Countrywide surges on takeover talk; merger talk boosts UAL, Continental, AMR, Yahoo!

By Evan Weinberger

New York, Jan. 10 - Reports of a possible takeover by Bank of America led to a surge in Countrywide Financial Corp. convertibles. The debentures regained almost all the value they've lost since the beginning of the year in one day.

SLM Corp. and Washington Mutual Inc. convertibles, as well as other financials, were also up.

E*Trade Financial Corp.'s equity units continued to rise, aided by the Countrywide chatter and the reports of progress in its turnaround plan.

Thornburg Mortgage Inc. 10% preferreds were down on the announcement that the struggling lender will add another $112.5 million to the issue Monday after the market close.

Airline convertibles, led by UAL Corp., Continental Airlines Inc. and AMR Corp., were up on speculation about consolidation among the big players in the industry.

Synaptics Inc. convertibles were slammed after an analyst's downgrade.

Yahoo! Inc. convertibles rose on more merger speculation.

No new issues priced in the United States Thursday. Despite predictions that there would be a flood of new issues almost right off the bat, the new issues space in the convertibles market has slowed to a trickle. Only one new deal has priced so far this year.

"I think things have to settle down a little bit," a buyside analyst said. "It's such a crazy market. Does an underwriter, or an issuer, for that matter, want to issue a convert when their stock is at $10 and then two weeks later it's at $7?"

Speaking of the crazy market, all three major indices rallied Thursday.

Markets were volatile but relatively flat leading up to the Countrywide-Bank of America reports. Even a promise from Federal Reserve chairman Ben Bernanke that the central bank would aggressively lower interest rates to support the economy and stave off a recession could only start a small rally that was quickly snuffed out.

"All Bernanke said was: 'Greenspan left us in a world of hurt,'" a trader said.

Investors were looking for any shred of good news, however, and the Countrywide talk provided the kindling for a real rally.

"I think anything good, resembling good or faintly good would be taken as an excuse to go up," the trader said.

After flirting with a 200-point gain, the Dow Jones Industrial Average closed 117.78 points, or 0.92%, higher for a 12,853.09 close.

The Nasdaq punched its way to a 13.97 point, or 0.56%, gain to close at 2,488.52.

The Standard & Poor's 500 closed at 1,420.33, a gain of 11.20 points, or 0.79%.

Countrywide surges on takeover reports

Countrywide proved to be the center of the market universe again Thursday. Reports surfaced in the afternoon that Bank of America had been engaged in serious takeover talks with the Calabasas, Calif.-based mortgage lender.

That sent Countrywide stock and convertibles soaring. The report also sparked a broader stock market surge.

The Wall Street Journal, which broke the story, said that the deal was not set in stone and that there was still a chance that it might not get done at all. But the New York Times reported an agreement could be announced as early as Thursday afternoon or Friday morning.

Bankruptcy rumors smashed Countrywide, and the wider markets, Tuesday. Prior to the takeover talk, an analyst remarked that the pattern for Countrywide was moving in reverse of the old market dictum of buy on the rumor, sell on the news. "That's going to continue to be volatile anytime anybody opens their mouth," he said. "Any rumor that comes along, it's sell on the rumor."

The old saw held true Thursday, however. When the analyst made his observations, at around 1:30 p.m. ET, Countrywide stock was up around 50 cents, or 10%.

After the report surfaced, the stock and convertibles took off. "The converts - which I couldn't get anyone to look at - have traded up big!" the trader said in an e-mail.

Countrywide's Libor minus 350 basis point series A convertible senior debentures due April 15, 2037 closed Thursday at 89 versus a closing stock price of $7.75. They closed Wednesday at 62.138 versus a stock price of $5.12.

Countrywide's Libor minus 225 bps series B convertible senior debentures due May 15, 2037 closed Thursday at 86 versus a stock price of $7.75. They closed Wednesday at 60 versus a stock price of $5.12.

Countrywide stock (NYSE: CFC) gained $2.63, or 51.37%.

Market watchers contacted at the time said they were confident that Bank of America, which had invested $2 billion in Countrywide in August, would not let the mortgage lender go under.

They stuck by that view Thursday when the takeover chatter heated up. "I have always said it will happen," a trader said.

Other financials buoyed

Their spirits lightened by the Countrywide-Bank of America reports, investors moved in on financial convertibles Thursday in the hopes that more deals will follow.

Another trader, who said he saw reports of Federal Reserve backing of the deal on CNBC late in the afternoon, said that just having the news that Bank of America and Countrywide were talking out on the street was a big deal.

An agreement between the two financial institutions would also spark other similar deals. "I think if CFC happens that the door to a whole lot of transactions [opens], probably in rapid succession," he said.

