Uncertainty weighs on Countrywide; Cheniere drops; Six Flags adds; Market mixed

By Rebecca Melvin

New York, May 5 - The convertible bond market reacted again to speculation surrounding Bank of America Corp.'s proposed takeover of Countrywide Financial Corp. on Monday, as investors wondered whether the deal would get done and what were the prospects for the mortgage lender's debt, market players said.

Other financial names were notably quiet in a thinly traded market, players said.

Cheniere Energy Inc. saw its convertibles trade down about half a point as its shares slid 15% amid expectations of diminishing prospects for the liquefied natural gas market in the United States. But other energy names, including Superior Energy Services Inc., were better as oil prices climbed again.

Six Flags Inc. was another notable gainer on no apparent news in a market that was characterized as thin and mixed.

"Financials slowed way down," a New York-based sellside trader said. "There wasn't any of the Bank of America, Citigroup, Wachovia trading that have been typical recently."

"It was basically Countrywide and Cheniere today," the trader said.

Fears fry Countrywide

Countrywide's convertibles were pressured lower but didn't make a big move Monday after a regulatory filing and Standard & Poor's follow-up move to downgrade Countrywide Friday rattled the market.

On Monday, several equity analysts in research notes questioned the viability of the deal, with a Friedman, Billings, Ramsey & Co. analyst suggesting that Bank of America should reconsider the deal or at least reduce the purchase price because of continued deterioration in mortgage markets. An S&P research analyst also suggested credit losses at Countrywide merited a reduced price.

Convertibles players still saw the deal getting done, however.

"I think there's a mixture of fear and jaw boning that they want to cut another deal; but I'm not worried that they are backing out completely," a Connecticut-based buyside analyst said.

"This is what you might expect in a situation like this. There's been jaw boning and discussion about how those bonds will be treated if they do the deal, whether they are assumed or not, or guaranteed, but they're not going to let them default; they'd ruin their own credit," the buysider said.

"I can understand why they'd want to keep their options open. But whether they are solely an obligation of CFC or guaranteed by BAC, while it's not implicit, it's still money good and would get you most of the way there, as far as certainty," the buysider said.

On the other hand, if there were no deal, then everyone has to re-assess what kind of shape Countrywide is in, he said. "I've not looked at it closely since last fall, but back then, they were OK with the earliest put, but the one after it, the following year was more questionable," he said.

The Countrywide floating-rate convertibles were issued in two tranches. The A tranche has a put later this year, while the B tranche has a put in the spring of 2009.

In a report on the Countrywide deal, two CreditSights analysts concurred with the buysider's opinion. They pointed out that Bank of America may be intentionally ambiguous about its intensions for Countrywide debt to be able to depress prices for the debt to buy it back at more favorable terms.

"We cannot recall a circumstance in which an acquiring bank did not honor the debt of a target bank," CreditSights analysts David Hendler and Baylor Lancaster wrote. "Still we acknowledge the last few months have been a sort of 'through-the-looking-glass' period in which quite a few episodes have been quite unusual (run on the bank at Bear Stearns; the Federal Reserve accepting ABS as loan collateral; 20% plus annual declines in housing prices, to name a few," they wrote in the report.

In speaking with Bank of America, the CreditSights analysts determined that Bank of America "seemed a little bit frustrated that S&P had only now decided to change its rating on Countrywide." Bank of America expressed that S&P's ratings on Countrywide should reflect its fundamental view of the company, rather than relying on the presumption of the acquisition.

The bank also indicated to the analysts that it hadn't yet made any decisions about the ultimate legal entity structure of Countrywide and may not do so until after the legal closing of the deal.

The bank also did not seem to support market talk that Countrywide could be split into a "good bank/bad bank" structure since it "couldn't imagine" what such a structure would look like.

In January, Bank of America agreed to acquire Countrywide for about $4 billion in an all-stock deal. The deal is supposed to close during the third quarter.

The Countrywide Libor minus 350 basis points series A convertible debentures due 2037 closed at about 90.5 versus a stock price of $5.36 on Monday. That compared to 91 versus a share price of $5.98 on Friday.

The Countrywide Libor minus 225 bps series B convertibles closed at about 88 versus the same share price on Monday, compared with 90.5 on Friday.

Shares of the Calabrasas, Calif.-based lender (NYSE: CFC) closed down 10% to $5.36, after closing down 1.2% on Friday.

Cheniere eases with uncertainty

Cheniere Energy's 2.25% convertible notes due 2012 were down about half a point at 61.5 against a stock price of $7.41. The shares dropped 15% on Monday, continuing a seemingly inexorable slide that began earlier this year.

The stock of the Houston-based operator of natural gas terminals and pipelines (Amex: LNG) closed off its low, down $1.33 at $7.49.

In general, there is a worry of a lack of supply of LNG for Cheniere, and now it looks like the financial health of the company in terms of cash flow and liquidity are coming under fire, a Connecticut-based sellside convertibles analyst said.

Countries producing LNG, namely in the Caribbean, aren't shipping to the U.S. because demand and prices are higher elsewhere, he said. "On the inauguration of its first new terminal on April 21, the stock fell out of bed." And the convertibles are trading at 1,300 bps over Libor with a volatility of 45%.

Meanwhile Superior Energy's 1.5% exchangeable senior notes due 2026 gained about 5 points in trade on Monday to 125, as its underlying shares added more than 6%.

A Harvey, La.-based oil services contractor, Superior Energy's shares (NYSE: SPN) picked up $3.03, or 6.4%, to $50.36.

Six Flags bonds extend gain

Six Flags convertible bonds extended their gains from Friday on no apparent news.

"It's been following the rest of the market in general perhaps; but it is largely a real estate play at this point so [there] might be some news related to that," a New York-based sellside trader suggested.

The New York-based amusement park operator's 4.5% convertible senior notes due May 15, 2015 traded at 64.5 with the stock up $2.15 on Monday.

Six Flags stock (NYSE: SIX) closed slightly higher, jumping 10 cents, or 4.8%, to $2.19.

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