RAIT Financial Trust, KKR Financial tumble; AmeriCredit stumbles; mortgage-linked convertibles dive

By Evan Weinberger

New York, July 31 - Convertibles saw a busy day Tuesday, continuing the recent trend of active secondary-market trading. But as equity markets tumbled, trading in convertibles slowed as the day went on, according to traders and analysts.

One trader said he saw "bids dry up" as the day progressed.

Several convertibles linked to home mortgage lenders and other financial companies took it on the chin as the day progressed, especially those from RAIT Financial Trust and KKR Financial Corp.

"Obviously, a lot of these mortgage lenders are melting away," one sellside analyst said.

After starting out strong with the Dow Jones Industrial Average gaining as much as 150 points, equity markets came crashing down Tuesday. Strong earnings from General Motors Corp. and Sun Microsystems Inc. were no match for American Home Mortgage Investment Corp.'s announcement that the residential mortgage lender was no longer able to tap into credit lines and was looking at its options.

By the end, the Dow had lost 146.32 points, or 1.1%, to close at 13,211.99. The Nasdaq was down 37.01 points, or 1.43%, to close at 2,546.27.

American Home Mortgage (NYSE: AHM) led the losers Tuesday, when the stock lost $9.43, a staggering 90.07% Tuesday, closing at $1.04.

One new issue was announced as the convertibles market heads into the usually languid month of August. Horizon Lines, Inc., a shipping and cargo logistics firm based in Charlotte, N.C., launched $300 million in convertible senior notes. The convertibles are scheduled to price Wednesday after market close.

Talk has the coupon at 3.5% to 4% and the initial conversion premium at 30% to 35%.

The company plans to use the proceeds for a stock buyback as well as hedge transactions and the redemption of previously issued bonds.

Mortgage-linked convertibles take a big hit

As the market swirled around mortgage-related stocks, many of the convertible bonds linked to them were caught in the spiral. And while that was expected, even bonds issued by financial companies not in the home mortgage market were caught in the overflow of bad sentiment.

"When sentiment takes hold, it just goes on until it's done. It's like a forest fire," a trader said.

AmeriCredit Corp. had two convertibles that investors looked to flee Tuesday, even though the Fort Worth, Texas-based company is an auto lender, not a home lender.

The company's 0.75% convertible senior notes fell to 89.204 versus a stock price of $20.34. They closed Monday at 94.986 versus $22.23. AmeriCredit 2.125% convertible senior notes due 2013 fell to 87.7018 versus a $20.34 share price after closing Monday at 94.003 versus $22.23.

AmeriCredit stock closed down $1.89, or 8.5%.

Also dropping Tuesday were KKR Financial Corp.'s 7% convertible senior notes due 2012. The bonds closed the day at 90.93 versus $20.74 on the shares, which one trader called a significant drop from where it had been trading. KKR Financial stock (NYSE: KFN) traded lower Tuesday also, finish the day down 83 cents, or 3.85%, closing at $20.74.

"I think it's really been unfairly tainted at this time, but when the market's acting like this the baby goes out with the bath water," the trader said.

Another mortgage-related convertible that had a disastrous day was the 6.875% convertible senior notes due 2027 issued by RAIT Financial Trust. A trader said he saw the bonds quoted early in the day in the 70s, but by the close they were trading in the 50s versus a closing stock price of $10.36.

The Philadelphia-based mortgage and other real estate finance provider's stock (NYSE: RAS) lost $5.72, or 35.37%, on the day.

Some bright spots, and one cloudy spot, on a rainy day

While many mortgage- and finance-related convertibles took a pounding Tuesday, there were a few safe havens.

Investors continued to look to Intel Corp.'s 2.95% junior subordinated convertible notes, which saw active trading, closing at 95.535 versus $23.62 for the shares. They closed Monday at 96.75 versus $23.85. Stock in the Santa Clara, Calif.-based microchip maker closed down 23 cents, or 0.96% Tuesday.

Two issues from Amgen Inc. were also active Tuesday. The Thousand Oaks, Calif.-based biotech's 0.125% convertible senior notes finished the day at 90.6211 versus a closing stock price of $53.74. They closed Monday at 90.25 versus $56.19.

The company's 0.375% convertible senior notes due 2011 closed at 88.50 versus $53.74. They finished Monday at 90.138 versus $56.19.

Amgen stock (Nasdaq: AMGN) closed down $245, or 4.36%, Tuesday.

One non-mortgage related convertible that had a tough day was Stanley Works' Libor plus 350 basis points convertible mandatories. The mandatories tumbled $35.05, or 3.28%, to close at 1,034.95.

Stock in the New Britain, Conn.-based tool maker (NYSE: SWK) also had a down day, losing 47 cents, or 0.84%, to close at $55.33.

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