By Rebecca Melvin
New York, June 26 - Convertible bonds were mixed Wednesday as market players began to "feel more comfortable," but pockets of weakness were still clearly evident.
"We're still seeing higher dollar names being sold, but volumes are up and people seem more comfortable. It felt better," a New York-based trader said.
Among particular names, Affiliated Managers Group Inc.'s 3.95% convertibles were weaker, coming in about 0.5 point to a point on the day on a hedged basis.
The bonds of the Prides Crossing, Mass.-based asset management company were "better for sale," meaning the paper was readily offered but the bid was weak.
Peabody Energy Corp.'s 4.75% convertibles gapped lower into the upper 60s from the lower 70s, marking the continuation of an ongoing move that has been sector wide.
On the upside, the convertibles of DDR Corp. - a shopping mall real estate investment trust based in Ohio - were fairly active and up again. One trader saw the DDR 1.75% convertibles up a point to 1.5 points on an outright basis and better on a dollar neutral, or hedged, basis as well, by 0.125 point.
Alcatel-Lucent SA launched and priced €547.8 million of five-year convertible bonds in the Oceane structure at par on Wednesday to yield 4.25%, with an initial conversion premium of 37%, according to a syndicate source.
Proceeds from the new deal are earmarked for repurchasing existing convertibles and the French telecom equipment maker's existing 2.875% convertibles due 2023 were seen up 2 points.
The broader markets were cheered by a big revision downward in first quarter gross domestic product. The weaker GDP was looked at as evidence tilting the Federal Reserve away from early tapering of its bond-purchasing program.
The U.S. Commerce Department said the U.S. GDP grew at a 1.8% annual rate for the first quarter, which was less than its earlier reading of a 2.4% rate of growth.
The final revision was lower than initially estimated due to consumption expenditures, which came in lower at 2.6% growth from the earlier 3.4% growth estimate, and lower business investment spending, which came in at a weaker growth reading of 0.4%, compared with a 2.2% gain in the earlier report.
Government spending was little changed from the earlier estimates and still lower, down 8.7%, while exports were weaker than first estimated, though imports declined helping to neutralize the impact on growth.
Stocks on Wednesday extended gains. The S&P 500 stock index gained 15.23 points, or 1%, to 1,603.26; the Dow Jones industrial average added 149.83 points, or 1%, to 14,910.14; and the Nasdaq stock market gained 28.34 points, or 0.9%, to 3,376.22.
Affiliated 'comes in'
Affiliated Managers' 3.95% convertibles due 2023 traded at 126.827 on Wednesday, and they were seen at 126.5 near the close versus a share price of $157.81, a New York-based trader said.
The stock closed a little lower than that, but up on the day at $157.68, which was up $1.10, or 0.7%.
"It came in to parity plus 0.625 point to 0.875 point from parity plus one and a teeny," the trader said.
He said the bond was better for sale, compared to Tuesday when it was better bid.
He attributed the weakness to the fact that the in-the-money name was a likely candidate to be called, and if it is called, it will lose value.
Peabody gaps lower
Peabody Energy's 4.75% convertibles due 2041 traded at 67.875 during the session, which was down 3.125 points on the day, according to Trace data. A New York-based trader reported a trade at 68.75 at the end of the session, and another source said the paper was around 69, which was "down again."
The Peabody bonds had been in the lower 70s on Tuesday and at 79 a couple of weeks ago.
Peabody's convertibles trade outright, but the underlying shares of the St. Louis-based coal mining company were also down Wednesday at a 52-week low. At one point, the shares were down as much as 4.5%, but they closed lower by 49 cents, or 3.3%, at $14.54.
On Tuesday, Alpha Natural Resources Inc.'s 3.25% convertibles due 2015 traded down nearly 4 points to 91.5.
"The whole sector is getting killed," a Connecticut-based trader said. More pressure seemed to result Wednesday after president Barack Obama's speech Tuesday in which he vowed to fight climate change. His plan to do this has included cutting pollution from coal-fired power plants and developing renewable energy.
As for the specific Peabody bond issue, the trader said, "It's a long-dated bond with no puts, and interest rates are going up."
Alcatel-Lucent picks up
Alcatel's 2.875% convertibles due 2023 were near 96.75 on Wednesday, which was up 2 points.
Alcatel shares ended the day down 3 cents, or 1.7%, at $1.73 in heavy volume.
The Paris based communications company launched and priced a new issue of Regulation S bonds in the Oceanes structure, the proceeds of which will be used to buy back older convertibles.
Pricing came at the rich end of talk, which was for a 4.25% to 5% coupon and 30% to 37% premium over the volume weighed price of its Euronext Paris-listed shares between launch and pricing.
There is an over-allotment option for up to an additional €81.1 million of bonds.
Deutsche Bank is global coordinator for the offering and is a lead manager and bookrunner along with Crédit Agricole Corporate and Investment Bank and Morgan Stanley.
The bonds are non-callable for three years until Aug. 1, 2016, and then provisionally callable if the underlying shares trade above 130% of the conversion price.
Paris-based Alcatel-Lucent provides solutions to deliver voice, data and video communication services to end-users.
DDR up
DDR's 1.75% convertibles were higher outright at 115.5 bid, 116 offered. That level was versus a $16.28 share price, and compared to 114 bid, 115 offered on Tuesday versus an underlying share price of $16.07.
"Moving them on a 75% delta, the bonds were up about 0.125 point, or maybe a bit little more depending on hedge," a New York-based trader said.
The convertible was actively traded and up again. "It's a solid REIT credit," the trader said, "and it has the benefit that it will hold up well if the market cracks."
Mentioned in this article:
Affiliated Managers Group Inc. NYSE: AMG
| Alcatel-Lucent SA: | NYSE and Paris: ALU
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| DDR Corp. | NYSE: DDR
|
| Peabody Energy Corp. | NYSE: BTU
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