Seattle-based savings and loan Washington Mutual Inc. saw its 7.75% series R non-cumulative perpetual convertible preferred stock close Thursday at 889.92 versus a closing stock price of $14.16. They closed Wednesday at 760 versus a stock price of $12.34.

Washington Mutual stock (NYSE: WM) added $1.82, or 14.75%, on the day.

Reston, Va.-based student loan giant SLM, better known as Sallie Mae, followed Wednesday's rise in its new preferred stock offering with another strong day.

Sallie Mae's 7.25% series C mandatory convertible preferred stock due Dec. 15, 2010 closed Thursday at 1031.3 versus a closing stock price of $19.77. They closed Wednesday at 938 versus a stock price of $18.64.

Sallie Mae stock (NYSE: SLM) picked up $1.13, or 6.06%, on the day.

E*Trade continues rally

On Wednesday, limping New York-based online brokerage E*Trade announced that the first phase of its turnaround plan was meeting expectations. The company's stock and equity units responded positively.

That continued Thursday. E*Trade's 6.125% common equity units due Nov. 18 closed Thursday at 4.91 versus a closing stock price of $2.93. They closed Wednesday at 3.98 versus a stock price of $2.40.

E*Trade stock (Nasdaq: ETFC) added 53 cents, or 22.08%, on Thursday.

Thornburg addition leads to subtraction

Late Wednesday, Santa Fe, N.M.-based mortgage lender Thornburg Mortgage announced that it will add 4.5 million shares, or $112.5 million, to its existing 10% cumulative convertible redeemable preferred stock. Those issues priced over the summer.

Thornburg also said that it will be pricing an issue of common stock at the same time. The total amount raised will be $200 million.

The issues are expected to price Monday after the market close.

A trader said he was advising clients to stay away from the addition. "I am not a fan of TMA," he said. "While [the convertibles'] terms are OK, not being a bank - thereby being stuck going to the market for liquidity - is not an area I want to own at this point."

The preferreds closed the day at 21.25 versus a closing stock price of $8.38. They closed Wednesday at 22.8 versus a stock price of $8.78.

Thornburg stock (NYSE: TMA) lost 40 cents, or 4.56%, on the day.

Airlines fly on merger rumors

Reports that Delta Air Lines Inc. was about to begin merger talks with two of its rivals sparked a round of buying in airline stocks and convertibles Thursday.

One of the airlines with which Delta will reportedly start talking is Chicago-based UAL, the parent company of United Airlines.

UAL's 4.5% convertible senior limited-subordination notes due June 30, 2021 closed Thursday at 118.975 versus a closing stock price of $32.19. They closed Wednesday at 103.975 versus a stock price of $26.03.

UAL stock (Nasdaq: UAUA) flew $6.16, or 23.66%, Thursday.

Fort Worth, Texas-based AMR, the parent company of American Airlines, saw its 4.5% convertible senior notes due Feb. 15, 2024 close Thursday at 103.198 versus a closing stock price of $13.41. They closed Wednesday at 100 versus a stock price of $11.84.

AMR's 4.25% convertible senior notes due Sept. 23, 2023 closed Thursday at 104.903 versus a stock price of $13.41 after finishing Wednesday at 103.26 versus a stock price of $11.84.

AMR stock (NYSE: AMR) gained $1.57, or 13.26%, on the day.

Houston-based Continental took off Thursday.

Continental's 5% convertible senior notes due June 15, 2023 closed the day at 137.138 versus a closing stock price $23.25. They closed Wednesday at 117.758 versus a stock price of $18.80.

Continental stock soared $4.45, or 23.67%, on the day.

Synaptics slammed by analyst

Santa Clara, Calif.-based computer components maker Synaptics was downgraded to "neutral" from "buy" by an AmTech Research analyst Thursday. The analyst said Synaptics was losing market share to its competitors.

In this environment, one bad word from an analyst is all it takes to send a convertible or stock tumbling, a buyside analyst said.

Synaptics' 0.5% convertible senior subordinated notes due Dec. 1, 2024 closed Thursday at 98.66 versus a stock price of $32.71. They finished Wednesday at 103.634 versus a stock price of $38.43.

Synaptics stock (Nasdaq: SYNA) tumbled $5.72, or 14.88%, on the day.

Yahoo! up on merger talk

The recurring rumors that Microsoft has its eyes on Sunnyvale, Calif.-based internet services provider Yahoo surfaced again Thursday.

This time it was in the New York Post.

That report sent Yahoo's zero-coupon convertible senior notes due April 1 to 118.767 versus a closing stock price of $24.09 Thursday. They finished Wednesday at 114.095 versus a stock price of $22.56.

Yahoo stock (Nasdaq: YHOO) gained $1.53, or 6.78%, on the day.

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