Convertibles sink with drop in equities; Virgin Media, Coinstar slip; Alcoa earnings eyed

By Rebecca Melvin

New York, July 11 - Convertibles were generally marked lower by 0.25 point to 0.5 point on Monday as equities dropped on renewed European debt worries and ahead of the unofficial kick off of earnings season after the market close.

But many convertible players sat out the session and volumes were quite light, market sources said.

"People sort of sat on their hands and watched the market be weak today," a New York-based trader said. "It's the beginning of earnings season, and this was not the kind of tape that anyone wanted to get out in front of given that it's a Monday and people are still coming in from weekends and stuff."

Italy and Spain were pulled into the European debt fray, and yields on Italian and Spanish debt jumped to euro-era records.

Investors were interested how Alcoa Inc. earnings were going to fare after the market close. But even so the aluminum maker's 5.25% convertibles due 2014 were not expected to be a big focus of trade.

"They are not very interesting. There's not much you can do with them," a sellsider said of the Alcoa 5.25% convertibles that are so far in the money with no premium that it isn't much of a play for hedge players and was expected to move only in step with the common.

Another convertible name that reported earnings after the market close was Novellus Systems Inc. Novellus' shares fell in after-hours trade after the chip gear maker posted second-quarter revenue below estimates and curbed its third-quarter earnings forecast.

Other convertible names expected to release earnings this week are Cubist Pharmaceuticals Inc. on Thursday and Citigroup Inc. on Friday.

Trades on Monday were often linked to sharp moves in the common stock, a Chicago-based convertibles sellsider said. Virgin Media Inc. came in about 0.25 point over the past week with the stock off over the last 10 days and down again on Monday by nearly 4%.

Coinstar Inc., the Bellevue, Wash.-based owner and operator of self-service coin-counting machines, was another name that was in about 0.25 point to 0.375 point in the last week with weaker underlying shares.

"Where you do see some of the volume is on the back of big equity moves," the sellsider said.

Markets tossed around

European sovereign debt worries hit again, torpedoing equities, but one trader noted: "It changes from day to day."

"Just when you're told not to worry about Greece, now you're told to worry about Italy. I think there's a general lack of ability to really understand how much people should be worried or not, and there's not a lot of conviction or duration behind any of [the market moves] and none of them are on heavy volume," the trader said.

Given light volumes in convertibles it was difficult to get a handle on exactly how the convertible market held up. Especially since convertible arbitrage players, who still drive marginal trade and market direction, were not actively involved in Monday's market.

"In general, fewer things get quoted, fewer deals get done. It's harder to get a sense if things are better or not," a New York-based sellsider said. "Our market is driven more by investors, and the inquiry that they generate rather than dealers. We go out with stuff all the time, and most of it gets no response on days like this."

"There was not anything much going on and not enough traded to have a real feel on whether things got better or worse," the source said.

A second sellsider said that there were some low-ball bids thrown into the convertibles market on Monday, with "people seeing if there were any forced sellers out there," but there weren't, and there wasn't a lot of volume, he said.

Nevertheless, with last month's returns coming in pretty weak and now convert arb gains for the year to date at 1% to 3%, the sellsider thought that the buyside must be beginning to wonder whether redemptions in the fall are a possibility.

"It's way too early for that yet, but I wonder if that's in the back of their minds," the sellsider said.

Alcoa to follow common

Alcoa's 5.25% convertibles due 2014 were seen at about 256.25 at the end of Monday's session. Shares of the Pittsburgh-based aluminum maker shed 47 cents, or nearly 3%, on the day to close at $15.91.

"The big issue is what happens with Alcoa with earnings," a New York-based trader said.

Alcoa's second-quarter earnings rose as improvement in the manufacturing sector brought higher sales and prices that offset rising raw materials costs.

After the market close, the company reported its net income totaled $322 million, or 28 cents a share, which was up compared to $136 million, or 13 cents a share, a year ago. Sales totaled $6.59 billion, compared with $5.19 billion in the second quarter a year earlier.

Nevertheless, Alcoa's convertibles at well over double par weren't seen as very interesting. The issue was one of the sundry issues that came to market at the beginning of 2009 when stocks were very depressed.

They, along with a number of the other issues of that vintage, quickly went into the money.

They were done out of necessity when credit was difficult and the convertible market was open to the issuers.

"Effectively, they were able to sell their stock at some kind of premium. It was less than ideal levels for them to sell stock, and they got some cheap money," a trader said.

Virgin Media edges inward

Virgin Media's 6.5% convertibles due 2016 were seen at 169.45 versus an underlying share price of $27.90 at the close. They came in about 0.25 point on a swap basis over the past week.

Shares of the New York-based provider of entertainment and communications services in the United Kingdom ended Monday's session down $1.09, or 3.8%, at $27.91.

"They held up pretty well," a sellsider said of the convertibles. "The stock has come off in the last 10 days."

Mentioned in this article:

Alcoa Inc. NYSE: AA

Citigroup Inc. NYSE: C

Coinstar Inc. Nasdaq: CSTR

Cubist Pharmaceuticals Inc. Nasdaq: CBST

Kinetic Concepts Inc. NYSE: KCI

Novellus Systems Inc. Nasdaq: NVLS

Virgin Media Inc. Nasdaq: VMED

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