Alcoa convertibles in line after mixed earnings report; Intel better; Ciena extends gains

By Rebecca Melvin

New York, April 13 - The convertible bond market remained pretty quiet on Tuesday as earnings season - which is hoped to spark volatility and trading in convertibles - got underway.

But Alcoa Inc.'s mixed earnings release that came after the market close on Monday was a "non-event," a New York convertibles sellsider said, and the convertibles of the aluminum producer didn't really trade much Tuesday. The paper was lower outright but mostly flat in line with its underlying shares.

Intel Inc.'s newer 3.25% convertibles were steady to higher on a dollar-neutral basis, but also very thinly traded, ahead of the semiconductor company's earnings release expected after the market close Tuesday.

"The Intel bonds haven't traded either, just odd lots," a sellsider said. That earnings report came in better than expected, and Intel stock was higher in after-hours trading.

Away from earnings news, Ciena Corp. convertibles were higher along with their underlying shares, which continue to run up as they have been doing since November 2009.

Secondary volume muted

Overall, trading volume was thin, with investors described as "passive," or not caring to set up any trades, with pricing mostly sideways.

Because convertibles-specific news continues to sap product from the market, there were few sellers, a Connecticut-based sellside trader said.

"We're losing product and that makes people even more reluctant to sell anything," the trader said, adding that specific news included Quanta Services Inc.'s call of its 3.75% convertibles and Medical Properties' tender.

Specifically, Medical Properties Trust Inc. announced late Monday that it was tendering for the outstanding 6.125% exchangeable senior notes due 2011 and funding the tender with an offering of 24 million shares of common stock.

Another sellsider said activity was reduced from last week, when extended vacations after the holiday weekend crimped action in the convertibles and in financial markets in general.

"It seems like people are just looking at their books, but not doing anything. There is no rotation of names," the sellsider said.

That being said, a level on Mentor Graphics Corp.'s 6.25% convertible debentures due 2026 was 97 or 98, and UAL Corp.'s convertibles, including the newest UAL 6% convertibles, were seen in trade at higher levels.

The UAL 6% paper was all the way up to 262 versus a share price of $21.50. The UAL 4.5% convertibles, with an upcoming put, saw pretty strong pricing with a 90s handle.

Alcoa mostly in line with stock

Alcoa's 5.25% convertibles due 2014 traded down to about 228 on Tuesday from 236 on Monday, for a drop of about 9 points; but on a dollar-neutral basis they were little changed.

Shares of the Pittsburgh-based aluminum company pared early losses to settle down just 23 cents, or 1.6%, at $14.34. At their worst, the shares were down 3.6% on the day.

"It was totally in line, as expected," a Connecticut-based sellside analyst said, referring to the bond pricing on a dollar-neutral basis being flat, neither expanding nor contracting.

"If you want to get technical about it, they'd be up a little today," with the dollar-neutral price lower at 227.80 compared to the actual price of 228, the sellsider said.

A second sellsider said that the paper was about 0.625 point cheaper on a dollar-neutral basis using a 95% delta and about 0.72 point cheaper using a 93% delta.

"So I would say, they are less than a point cheaper post earnings compared to where they last traded in size," the sellsider said, using the last size print from the previous week of 239.466 versus a share price of $14.85, and the last trade in size on Tuesday of 231.366 versus a share price of $14.3495.

Overall, market reaction was mixed to the earnings release, which is considered the unofficial kick off of earnings season.

Alcoa posted a loss that was in line with estimates. For the three months ended March 31, the aluminum producer's net loss was $194 million, or $0.19 per share, compared to a loss from continuing operations of $480 million, or $0.59 per share, for the same quarter a year earlier.

Excluding non-cash restructuring and special charges totaling $295 million, the company posted a small profit of about 10 cents a share.

Revenue for the first quarter rose 18% to $4.9 billion, compared to $4.1 billion in the first quarter of 2009.

Alcoa chief executive Klaus Kleinfeld said in a news release that the company's performance improved thanks to higher realized prices and strong operational results. He also said that gradually improving markets are expected.

On Tuesday, UBS downgraded Alcoa shares to "neutral" from "buy." Deutsche Bank downgraded the company last week ahead of earnings.

Convertibles traders are hoping that earnings news will promote more volatility in the market, and hence more convert bond activity. But that wasn't the case today. Still, "there's only been one bellwether, and that was Alcoa, and it was mixed," a Connecticut-based sellside analyst said.

Intel adds a little

Intel's 3.25% convertibles due 2039 traded at 122 versus a share price of $22.55, according to a New York-based sellside desk analyst.

Another pricing source had them up about 0.80 point outright at 121.88 compared to 121.08.

The older Intel 2.95% convertibles due 2035 were seen little changed at 98.92.

Shares of the Santa Clara, Calif.-based chipmaker ended up about 23 cents, or 1%, at $22.7699.

After the market close, the company said its net income for the first quarter nearly quadrupled due to better spending by companies on technology.

For the quarter, it earned $2.4 billion, or 43 cents per shares, compared to $629 million, or 11 cents per shares. The net beat the consensus estimate of 38 cents a share.

Revenue for the quarter jumped 44% to $10.3 billion. That was better than analysts' estimates for revenue of $9.8 billion.

The company's stock is up 15% in the last several months.

Ciena extends gains

Ciena's 4% convertibles traded at 111.75 versus a share price of $17.50, which was up from 104 versus a share price of $15.25 on March 31.

Shares of the Linthicum, Md.-based communications networking company gained 57 cents, or 3.3%, to end at $18.06 on the day.

Bank of America upgraded the company's shares to a "buy."

The convertibles, which initially priced in March, "continue to do very well," a sellsider said.

Mentioned in this article:

Alcoa Inc. NYSE: AA

Ciena Corp. Nasdaq: CIEN

Intel Inc. Nasdaq: INTC

Medical Properties Trust Inc. NYSE: MPW

Mentor Graphics Corp. Nasdaq: MENT

Popular Inc. Nasdaq: BPOP

UAL Corp. Nasdaq: UAUA

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