Convertibles unfazed by rate cut; B of A dips; Transocean weaker with downgrade; AMD retraces gains

By Rebecca Melvin

New York, Oct. 8 - The convertible bond market wasn't relieved Wednesday by continuing efforts to loosen up frozen credit markets, including an unprecedented, coordinated interest-rate cut by the United States and other leading central banks.

The Federal Reserve was joined by the ECB, Bank of England, Bank of Canada, the Swedish Riksbank and the Swiss National Bank in lowering rates by half a percentage point.

Stock markets attempted to gain some stability from the move and pushed into positive territory intermittently during the session, but convertibles remained "down all day," a New York-based sellside trader said.

Bank of America Corp. closed below 700 as its shares struggled to push higher from a low open. The shares ended at $22.10, a dime better than the bank's secondary offering of 455 million shares, which priced at $22.00 each late Tuesday.

The offering raises almost $10 billion for Bank of America's acquisition of Merrill Lynch & Co. and is also intended to fortify its balance sheet against potential greater loan losses.

Transocean Inc. convertibles weakened early along with their underlying shares amid a downgrade to "hold" from "buy" by Dahlman Rose & Co., an investment bank specializing in natural resources supply chain, and also on lower oil prices.

Later, Transocean shares pushed into positive territory and held on to a small gain at the close. But the convertibles remain very cheap, with attractive yields and spreads far wider than commensurate credit default swaps, a West Coast-based sellsider said.

Advanced Micro Devices Inc. retraced gains notched Tuesday on credit-positive news about spinning off its expensive fabricating plants into a joint venture. The chip maker was downgraded Wednesday to "neutral" from "overweight" by Global Crown Capital.

Convertibles are noticeably cheap and attracting non-traditional participants including high-yield, distressed and equity players.

"They know the story, and they are not rushing in. They pick their spots - in other words, outrights, with stickier capital," the West Coast trader said of the nontraditional participants.

Recent trends in convertibles remained in force Wednesday: trading volumes were concentrated in large, liquid names with which funds could readily raise cash; short-dated, low premium names were in focus, and models showing implied volatility versus realized weren't working.

"The model is useless, the fundamentals are worthless," the West Coast sellsider said.

"I keep telling myself, if you can withstand this, you and the product should do all right, but how long can you stand it," he said.

B of A slips lower again

Bank of America's 7.25% series L convertible preferreds were indicated to close at 697.6 versus a share price of $22.10 on Wednesday, compared 730 versus a share price of $23.77 on Tuesday.

The 7.25 preferreds traded intraday at 715 versus a share price of $22.76 and at 700 versus a share price of $22.15. Shares of the Charlotte, N.C.-based bank shed another 7% Wednesday after plunging 26% on Tuesday.

Financial stocks in general swooned late in the day. Treasury secretary Henry Paulson held a press conference late in the day and said essentially that the financial system will recover, especially given all the steps that have been taken by the government to alleviate problems, but that it's a large ship that can't turn around very quickly.

There are troubles ahead, he said, including more bank failures.

Late Monday, Bank of America reported third-quarter earnings of $0.15 per share that were significantly lower than expected. Independent research firm CreditSights said in a report that the results were driven by higher credit provisions and various charges for "hot stove" marks and other items.

Those "hot stove" exposures and merger expenses included a $952 million CDO and subprime-related charge and $327 million leveraged loan and commercial mortgage-related write downs. Included in the $952 million of CDO markdowns were about $225 million in credit valuation adjustments related to CDO hedges with financial guarantors.

CDO marks were also driven by widening corporate loan spreads.

The company booked a total of $313 million in losses on a commitment to buy back auction-rate securities. Other charges included write downs of $320 million on preferred stock of Fannie Mae and Freddie Mac and $630 million to support money market funds.

Pre-tax merger and restructuring charges related to acquisitions were $247 million, which were partially offset by a gain from the sale of credit card portfolios, and prime brokerage $500 million. "All together we estimate these items represented $2.2 billion or $0.49 cents in earning per share," CreditSights' analysts said in the report.

