Fannie Mae extends slide; Advanced Micro Devices ends day weaker; Energy sector indicated higher

By Rebecca Melvin

New York, July 10 - Many convertible bond players were content to sit out of the market Thursday as nervousness regarding financials dominated action again, pulling equities all over the place amid headlines weighing potential insolvencies for Fannie Mae and Freddie Mac, sources said.

"It was somewhat quiet today. I was talking to other desks, too, and they said it was one of the quieter days," a Boston-based buyside trader said.

The already-jittery market was "spooked" by former St. Louis Federal Reserve president William Poole's comments on Fannie Mae and Freddie Mac, a West Coast-based sellsider said, pointing out that the former president had been negative on the entities for a long time.

Fannie Mae convertibles fell again along with their underlying shares and other debt after an interview in which he said the government should recognize that the pair of mortgage lenders is insolvent.

Treasury secretary Henry Paulson countered the comments during testimony before the House Financial Services Committee, saying Fannie Mae is adequately capitalized.

Advanced Micro Devices Inc. convertibles were weaker as its underlying shares moved lower in heavy volume, hitting a multi-year low a week before the Sunnyvale, Calif.-based chip maker reports quarterly earnings.

The energy sector rallied toward the end of the session as crude oil jumped $5 to more than $141 a barrel. Tensions in the Middle East heated up with Iran's second test in two days of missiles capable of reaching Israel.

Carrizo Oil & Gas Inc. convertibles were indicated higher but weren't reported in trade, as its shares rallied through the session to a 7% higher close.

There was no action in the primary market, although the day started with news that Warren Buffet is buying $3 billion of convertible preferred shares in a private deal that the public market would have loved to have had.

The private placement is part of the financing for Dow Chemical Co.'s all-cash purchase of rival chemical maker Rohm and Haas Co. for $15.3 billion.

"It doesn't say anything about the public market; Dow could have done it in the public market. It's just that everyone wants Warren Buffet as a shareholder. That was likely the issue for the company," a New York-based syndicate source said.

"It would have been a great piece of paper [for the public market]," he added.

Fannie Mae spirals lower

The new Fannie Mae 8.75% mandatory convertible preferreds that priced at par of $50 two months ago was quoted at 28.75 versus a share price of $13.60 on Thursday, which was lower from about $32.98 versus a share price of $15.74 on Monday.

The older Fannie Mae 5.375% series 2004-1 convertible perpetual preferred stock traded in the 48,000 to 49,000 context, compared to 58,000 on Monday, according to a sellsider.

Freddie Mac isn't a convertible issuer and is unlikely to become one soon despite its need to raise capital. Freddie has said that it's going to raise capital instead with a combination of common stock and non-convertible preferred stock.

"I'm short Freddie and agnostic on Fannie," a New York-based buyside analyst said. Fannie Mae is short for the Federal National Mortgage Association.

"I don't know why these are public companies. It's really not necessary, and it's so tangled up," the analyst said, noting that the government sponsored mortgage lenders aren't as severely undercapitalized as banks.

"Their regulators say they are adequately capitalized, but then former governor Poole came in and made his comments. Freddie does have to do a capital raise that's larger than its market cap, and that's scaring the whole market because Fannie and Freddie are the only ones buying mortgages at this point," the analyst said.

And it started Monday with the Lehman report on FAS 140, which says companies would have to bring securitizations back on their balance sheet, and people started to think about what that would look like and it's not very pretty, the analyst said.

Nevertheless, they account for 90% of the demand of the mortgage market and people need to get mortgages so that the excess housing inventory can be whittled down. And the market seems pretty confident in the implicit government guarantee.

Still, these aren't for widows and orphans, the analyst said. "It's hard for me to figure out whether earnings or book value is real, so I'd just stay away."

"There's going to be a wicked rally at some point, but they give me the creeps," the analyst said.

Washington, D.C.-based Fannie Mae shares (NYSE: FNM) close down $2.11, or 14%, at $13.20.

AMD weakens

Advanced Micro Devices' 5.75% convertibles due 2012 closed at 69.6 versus a closing share price of $4.96 on Thursday. That compared to about 70 versus a $5.06 share price on Wednesday.

AMD's 6% convertibles due 2015 traded at 59.6, compared with about 60 on Wednesday.

Shares of the chipmaker (NYSE: AMD) lost 10 cents, or 2%, contrary to a move in the overall semiconductor sector.

AMD faces steep competition from its larger rival Intel Corp., and it seems to be losing the battle. The stock was $16 a year ago and $23 a share two years ago.

AMD reports earnings in a week, two days after Intel.

Energy picks up in afternoon

The turnaround in crude oil boosted energy shares and convertibles late in the session, but not much in the way of convertibles were trading.

One interesting name was Carrizo Oil, which saw its shares rally in heavy volume on decidedly negative early news that it expected lower production levels due to a gas hook-up delay.

Large intraday swings of 5% on the stock are not uncommon, he said. In addition there are a couple of potential positive trading catalysts seen in August related to well production.

The Carrizo 4.375% convertibles due 2028 were seen closing at 97.75 bid, 98.50 offered versus a closing share price of $61.25. A month ago, the convertibles were about 103.50 bid, 104.50 offered versus a share price of $69.74.

Shares of the Houston-based natural gas and oil producer (Nasdaq: CRZO) jumped $4.07, or 7%, on Thursday.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.