Convertibles finish week on quiet note; WebMD creeps higher; financials under pressure

By Rebecca Melvin

New York, Jan. 7 - Convertible bond trading ended the week on a quiet note Friday, with snow pelting the New York area cited as possibly keeping a lid on Wall Street activity, market players said.

Pricing was said to be steady, with the "normal big names dominating the snow day activity," a New York-based sellside trader said.

Away from the typical, big, liquid names, WebMD Corp.'s newly priced 2.5% convertibles due 2018 gained a little to trade to 99.375, after Thursday's new issue was reoffered to investors at a 1% discount of 99.

Hercules Offshore Inc.'s convertibles traded actively and were mostly steady despite a slide in their underlying shares by as much as 15% after Wells Fargo cut the stock to "under perform." Shares ended the day lower by only 8.6%, however.

Elsewhere, some financial names were pulled into trade as their underlying shares slid in early trade after a state court ruling that went against a pair of banks in their foreclosure and mortgage-repurchasing practices. The convertibles regained some ground late in the session along with the shares after steeper losses earlier.

Wells Fargo & Co.'s convertible preferred shares traded down nearly a point as the common shares took a hit related to the Massachusetts Supreme Court decision against Wells and US Bancorp, voiding two foreclosures because of inadequate documentation related to the banks' mortgage securitization practices.

Bank of America Corp.'s convertible preferreds were down about 3 points, and there was some volume in Fifth Third Bancorp, which was also lower, although its common shares actually recovered from an early loss to close with a 0.5% gain.

The financials pressured the broader markets, which were also disappointed by December's jobs report, in which non-farm payrolls gained by only 103,000 jobs as private-sector employers added 113,000 jobs. Analysts had expected payrolls to rise by 150,000 jobs.

And even though the Labor Department showed that the unemployment fell to a 9.4% rate from 9.8%, that lower rate was attributed partly to a shrinking labor pool as more long-term unemployed left the labor market. Analysts had expected the jobless rate would fall slightly to 9.7%.

Fed chairman Ben Bernanke said Friday in testimony before the Senate Budget Committee that economic recovery that began a year and a half ago is continuing, but at a very slow pace that is unlikely to reduce unemployment significantly any time soon.

Economic recovery seems likely to be stronger in 2011 than it was in 2010, Bernanke said. But with most participants expecting the unemployment rate to be close to 8% two years from now, it could take four years to five years before the job market gets back to normal.

Hercules Offshore steady

Hercules Offshore's 3.375% convertibles due 2038 traded last at 78.25, which was actually up 0.75 point on the day, according to Trace data. The paper traded in a range between 77 and 80, according to Trace.

Shares of the Houston-based oil services company closed the session at $3.31, which was down 31 cents, or 8.6%, in heavy volume. But that level was an improvement from the low point of trading at $3.0675.

Wells Fargo downgraded the company's stock to "under perform" from "market perform," citing potential shareholder dilution resulting from the company's need to issue further stock to help repair its ailing balance sheet.

"The bonds have a premium of almost 1,000, so they don't move with the stock," a Connecticut-based sellside analyst said.

The convertible bonds were among the day's most actives, according to Trace data.

Bank names in trade

Many convertible preferred shares sunk in the early going Friday but came back later along with the underlying shares.

Wells Fargo's 7.5% convertible preferred shares were down 0.91 point at 1,003.07 versus a closing stock price of $31.50. Traded volume of Wells Fargo common stock was more than two times the three-month average volume.

Bank of America's 7.25% convertible preferred traded at 964.72, which was down 3.28 points on the day, with the common stock ending at $45.25, which was down 19 cents, or 1.3%.

Fifth Third's 8.5% depositary shares were seen trading at 146.144, which was down 2.4 points.

Other financial convertible preferreds were also in trade including Citigroup's, according to a market source.

Massachusetts' highest court voided the foreclosure of two homes by Wells Fargo and U.S. Bancorp due to what it said was the banks' failure to provide proper documentation for the foreclosures.

The unanimous decision could form a precedent in which other ongoing court cases may follow, sources said. And that could in turn make it more difficult and expensive for banks to foreclose on properties with delinquent mortgages.

Mentioned in this article:

Bank of America Corp. NYSE: BAC

Fifth Third Bancorp Nasdaq: FITB

Hercules Offshore Inc. Nasdaq: HERO

WebMD Corp. Nasdaq: WBMD

Wells Fargo & Co. NYSE: WFC

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