Countrywide rebounds; Wild Oats rallies; Rare Hospitality skyrockets on takeover news

By Evan Weinberger

New York, Aug. 17 - Countrywide Financial Corp. convertibles staged a comeback Friday after the Federal Reserve cut the discount rate, while Wild Oats Markets Inc. and Rare Hospitality International Inc. convertibles also moved higher on takeover news.

Confidence was back, at least for the day, and that led to an uptick in convertibles and a big leap for stocks after a week of sharp declines in equities and a lack of activity in convertibles. "It wasn't a normal day, but more normal than it has been," one analyst said.

A trader said that convertibles trading, as well as most other activity, took a backseat Friday as investors tried to cash in on the big gains in stocks. "I think people are basically trading their hedges and shifting their positions," he said.

Friday was a good day to capture volatility and make some money on it. The Dow Jones Industrial Average shot up more than 300 points in early trading after the Fed announced that it was cutting the discount rate on its loans to banks by half a percentage point to 5.75%. In its announcement, the central bank said that it recognized that losses on Wall Street and trouble in the credit markets could slow the wider economy. "In changing their language, they pretty well telegraphed they were looking at a rate cut in September," a convertibles analyst said.

After an initial 300 point spike, the Dow gave back some of its gains before rallying again in the afternoon. In the end, the index closed up 233.30 points, or 1.82%, at 13,079.08.

The Nasdaq and S&P 500 were also up Friday. The Nasdaq picked up 53.96 points, or 2.20%, closing at 2,505.03. The S&P 500 was the biggest gainer on the day, adding 34.67 points, or 2.46%, and closing at 1,445.94.

A longtime analyst said the Fed's announcement that it was making lending easier was only a temporary salve on investor worries.

"The whole problem is we're dealing with the fact that money was too easy," he said, echoing other analysts. "I think it's still as uncertain as ever. There's a sort of temporary reprieve."

One Indian deal closed Friday, although the convertibles priced Aug. 9. Zenith Infotech Ltd., a Mumbai-based desktop computer monitoring and service firm settled its $45 million in foreign currency convertible bonds. There is also a $5 million greenshoe.

The convertibles have a 3% coupon, a 7.8% yield and an initial conversion premium of 22.3%. The company plans to use the proceeds for strategic acquisitions and general corporate purposes.

KKR higher

In other secondary activity, KKR Financial Corp. rose sharply Friday. The San Francisco-based lending arm of buyout firm Kohlberg Kravis Roberts & Co. saw its 7% convertible senior notes due 2012 close at 84.5 versus $14.40. The convertibles closed at 72 Thursday, according to one analyst, and 77, according to another, versus a closing share price of $13.25.

KKR Financial stock (NYSE: KFN) closed up $1.15, or 8.68%, Friday.

Hopkinton, Mass.-based information technology firm EMC Corp. saw both tranches of its convertibles trade Friday. The company's 1.75% convertible senior notes due Dec. 1, 2012 closed at 128.625 versus a closing stock price of $18.29. They closed Thursday at 128.5 versus $18.19.

The B tranche of 1.75% convertible senior notes due Dec. 1, 2013 closed at 129.75 versus $18.29 Friday after closing at 129.5 versus $18.19 Thursday.

EMC stock (NYSE: EMC) closed up 10 cents, or 0.55%, Friday.

Amylin Pharmaceuticals Inc.'s 3% convertible senior notes due June 15, 2014 closed Friday at 104.625 versus $49.20. They closed Thursday at 102.625 versus $47.65.

The San Diego-based drug maker saw its stock (Nasdaq: AMLN) close up $1.55, or 3.25%, Friday.

Countrywide catches the wave

What a difference a day makes for Countrywide. Just a day after a steep stock slump, tapping an $11.5 billion credit facility and making changes in its lending practices, its stock and convertibles leaped Friday.

Part of the reason for the rebound was the Fed's discount rate cut - which at least one analyst feels was directly tied to the problems Countrywide faced - but also an encouraging outlook from Moody's Investor Services late in the afternoon Thursday and an upgrade from Bank of America Friday.

Having 40 banks involved in financing America's largest mortgage lender made it necessary for the Fed to prop up the banking sector, the analyst said. "Because of the threat to the banking system of having that bank line, and potentially others, was going to put a squeeze on banks," he said.

More simply, another analyst said that Calabasas, Calif.-based Countrywide had become sort of a bellwether for the markets.

"In a sense, how Countrywide goes the whole market goes, or vice versa," the analyst said.

Countrywide's Libor plus 350 bps series A convertible senior debentures due April 15, 2037 closed Friday at 87 versus a closing stock price of $21.43. They had closed Thursday at 85 versus a closing stock price of $18.95 Thursday.

The Libor plus 225 bps series B convertible senior debentures due April 15, 2037 closed Friday at 83.5 versus $21.43. They finished Thursday at 83 versus $18.95.

Countrywide stock (NYSE: CFC) finished up $2.48, or 13.09% Friday.

Wild Oats convertibles up on takeover talk

The long-discussed takeover of Wild Oats Markets by organic food giant Whole Foods Market Inc. appeared to be going ahead Friday after a United States District Court judge denied the Federal Trade Commission's bid to block the deal on anti-trust grounds.

The FTC has announced that it will appeal the ruling, but the two companies expect to announce their merger Monday.

Even with the threat of an FTC stop on the merger hanging in the air, stock and convertibles issued by Boulder, Colo.-based organic market Wild Oats rose sharply Friday.

The company's 3.25% convertible cash-to-zero senior debentures due May 15, 2034 closed at 110.875 versus a closing stock price of $17.92. The convertibles closed Thursday at 100.625 versus $15.21.

Wild Oats stock (Nasdaq: OATS) picked up $2.71, or 17.82% Friday.

RARE deal sparks investors

Stocks and bonds issued by Rare Hospitality, the Atlanta-based restaurant chain that owns the LongHorn Steakhouse and Capital Grille brands, among others, rose sharply on news that Darden Restaurants Inc. agreed to purchase the company for $1.4 billion. The deal was announced after market close Thursday, with the tender offer to fund the buyout set to start Aug. 31. Darden is an Orlando-based company that owns Red Lobster, Olive Garden and other chains.

Rare Hospitality's 2.5% convertible senior notes due Nov. 15, 2026 closed Friday at 105.125 versus a closing stock price of $37.38. They closed Thursday at 87.125 versus $27.51.

Rare Hospitality stock (Nasdaq: RARE) gained $9.87, or 35.88%, Friday.

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