

New York, Oct. 31 - Halloween brought a treat to convertibles players Friday as the market extended an upturn that began Wednesday, with buyers out in force, causing prices to continue to firm, sources said.

"There's been a three-day rally; the panic seems to have subsided, and there are some pretty compelling valuations out there," a New York-based sellside desk analyst said.

The only negative seemed to have been a lack of sellers.

"It was kind of quiet. In the bank area, I've got buyers that would love to do a trade, but there's no trading, no ability," a Boston-based sellside trader said. "Maybe it's because it's the last day of the month, and they're worried about funding, or they've got their books all set and ready to send out."

"Maybe they don't want to take the mark on the last day," the trader added.

Nevertheless, it was the first succession of positive days since as least Sept. 15, when the credit markets - already wracked by the Fannie and Freddie fiascos and American International Group bailouts - took another leg down when Lehman Brothers Holdings Inc. failed.

Given this week's trend, it was easy to begin thinking a turnaround had occurred, but some were hesitant to call it that.

"A turnaround is inevitable and is easy to foresee - but impossible to time," a New York-based buyside fund manager said.

A New York-based sellside trader said, "When you have had such a long protracted period of pain, it's all too easy to say 'turnaround.' I do believe this is part of the bottom. Not sure to say whether we will continue to improve."

"We have a lull until hedge funds find out just how large the redemption cycle will be. Equities are certainly calmer. I know pricing has improved, but it's still miles from where it was," he said.

The reasons behind the improvement were also debatable. Short sellers covering and the appearance of value investors were suggested, as was window dressing for month end and also for fiscal year-end for many mutual funds.

"Lots of portfolio managers were heavy with cash, and if they're momentum traders who don't know what they're doing, or maybe even if they're sensible, they will want to show fully invested portfolios at the end of a month that has seen a powerful rally," the New York buysider said.

Whether panic selling would return in the week ahead was in question, especially with the U.S. presidential election wildcard Tuesday. Could it sour the current uptrend? One sellsider said, "It depends who wins."

Among names in trade were UAL Corp., which gained along with the overall airline sector, as the price of oil edged lower early in the session. Later, oil turned around to rally up 3%.

Fifth Third Bancorp, the Cincinnati-based regional bank, traded at par plus 0.5 point versus a share price of $10.75, also looking better as the government's TARP plan began to play out this week.

Freeport-McMoRan Copper & Gold Inc., which has been sliding in recent weeks, continued to look stronger, even as its underlying shares edged lower Friday.

In the primary market, Barclays announced that it planned to issue £4.3 billion of mandatory convertible notes, of which £1.5 billion was being offered Friday to institutional investors.

This news was viewed as positive by convertibles players. "It's great that it was outside the government's purview," one sellsider said, adding that he thought institutional investors would step up to buy.

UAL gains

The UAL 4.5% convertible due 2021 traded at 59, while its 5% convertibles due 2021 traded at 56.6 Friday, both against a stock price of $15.25.

Ten days ago the UALs were at 55 versus a stock price of $13.50, and the 5% convertibles were at 52 against a stock price of $13.50.

The stock of the Chicago-based holding company of United Airlines surged to as high as $16.00 but retraced some gains to end up $1.28, or 10.5%, at $14.56 in light volume.

The move seemed related to oil prices, which had continued to move lower in anticipation of an economic recession. For the third quarter, gross domestic production shrank a fraction amid a declining housing market.

On Friday, crude for December delivery was lower earlier in the day but rallied 3%, or $1.96, to $67.92 a barrel by the close. Last year, the average price for oil was $72 a barrel.

A buysider recently said he got out of airlines a while ago with the weak economy.

"They are probably going to muddle along, with the oil prices down and the actions that they took," he said, referring to charging passengers for baggage and other actions that aren't being reversed, which should make the companies healthier.

Nevertheless, they are capital intensive businesses and capital is scare, he said.

Fifth Third strong

Fifth Third saw its 8.5% series G perpetual convertible preferreds trade above par at 100.5 versus a share price of $10.75. The preferred shares had been well above par prior to the recent slump but were recently in the mid-90s.

Fifth Third common stock closed up 69 cents, or 7%, at $10.85.

On Tuesday, the bank said that it will sell to the U.S. Treasury $3.45 billion of its senior preferred stock and related warrants as part of its bank capital purchase program announced earlier in October.

The purchase is subject to standard closing conditions.

Columbus-based Huntington Bancshares and Cleveland-based KeyCorp are also participating in the program.

A sellsider said that there were plenty of buyers for financial convertible preferreds and that those that had sold earlier and wanted to buy back couldn't get them at the same prices now.

Fifth Third said that the increased capital increases its flexibility as the industry undergoes change and allows additional capacity to provide credit to businesses and consumers.

Freeport moves higher

Freeport's 6.75% mandatory convertible preferreds due 2010 traded at 48 versus a stock price of $29.00. That was up from 44 versus a share price of $27.50 and 43 versus a share price of $27.00 a week ago.

Freeport's common stock actually slipped 96 cents, or 3% to $29.06.

The company has faced strong headwinds in recent weeks from a sharp pullback in commodity prices, affecting both gold and copper prices.

Gold futures for December delivery fell $20.30, or 2.7%, to $718.20 an ounce on the Comex division of the New York Mercantile Exchange. For the month, gold futures fell 18%, their biggest monthly drop in 28 years.

Barclays prices mandatories

Of Barclays' £4.3 billion of mandatory convertible notes, £1.5 billion are earmarked for institutional investors.

The mandatories, set to be converted by June 20, 2009, priced to yield a coupon of 9.75% with a 22.5% conversion discount to Barclays' average closing share price on Oct. 29-30.

Barclays Capital, Credit Suisse and JPMorgan Cazenove are acting as joint bookrunners.

Of the total mandatory issue, £2 billion are to be purchased by HH Sheikh Mansour Bin Zayed Al Nahyan, a member of the royal family of Abu Dhabi; £500 million are to be purchased by Qatar Holdings; and £300 million of the convertibles are to be purchased by Challenger Universal Ltd.

There is a concurrent issue of £3 billion of reserve capital instruments with an associated issue of warrants.

The issues are subject to shareholder approvals.

If the required consents are obtained, the convertibles are expected to be issued on Nov. 27, the third business day following a general meeting.

Barclays is a London-based bank.

Mentioned in this article:

UAL Corp. Nasdaq: UAUA

Fifth Third Bancorp Nasdaq: FITB

Freeport-McMoRan Copper & Gold Inc. NYSE: FCX

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