Low bids drag convertibles lower; Sallie Mae, Virgin Media retrace gains; Amgen convertibles better

By Rebecca Melvin

New York, Oct. 15 - Convertible bonds swung lower again Wednesday on low bids that controlled much of the trading that occurred, as a roller coaster market continued this week.

Stocks reeled from a larger-than-expected decline in retail sales for September, which were down 1.2%, led by lower auto sales, but which also included lower furniture, appliance and department store sales, the Commerce Department reported.

"Consumers are in crash position," a New York-based buyside analyst commented.

The Dow Jones Industrial Average skidded 733 points, or 8%, to 8,577.91.

But convertibles are also being wracked by the delevering that is occurring in financial markets on various levels, market sources said.

"People are lending less, and charging more," a West Coast-based sellsider said. "Also until risk managers are going to allow people to buy, and people aren't afraid of losing their jobs for buying, this will continue."

The trader said that outside the oil and gas market, which has been extremely volatile, convertibles were down Wednesday by about 0.5 point to a point on the day. But volumes were slim.

The situation marked a reversal from Tuesday when sources noted that liquidity in convertibles had improved and prices were mixed.

SLM Corp., better known as Sallie Mae, got a big boost Tuesday on news that banks are going to have a capital injection from the government, but was much lower again on Wednesday.

Virgin Media Inc. also retraced gains made Tuesday to end lower Wednesday.

Cypress Semiconductor Corp. was fairly quiet but under pressure as its underlying shares dropped 12% ahead of third-quarter earnings expected Thursday.

Amgen Inc. continued stronger.

Sallie Mae swings lower

Sallie Mae's 7.25% series C mandatory convertible preferred shares were seen closing at 422.83 versus a share price of $9.06 Wednesday, compared with a trade at 390 versus a share price of $8.00 on Monday.

In between, the Sallie Mae preferreds traded at 590 versus a share price of $11.50, however.

The mandatory is trading below the low strike price, and therefore moves like equity.

Shares of the Reston, Va.-based student lender closed down $2.44, or 21%. But they reached a nadir last week, closing at $6.40 Thursday, after dipping to an intraday low of $4.19.

With the U.S. government financial rescue plan, the feeling now is that Sallie Mae will be able to renew its credit facility and there will be other measures to help it continue to outperform competitors in the student loan space, a New York-based buyside financials analyst said.

For its part, the Reston, Va.-based lender says that its fundamentals are strong and that it is liquid and well-capitalized.

According to a letter to shareholders dated Oct. 2, 82% of its loans carry an explicit government guarantee. It has a Department of Education facility that provides 100% of the financing for $20 billion in loans it expects to make this academic year. It also has $10 billion of unencumbered FFELP loans.

In addition, it has $28 billion in asset-backed commercial paper facilities in place until February 2009, and it expects to be able to extend those facilities.

"That was the question in every short seller's mind: will Sallie Mae be able to extend this facility," and with the government programs rolled out this week, that should be the case, the analyst said.

That CP facility is with banks like JPMorgan Chase and Bank of America, and with all the incremental capital, banks will be more willing to lend, the analyst said.

"It's all good for Sallie Mae. In its third-quarter earnings preview, credit is not an issue, and it has funding for the next two years from the government," the analyst said.

"It is also the low-cost producer relative to its competitors, so I think they are going to be around," the analyst said. "The question is the viability of the securitization market."

Cost of business going up

Market liquidity issues also remain a concern, the analyst said.

"We're hearing things like prime brokerages raising cost of capital, the margin costs to clients, which is prompting further deleveraging. Guys used yesterday to trade, and got out of things," the analyst said.

For certain companies, rates have been raised from Fed Funds plus 30 basis points to Libor plus 400 bps, the analyst said.

"The deleveraging is super broad, and firms like mine, which aren't very leveraged, still suffer at the hands of the market," the analyst said.

Nevertheless, the buysider was optimistic that liquidity will improve sooner rather than later given the programs put in place this week by the government.

But remember, the banks haven't actually gotten the capital yet, and the CP paper program doesn't kick off until Oct. 27, the analyst pointed out.

In fact, particularly in the convertible preferred market, where there are many financial issues, the "artificial cheapness" existing between the prices and the price of shares, could be made up fairly quickly, possibly even before the end of the year, the analyst suggested.

Virgin Media slides

Virgin Media's 6.5% convertibles due 2016 traded at 53 versus a share price of $6.75 on Wednesday, compared to 57 versus a share price of $7.20 on Tuesday. On Monday, the paper traded at 51 versus a share price of $5.50.

Shortly after the paper was issued in April, it surged to 106 versus a share price of $14.00. On Wednesday, its shares slumped to a close of $5.83, which was down $1.27, or 18%.

New York-based Virgin, a U.K. cable and mobile phone company, said on Monday that it is asking its lenders for permission to defer bank amortization payments until June 2012 and make other amendments to its senior facilities. The amendments were seen giving the company more time to seek a complete refinancing of debt, which was originally planned for 2009.

Cypress little moved pre-earnings

Cypress Semiconductor 1% convertibles due September 2009 traded at 84.7 versus a share price of $3.73 on Wednesday, which was little moved compared to 85 versus a share price of $4.00 on Tuesday.

The San Jose, Calif.-based semiconductor maker, which supplies the telecom and solar industries, in addition to other industries, saw its shares end 52 cents lower, or 12%, at $3.73.

Amgen remains strong

Amgen's shorter-dated 0.125% convertibles due February 2011 ended at 85 versus a share price of $47.76, compared to 84 versus a share price of $50.00 on Monday.

In between, the Amgen's were at about 85.5.

Amgen improved nicely on Tuesday and remained strong on Wednesday, traders said.

Amgen shares ended lower Wednesday by $3.85, or 7.5%, at $47.76.

Mentioned in this article:

SLM Corp. NYSE: SLM

Cypress Semiconductor Corp. NYSE: CY

Virgin Media Inc. Nasdaq: VMED

Amgen Inc. Nasdaq: AMGN

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