While Bank of America's acquisition of Merrill Lynch positions the company to be a "universal bank," covering all major banking business lines and geographies in the United States, CreditSights notes: "we have seen in the last few weeks that the other large banks (JPMorgan, Citi, Wells) have all gone after major acquisitions which would position them to compete with Bank of America's branch dominance."

CreditSights tipped its hat to Bank of America for understanding early the long-term trend toward greater consolidation, therefore "we continue to feel that B of A's leading deposit share and diverse franchise positions it as a survivor in the industry despite the weaker-than-expected earnings posted for 3Q08."

Nevertheless, the near-term outlook remains challenging and the company's economic outlook was markedly more downbeat than it had been as of second-quarter 2008, the research firm noted.

Transocean mostly weaker

Transocean's series A 1.625% convertible due 2037 traded late at 88.25 versus a share price of $81.69. Earlier it had traded at 87.75. And previously it was seen around the 89 mark.

Shares of the Houston-based oil services company, which hit a 52-week low on Monday at $79.70, ended up $1.30, or 1.6% on Wednesday.

The series A convertibles were at 112 versus a stock price of $150 in early June.

Transocean's series B 1.5% convertible due 2037 ended Wednesday at 82.7, and the Transocean series C 1.5% convertible due 2037 ended at 78.9, down about a point from Tuesday but up from an intraday trade at 76.995.

The stock, which dropped below $100 this month from its highs in May at about $163, are oversold versus commodity prices, some analysts say. But Dahlman Rose downgraded Transocean to "hold" from "buy" due to uncertainty within oil and credit markets.

It believes the latest drops in oil will affect management's decisions, especially regarding its special dividend. The company may end up not paying off debt as aggressively as it intended to pay the big dividend and will have a generally more cautious approach to cash balances and future debt requirements.

Although day rates remain steady despite oil price swings, Dahlman Rose noted that it was nervous about operator appetite for rigs should oil keep selling off.

Crude oil for November delivery fell $1.11, or 1.2%, to settle at $88.95 a barrel on the New York Mercantile Exchange Wednesday. Futures touched $86.05 a barrel, the lowest since December, and have fallen 40% since reaching a record $147.27 a barrel on July 11.

Though contracting of deepwater rigs has not been as rampant as it was during the first half of 2008, the latest contract awards are at steady day rate levels, Dahlman Rose said. It believes however that there is a real risk of oil companies reducing their capex plans below initial budgets.

This risk stems from uncertainty on oil prices and less financing available from both the equity and debt markets. "We believe there is too much focus on the viability of field projects at certain oil price levels, and at current levels nearly all field projects are profitable for oil companies in our opinion, however E&Ps are faced with lower cash flows to pay for these projects in the current declining oil environment," Dahlman Rose said in a research note.

AMD retraces gains

Advanced Micro Devices' 5.75% convertibles due 2012 were seen closing at 47 versus a share price of $4.05, compared to 55 versus a share price of $4.59 on Tuesday.

AMD's 6% convertibles due 2015 traded at about 40 versus 42 bid, 43 offered on Tuesday.

Shares of the Sunnyvale, Calif.-based chipmaker fell 54 cents, or 12%, dropping precipitously in the final hour of trading. On Tuesday, the shares had jumped 18%.

Investors had been cheered by the chip maker's news that it was spinning off its fabricating plants into a $5.7 billion joint venture with Abu Dhabi state venture capital firm Advanced Technology Investment Co.

The so-called "smart asset" strategy allows AMD to better compete with its larger rival Intel Corp. by allowing more focus on chip design and less on factories.

The Abu Dhabi venture capital firm will invest $2.1 billion for a 55.6% stake in the venture and will hold half of the venture's board seats.

It also committed to investing another $3.6 billion to $6 billion over five years to fund the venture's expansion.

Another Abu Dhabi government company, Mubadala Development Co., will spend $314 million to increase its stake in AMD to 19.3% from 8.1% and gain a seat on AMD's board.

Mentioned in this article:

Bank of America Corp. NYSE: BAC

Transocean Inc. NYSE: RIG

Advanced Micro Devices Inc. NYSE: AMD

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