Countrywide active on BofA buyout; WaMu up on rumored deal; Sciele, Mylan up in search for safety

By Evan Weinberger

New York, Jan. 11 - Countrywide Financial Corp. convertibles went on a wild ride in reaction to news the company would be acquired by Bank of America. The securities ended up pretty much where they started, however.

Washington Mutual Inc. preferreds were up on a CNBC report that it had entered into preliminary talks with JPMorgan Chase about a merger of its own.

Standard Pacific Corp. convertibles were down as the homebuilder's stock was smashed.

Sciele Pharma Inc. and Mylan Inc. convertibles were both up on the day as market watchers said investors were moving to safer investments.

Transocean Inc. convertibles were down slightly because of fears of an economic slowdown hurting oil and energy companies.

Why did that fear crop up Friday? The New York Times reported that Merrill Lynch will unveil $15 billion in write-downs linked to the subprime mortgage mess when it announces its fourth-quarter earnings. And American Express said that increasing credit card defaults were a threat to earnings.

The Dow Jones Industrial Average flirted with losing 300 points on the day, but in the end the index lost 246.79 points, or 1.92%, for a 12,606.30 close.

The Nasdaq tumbled 48.58 points, or 1.95%, to close at 2,439.94.

The Standard & Poor's 500 closed at 1,401.02, a drop of 19.31 points, or 1.36%.

Countrywide takes a ride

A sellside convertibles analyst said he saw Countrywide's convertible debentures all over the map starting Thursday.

A bankruptcy rumor crushed the Calabasas, Calif.-based mortgage lender earlier in the week, leaving the company's Libor minus 350 basis point series A convertible senior debentures due April 15, 2037 trading in the low 60s to open Thursday. They shot up to the upper 80s, near 90, on the first reports that Charlotte, N.C.-based BofA was in talks to buy Countrywide Thursday afternoon, he said.

The series A convertibles opened Friday at around 94, he said, as the $4.1 billion deal was announced.

Then, as the details became known, they fell back.

In the end, the series A convertibles closed Friday at 88.057 versus a closing stock price of $6.33. They closed Thursday at 89.0072 versus a stock price of $7.75.

The series B convertible senior debentures due May 15, 2037 were on a similar roller coaster, the analyst said. In the end, they closed Friday at 85.5 versus a stock price of $6.33 after finishing Thursday at 86 versus a stock price of $7.75.

Countrywide stock (NYSE: CFC) lost $1.42, or 18.32%, on the day.

The analyst said he expects the convertibles to trend higher as the deal moves closer to completion. Right now it is scheduled to close in the third quarter.

But, he added, risk arb analysts have put a 9% spread on the deal getting done, once regulators sift through the details.

Investors, he said, are warned to do the same thing, and very carefully. "The risk, reward on this - it's a pretty juicy piece," he said. "The downside is obviously pretty meaningful. So people are obviously doing some homework."

A trader called the convertibles "a grand slam" for investors, especially those who bought them when they were trading in the 60s.

The analyst expects the deal to get regulators' blessings. Various media reports say the two companies have already consulted the necessary authorities. "Big picture, nobody wants Countrywide to go under," the analyst said.

Countrywide sparks deal talk

Market watchers say there may be more such bank mergers in the coming days. "It's safe to say there are a lot of finance companies out there that need additional cash," the analyst said. "If the answer to that is being bought, I think it's an alternative. You may see these companies trying to raise some cash in the market on their own before going down that road."

Merrill Lynch is reportedly looking to sovereign investment funds for more financing in the face of its steep subprime losses.

CNBC reported Friday morning that New York-based JPMorgan chase and Seattle-based savings and loan Washington Mutual had entered into preliminary talks about a merger of their own. Washington Mutual has also been slammed by subprime.

Washington Mutual's 7.75% series R non-cumulative perpetual convertible preferred stock closed Friday at 916.856 versus a closing stock price of $14.69. They closed Thursday at 889.92 versus a stock price of $14.16.

Washington Mutual stock (NYSE: WM) gained 53 cents, or 3.74%, on the JPMorgan speculation.

The trader said he was telling holders of the Countrywide convertibles to look at Philadelphia-based Sovereign Bancorp Inc. He expects another bank, possibly Spain's Banco Santander, to rescue Sovereign.

Sovereign's 4.375% Trust Piers due March 1, 2034 closed Friday at 32.5 versus a stock price of $10.68. They closed Thursday at 34 versus a stock price of $10.71.

Sovereign stock (NYSE: SOV) was down 3 cents, or 0.28%, on the day.

Standard Pacific down

Irvine, Calif.-based homebuilder Standard Pacific's stock got hammered Friday along with other homebuilders.

Rumors of a corporate restructuring apparently surfaced, and the New York Stock Exchange asked Standard Pacific to explain Friday's steep and active drop. Standard Pacific declined to do so.

Standard Pacific's 6% convertible subordinated notes due Oct. 1, 2012 fell further, closing Friday at 44.312 versus a closing stock price of $2.20. They closed Thursday at 46.405 versus a stock price of $2.67.

Standard Pacific stock (NYSE: SPF) plummeted 47 cents, or 17.60%, on the day.

Flight to quality raises health care

A sellside analyst said he's seen a flight to slowdown- or recession-resistant convertibles in recent days as fears increase.

Two names he pointed to were Atlanta-based drug maker Sciele Pharma and Canonsburg, Pa.-based pharmaceutical company Mylan.

Sciele's 2.625% convertible senior notes due May 15, 2027 closed Friday at 107.598 versus a closing stock price of $24.12. They closed Thursday at 105.018 versus a stock price of $23.40.

Sciele stock (Nasdaq: SCRX) gained 72 cents, or 3.08%, on the day.

Mylan's 1.25% convertible senior notes due March 15, 2012 closed Friday at 93.9163 versus a closing stock price of $15.40. They closed Thursday at 93.3454 versus a stock price of $15.10.

Mylan's 6.5% mandatory convertible preferred stock due Nov. 15, 2010 closed Friday at 1,092.5 versus a stock price of $15.40 after finishing Thursday at 1,074.68 versus a stock price of $15.10.

Mylan stock (Nasdaq: MYL) gained 30 cents, or 1.99%, on the day.

"You'll continue to see those types of names do well," he said.

Transocean slips

While oil and energy may seem like recession-proof sectors, the analyst said not so fast. "To a certain extent, I'd rather be in that than in financials. But there is a bear case to be made," he said.

Falling energy prices and falling industrial demand in the face of an economic slowdown could hurt oil and energy companies. "I'm not sure if fundamentally if they hold up as well as health care or military-defense," the analyst said.

Houston-based drilling company Transocean saw all three of its recently issued convertibles trade slightly lower Friday.

The steepest losses were seen in the 1.5% series C convertible senior notes due Dec. 15, 2037, which closed the day at 108.756 versus a closing stock price of $136.39. They closed Thursday at 109.49 versus a stock price of $137.64.

Transocean stock (NYSE: RIG) was down $1.25, or 0.91%, on the day.

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