Thornburg, Countrywide, Annaly fall as credits crack; Merrill bucks trend; Ambac flat, Stillwater quiet

By Kenneth Lim

Boston, March 6 - The convertibles market took a beating on Thursday as credit problems at Thornburg Mortgage Inc. and an investment fund run by private equity firm Carlyle Group rattled the bond markets.

Ambac Financial Group Inc.'s proposed $500 million offering of 3.2-year mandatory convertible equity units drew a lackluster response in the gray market amid uncertainty about the quality of the borrow.

Elsewhere in the primary market, Stillwater Mining Co. caused hardly a ripple in the pre-market as interest was muted by the small size of the deal and a lack of borrow.

Credit woes pile on

The convertible market in general had a tough session on Thursday as a barrage of bad credit-related news brought out the sellers.

"It's just ugly out there the last couple of days," a California-based convertible trader said.

"Anything credit sensitive is just getting hit. Nobody wants to buy it if it's financial-, real estate- or mortgage-related. People are sellers. At some point people have to - well, they don't have to - but at some point you hope people will look at some of these names and they'll say, it's too cheap."

The trader said the sellers easily outnumbered the buyers.

"It doesn't necessarily have to trade," the trader said. "The offer just has to come in more and more. And when somebody does buy it's usually just a small amount...That's the problem right now. Good, bad or otherwise, everything's coming in."

A New York-based convertible analyst said the problem lay with the overall credit market.

"All the credit markets were weakening today," the analyst said. "The convertible market wasn't able to avoid the selling pressure."

Financials take hit

The main credit drag came from Thornburg Mortgage, which said late Wednesday that it JPMorgan Chase & Co. had sent a notice of default for failing to meet a $28 million margin call. Thornburg was subsequently downgraded by a number of analysts and credit agencies, and the threat of bankruptcy loomed larger for the Santa Fe, N.M.-based mortgage lender.

"It just keeps getting worse for these guys," a sellside convertible trader said. "And each time it gets worse it affects the rest of the market...I think it's overdone, but that has very little to do with what's going on right now. Right now it doesn't take much to send everyone fleeing, so even guys who are looking for opportunities are afraid to step in at this point in time."

Thornburg's 10% series F perpetual convertible preferred fell 51% to $5.47 on Thursday as the common (NYSE: TMA) also lost half its value to close at $1.65.

The market got worse as the day wore on, as private equity firm Carlyle Group said its Dutch-listed unit Carlyle Capital, which invests in mortgage-backed securities, was facing default because it could not cover margin calls that totaled more than $37 million.

Calabasas, Calif.-based Countrywide Financial Corp., another mortgage lender, saw its floating-rate series A Libor minus 350 basis points convertible due April 2037 fell 3 points outright to trade at 83 while its series B Libor minus 225 bps convertible due May 2037 also dropped 3 points outright to trade at 80. Countrywide common stock (NYSE: CFC) dropped 8.77% or $0.50 to close at $5.20.

Annaly Capital Management Inc.'s convertible preferreds also fell following Carlyle's problems. Its 6% perpetual convertible preferred was marked at 32.75 versus a stock price of $16.30 and closed at 31.35 against the closing common stock price of $15.81. Annaly stock (NYSE: NLY) closed down by 18% or $3.47. Annaly is a New York-based real estate investment trust that focuses on mortgage-backed securities.

A sellside trader said that on a 90% delta, bids for Annaly's preferreds were actually up slightly on a dollar-neutral basis.

"This company has mostly escaped or missed the scorch of the credit market," the trader said. "Until today."

One financial name that bucked the trend was Merrill Lynch & Co. Inc.'s zero-coupon Exchange Liquid Yield Option (LYON) notes due 2032, which gained two points outright to close at 111 against a stock price of $45.875. Merrill Lynch common stock (NYSE: MER) closed at $45.86, down by 7.01% or $3.46.

The gains came after the New York-based bank said it will increase the conversion rate of the convertible to 16.5000 from 14.0915 and add puts on Sept. 13, 2010 and March 13, 2014. The convertibles will also become callable on March 13, 2014.

Ambac flat in gray

Ambac's proposed $500 million offering of 3.2-year mandatory convertible equity units were offered at par and slightly below in the gray market on Thursday as observers described the deal as unexciting.

"It looks like they're better for sale," a sellside trader said. "I didn't look at it but I was speaking to somebody in the name and his comment was these guys, they're just not getting it. It sounds as though everybody's pretty skeptical of what they're doing and what they need to do."

The equity units are offered at $50 apiece and were talked to yield 8% to 8.5% with an initial conversion premium of 18% to 22%.

Concurrent with the equity units offering, Ambac will offer at least $1 billion of common stock. Both offerings are being sold under a shelf registration, according to a company news release.

Credit Suisse Securities (USA) LLC, Citigroup Global Markets, UBS Securities LLC and Banc of America Securities LLC are joint bookrunners of the equity units offering.

Most of the net proceeds from the offerings will contribute to the capital position of insurance company subsidiary Ambac Assurance Corp. About $100 million of proceeds will be retained by Ambac to provide incremental holding company liquidity to pay principal and interest on debt, to pay operating expenses and to pay dividends on capital stock.

New York-based Ambac (NYSE: ABK), a bond insurer, saw its shares slump 14.71% or $1.28 to close at $7.42 on Thursday.

A sellside analyst said the deal "doesn't look that great" using a 1% volatility and a credit spread of about 1,000 basis points over Libor.

"It's coming up around fair value, maybe a little lower," the analyst said.

The analyst said the borrow on the name was a question mark.

"The other thing I'm assuming is a good borrow on it when actually there's no borrow on the market right now," the analyst said. "I'm just assuming a good borrow because of the stock offering. Chances are it's going to free up borrow a little bit, but I don't know whether it's going to be enough or whether it's going to get you a top-rate rebate."

Stillwater may face borrow problem

Stillwater's planned $165 million of 20-year convertible senior notes were quiet in the gray market on Thursday with interest dampened by a poor borrow and a relatively small deal size.

The deal was talked to yield 1.875% to 2.375% with an initial conversion premium of 22.5% to 27.5% on Thursday after the market closed.

There is an over-allotment option for a further $16.5 million.

Deutsche Bank is the bookrunner of the Rule 144A offering.

If the deal is fully subscribed, MMC Norilsk Nickel and its subsidiaries will buy $80 million of the offered convertibles.

The notes will be offered at par.

Stillwater, a Billings, Mont.-based producer of palladium and platinum, said it will use the proceeds of the deal to repay outstanding debt under a credit facility and for general corporate purposes.

"I haven't looked at it because half of it is being bought by Norilsk Nickel, which means it's roughly an $80 million issue, so we don't really cover that," an analyst said. "But I think there might be a pretty good reception for it just because commodities are hot right now, but it's going to be small."

Another analyst thought that the deal will likely only see limited interest.

"The borrow's bad, and so that means only outrights will be looking at it," the second analyst said. "But for outrights, you have to think that the price of platinum and palladium are going to go high and they've been vertical recently, and it's going to be a bet."

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