Washington Mutual, Ambac Financial edge higher; General Growth strengthens; General Motors down

By Rebecca Melvin

New York, Aug. 1 - Washington Mutual Inc. Friday extended gains a second day after word Thursday that a British-based hedge fund has amassed a 6% stake in the ailing Seattle-based thrift.

Ambac Financial Group Inc.'s convertibles, stock and credit default swaps were higher on news that the New York-based bond insurer had settled one of its largest exposures to collateralized debt obligations.

Some viewed the WaMu stake as a positive sign that perhaps a bottom is being marked in the foundering financial sector, but it was cold comfort to many others.

"From what I understand, they already had a position," a New York-based convertibles sellside trader said of hedge fund Toscafund Asset Management LLP. "This is a legacy position, and the filing said that it was as of July 16."

Another New York-based sellsider said, "We might have reached a bottom on blow ups and major negative news coming out of some of these people. But convertible funds could be in enough trouble, and these financials coming out of the distressed area aren't going to save our market."

July wasn't a good month in terms of markdowns in convertibles, and some are worrying about what hedge fund redemptions are going to look like at the end of the quarter.

Meanwhile, General Growth Properties Inc., the Chicago-based real estate investment trust, saw its convertibles edge higher despite a move in its shares in the opposite direction. General Growth posted earnings late Wednesday.

General Motors Corp.'s convertibles were lower along with its shares after the Detroit automaker reported a $15.5 billion second-quarter loss as sales dried up amid high gasoline prices, the weak economy, and tight credit.

Elsewhere, Hologic Inc. convertibles were weaker Friday despite a small bounce back in its underlying shares after the medical device maker reported disappointing earning on Thursday. Argus downgraded Hologic stock to "hold" from "buy" on Friday.

Allergan Inc. was off Friday after the Irvine, Calif.-based specialty health care company posted earnings and its stock hit a 52-week low.

Overall, trading volume was thin, as might be expected on a summer Friday. But some said even in light of a summer Friday, it was notably thin.

For the week, traders saw some stabilization in the convertible market occurred Thursday after a weak Wednesday. "But I'm not seeing enough volume to get a gauge," a trader said of Friday's market.

WaMu trades a little higher

Washington Mutual's 7.75% series R non-cumulative perpetual convertible preferred shares, with a par of $1,000, traded Friday at $485 versus a share price of $5.375, which was higher compared to Thursday's trades such as $475 versus a share price of $5.25.

Washington Mutual 5.375% PIES due 2041 traded at 22 versus the same share price of $5.375, compared to a trade at 21.5 versus the $5.25 price Thursday.

Washington Mutual shares (NYSE: WM) closed little changed, down a penny at $5.32.

Convertibles activity in the name was extended from Thursday when it was learned that Toscafund Asset Management has amassed a 6% passive stake in Washington Mutual.

It said it beneficially held about 105.5 million shares of Washington Mutual as of July 16, according to a filing Thursday with the Securities and Exchange Commission.

How much of the stake was acquired in April when the company undertook a $7 billion capital infusion wasn't known.

The 6% stake would make Toscafund Washington Mutual's second-largest institutional holder. The stake may be a sign of a bottom in financials.

But last week, the convertibles of Washington Mutual fell after the bank's credit ratings were cut and investors expected the company to have to raise more capital.

The bank said it had more than $40 billion of liquidity available at the end of the quarter, and it improved its capital ratio to 7.79% and does not expect to have to raise more capital.

Washington Mutual is a staple in convertibles market trading. "Not every hand that holds it says, 'Wow, I'm happy I own this,'" so maybe it's one in which people are quick to sell and quick to buy, a sellside trader offered by way of explanation.

Washington Mutual's stock is down 85% from its level last summer.

Ambac moves up big

Ambac Financial 9.5% mandatory convertible equity units due May 2011 traded at 30 during the session and were seen closing at $31.91 versus a stock price of $3.79 on Friday, compared to $1.75 versus a stock price of $2.52 on Thursday.

Thte mandatories have a $50 par.

Shares of the New York-based bond insurer (NYSE: ABK) jumped $1.27, or 50%, to $3.79.

It's a non-cash gain, but like Merrill - or unlike Merrill - it gets some of its liabilities off the books. Many CDOs include portions of mortgage-backed securities whose defaults are likely because of rising defaults among underlying mortgages. There is a lot of uncertainty surrounding ultimate losses on products like CDOs.

Ambac CDS on Friday narrowed to 14.75 per $10 million worth, from 18.50, a sellsider noted. But still the moves should be taken in context. "Ambac was a $72 stock last October," he said.

General Growth edges higher

General Growth's 3.98% exchangeable senior notes due 2027 traded at 74 versus a share price of $26.75 Friday, compared with a trade at 73.25 versus a share price of $27.25 on Thursday.

"Yesterday's price was too low," a sellsider trader said, suggesting that the quote was a pre-conference call quote. Nevertheless he acknowledged that the high yield on the REIT - at almost 13% versus a price of 74.25 - made it attractive to investors.

"The truth is people are looking for yield in this market, and with the bond market unchanged, the question is are you getting paid to wait on some of these names; and with General Growth, the answer is yes, you're getting paid," the trader said.

"It is one of the higher yielding REITs in the market," he said, adding that it is "one of the companies that have a boat load of debt and a boat load of debt coming due."

Earlier this week, General Growth missed estimates despite decent operating results, as same-store growth came in below previous run rates; and the company lowered its full-year guidance on delayed development projects. It also outlined its potential liquidity sources.

With a focus on capital planning, General Growth is taking the necessary steps to address its sky-high leverage, which has worried investors as some highly leveraged REITs found themselves distressed by the credit crunch, independent research firm CreditSights said in a report.

In addition to closing a $1.7 billion secured loan to generate cash proceeds from mortgaging unencumbered malls, General Growth plans to sell $1 billion to $2 billion of investment-grade bonds secured by its own malls in the fall, CreditSights said.

Shares of General Growth (NYSE: GGP) closed down 42 cents, or 1.5%, at $26.99 on Friday.

GM takes a hit

The GM 6.25% convertibles due 2033 (NYSE: GPM) closed down 68 cents, or 6%, at $10.74 in average volume versus a closing stock price of $10.23. That compared with $11.42 versus a stock price of $11.07 at the close Tuesday.

In heavy volume, the GM 5.25% convertibles due 2032 (NYSE: GBM) dropped 52 cents, or 4%, to $11.79 versus a closing stock price of $10.23. That compared with $12.31 versus a stock price of $11.07 on Tuesday.

The shorter dated GM 1.5% convertibles due June 2009 (NYSE: GRM) closed down $1.06, or 5%, at $20.31, in heavier-than-average volume.

Shares of the Detroit-based carmaker (NYSE: GM) sank 84 cents, or nearly 8%.

Hologic weaker, Allergan lower

Hologic 2% convertibles due Dec. 15, 2037 closed at 77 bid, 77.25 offered versus a share price of $18.63 on Friday, compared with 77.365 bid, 78 offered versus a share price $18.47 on Thursday.

The Bedford, Mass.-based company's shares (Nasdaq: HOLX) edged up 16 cents, or nearly 1%, to $18.63.

Allergan's 1.5% convertible senior notes due April 1, 2026 traded Friday at 106 versus a closing stock price of $51.50. The convertibles closed Thursday at about 106.5.

Shares of Allergan (NYSE: AGN) closed down $1.28, or 2.5%, to $50.65.

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