Economic data lifts financial convertibles; KKR better; Conexant quoted up on earnings

By Kenneth Lim

Boston, Aug. 3 - The convertible market started on a positive note Monday as financials got a boost on positive economic news.

Convertible preferreds of Bank of America Corp., Wells Fargo & Co. and KeyCorp all ended better outright as their common stocks led the surge.

KKR Financial Corp. also saw better buying interest in its convertibles following positive news reports in the previous week.

Conexant Systems Inc. was a non-financial name that raised eyebrows as bids shot up following the company's earnings.

The market in general had a slow day with thin volumes, even among the biggest gainers, market sources said.

"Everything's to buy, but nobody's selling," one New York-based trader lamented.

Another convertible trader called it a "typical Monday in convert land." Another trader on the East Coast noted an absence of market catalysts expected for the rest of the week.

"It's been really quiet, the only thing I can imagine is hoping for some new issuance," that trader said.

Banks get economic boost

Bank preferreds moved firmly higher on Monday as equity markets rallied strongly on positive economic data.

Bank of America's 7.25% convertible preferred closed at 855, up by 15, with the common stock ending at $15.32. The common stock was 3.58%, or $0.53, higher on the day.

Wells Fargo's 7.5% convertible preferred gained 5 points to end at 845 versus the closing stock price of $25.80. Wells Fargo common stock gained 5.48% or $1.34 on Monday.

KeyCorp's 7.75% convertible preferred increased by 2.75 points to end the day at 84. The common stock closed at $6.43, up by 11.25% or $0.65.

Charlotte, N.C.-based Bank of America, San Francisco-based Wells Fargo and Cleveland-based KeyCorp are bank holding companies.

"Bank preferreds up strongly," one trader said. "BAC preferreds, WFC preferreds and especially KEY preferreds."

The Institute of Supply Management on Monday forecast an increase in U.S. manufacturing activity in September, while the Commerce Department reported higher construction spending in June, helping to send the stock markets soaring.

But a sellside convertible trader cautioned about getting too excited.

"I think it's all positive news, but I think we're easily setting up for a correction at some point," the trader said. "I think guys are looking closely for the next sell signal to start taking profit."

KKR better bid

KKR Financial's 7% convertible due 2012 saw strong buy interest on the back of a climbing common stock.

The convertible was seen bid at 67 on Monday outright, while the common closed at $2.70. KeyCorp common stock gained 32.35% or $0.66.

"KFN became very well bid for, the common was up by a lot," a convertible trader said.

KKR, a San Francisco-based specialty finance company, on July 28 said it expects to report second-quarter earnings of between 11 and 19 cents per share on Thursday. The company also said it managed to delever four of its collateralized loan obligations, allowing the company to begin receive cash from the CLOs again.

The develeraging "greatly improve KFN's future liquidity profile," KKR chief executive William Sonneborn said in a statement.

Conexant moves up

Conexant's 4% convertible due 2026 was bid at 64 on Monday, leading one observer to note that the paper's rapid rise.

"These bonds have appreciated greatly in the last few months," the trader said. "They were 20 back in January...45 on July 22. Earnings came out last week, the bonds were around 53 on Friday, today they're 64 bid."

The bonds were not actively traded on Monday, when the stock rose 28.67% or $0.43 to close at $1.93. Conexant is a Newport Beach, Calif.-based maker of semiconductor systems.

Conexant reported a fiscal third-quarter net income of $1.9 million, or $0.04 per share, reverse a year-ago loss. Excluding earnings from a broadband access unit that was sold, the company would have had a net loss of $1 million, or $0.02 per share.

Old paper that had been depressed over the past year has seen its prices improve significantly as better-than-expected earnings are reported across the board, the trader said.

"People are just getting more comfortable with their credit," the trader said.

The Conexant convertibles may also be put in 2011, and that could have given the notes an extra boost.

"I think there's people thinking it's 1.5 years to a put, they think they can just put it back at that time," the trader said.

Mentioned in this article:

Bank of America Corp. NYSE: BAC

Conexant Systems Inc. Nasdaq: CNXT

KeyCorp NYSE: KEY

KKR Financial Corp. NYSE: KFN

Wells Fargo & Co. NYSE: WFC

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