Volcano drops outright, flat to better on hedge; Chemed down outright, expands on hedge

By Rebecca Melvin

New York, Oct. 29 - Earnings news and guidance spurred trading action in a number of convertible bonds Tuesday, with mostly flat to better results as a recent trend of sudden stock drops works in favor of hedged players.

Volcano Corp. was the latest example of convertible paper that held in or did better amid lower shares. The San Diego-based medical-device maker's updated guidance Tuesday sent shares down 14%, and the Volcano 1.75% convertibles dropped on an outright basis to below par from about 105ish; but, on a dollar-neutral, or hedged, basis, the bonds held in or even expanded slightly depending on the delta hedge on which the bonds were held.

Chemed Corp.'s third-quarter earnings beat estimates but revenue missed estimates, and the Cincinnati-based hospice operator guided full-year 2013 earnings below estimates. Shares were lower, but the Chemed convertibles were said to have expanded 0.5 point.

But Alcoa Inc.'s convertibles continued a recent move to the downside, coming in as market players weigh the bond's optionality ahead of maturity in March, and with sellers around in the short-dated bonds.

Overall, volume was relatively strong, although traders said the session "felt quiet."

"Things are trading," one source said, but it seems as if investors are in a wait-and-see mode. The primary market remained quiet for a second straight day.

The Federal Open Market Committee began a two-day policy setting meeting Tuesday, and that can foster sitting on hands until after the statement. But market watchers are not expecting anything new from the Fed on Wednesday, when the meeting concludes. No tapering and no changes in forward guidance were anticipated, sources said.

In September, the Fed surprised the market by deciding to hold steady on its $85 billion per month in asset purchases despite months of discussion around a framework for starting to taper by the end of this year and concluding asset purchases around midyear 2014. That timetable has been shelved amid mediocre economic data and heightened fiscal policy uncertainty.

Nevertheless, convertible players seem to have benefited from recent sudden stock drops, including those of Covanta Holding Corp. and Rayonier Inc.

The sudden stock drops in these names resulted in "a home run" for hedged players. "It's really the best case scenario," the trader said.

Health Care REIT Inc. also improved. The REIT saw shares move, although typically vol. is less of a feature in a REIT name. But Health Care REIT seemed to move in sympathy with an expansion in other in-the-money names, the trader said.

Volcano flat to better

Volcano's 1.75% convertible due 2017 were seen around 97.375 versus an underlying share price of $20.45 in the early going Tuesday, according to a New York-based trader. A second trader put the level at 97.75 versus an underlying share price of $20.00.

Later the bonds were seen a little higher at 98 bid, 99 offered, with shares still down $3.42, or 14%, at $20.94 at the close.

Initially the paper was seen in line, or flat, to maybe slightly better, depending on the delta hedge. Most holders were on a delta hedge of 50% to 70%, a New York-based trader said.

"Maybe they have gone a little better," a trader said at the end of the day. But he capped the expansion at better by 0.5 point.

Initially the bonds nuked straight down, the trader said, referring to a move lower in line with a drop in the underlying shares.

The company updated its third-quarter, full-year and 2014 revenue guidance, which was below consensus estimates.

The company said full-year revenue is now expected to be $391 million to $395 million, which pulls in slightly from a previous estimate of $394 million to $400 million.

It also said that revenue in the third quarter rose 2.2% to $95.8 million, but called its precision-guided medical device sales weak in the United States.

The news was followed by three downgrades from JPMorgan Chase, Credit Suisse and Canaccord Genuity.

"Our analyst is still overweight on the name for whatever reason. But there's a slew of reasons to be negative on the name," a New York-based trader said.

Volcano's convertibles traded very actively atop the top volume names, according to Trace data, and was seen as name of the day.

Chemed expands

Chemed's 1.875% convertibles due 2014 fell outright but expanded on a dollar-neutral, or hedged, basis by about 0.5 point. The bonds were seen at 101.625 versus an underlying share price of $64.75.

Chemed shares ended the session down $2.68, or nearly 4%, at $66.14.

Chemed said its adjusted earnings increased 6.3% to $1.36 per share while revenue decreased 3.8% to $341 million.

Looking ahead, Chemed said that revenue will be constrained in the fourth quarter due to a shift in its services provided away from high acuity care to routine home care.

Alcoa slips further

The Alcoa 5.25% convertibles were last seen at 148.283 with the shares at $9.49. Shares closed a little better than that, or down 2 cents, at $9.54.

"Alcoa continues to come in. Guys are wondering are they going to be able to monetize it like other names," a trader said.

The level at which the Alcoa convertibles are now trading is "right around cash flow," or equal to the coupon income.

The paper was a little lower compared to Friday. But Alcoa shares were lower on Friday.

Mentioned in this article:

Alcoa Inc. NYSE: AA

Chemed Corp. NYSE: CHE

Covanta Holding Corp. NYSE: CVA

Health Care REIT Inc. NYSE: HCN

Rayonier Inc. NYSE: RYN

Volcano Corp. Nasdaq: VOLC

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