Convertibles firm; Alcoa better ahead of earnings; Allergan in line; Chesapeake trades up

By Rebecca Melvin

New York, April 11 – Convertibles were quiet on Monday. Trading levels were flat to higher amid a lack of issuance that has contributed to tight supply in the space and thereby a firm secondary market, a New York-based trader said.

Among bonds, volumes were light, and there was more action in the convertible preferreds, the trader said.

Alcoa Inc.’s 5.375% mandatory convertible preferreds due 2017 were active and higher by about 0.375 point on a dollar-neutral, or swap, basis ahead of the aluminum producer’s first-quarter earnings released after the market close and unofficially kicking off the new earnings season.

The Alcoa earnings came in below estimates and shares fell in after-hours action, but the New York-based aluminum producer is still on track to spin off its faster-growing aerospace and auto business segments later this year into a separate company.

Allergan plc’s convertible preferred remained active and were in line, or flat, in trading action, a trader said. The Allergan preferreds have been active since the company’s tie up with Pfizer Inc. was spiked last week following new U.S. regulations that discourage mergers related to corporate tax inversions.

Among bonds, Chesapeake Energy Corp.’s convertibles were trading better on Monday after the Oklahoma City-based natural gas company announced that it has amended its $4 billion revolving credit facility agreement, granting relief of some debt covenants and allowing the company to continue to borrow at unchanged levels.

Chesapeake’s 2.5% convertibles due 2037 jumped about 10 points to around 70.5. Chesapeake’s 2.25% convertibles due 2038 rose about 5 points to 46, according to Trace data. Chesapeake shares ended up 74 cents, or 20%, at $4.50.

Chesapeake has gained leverage ratio covenant relief until September 2017, and the interest coverage ratio covenant was reduced to 0.65x through March 2017. It agreed to pledge additional assets as collateral under the credit agreement, and the next scheduled borrowing base redetermination review has been postponed and lenders have agreed not to exercise their interim redetermination right until June 2017.

Elsewhere, Yahoo! Inc.’s 0% convertibles due 2018 gained another 0.5 point to 100.5 as deal chatter continues to swirl around the Sunnyvale, Calif.-based internet search, content and communications company.

In addition to the Verizon Communications Inc. bid for Yahoo!’s web assets, which was speculated about on Friday, the U.K’s Daily Mail confirmed that it is in early discussions with a number of potential bidders for Yahoo!.

Yahoo! shares were up 41 cents, or 1.1%, to $36.48.

Overall, it was “super quiet” on the bond front, a trader said. “Things are grinding higher because of a lack of paper, and things were mostly better to buy, but there was nothing notable trading in bonds.”

Alcoa mandatories add

Alcoa’s 5.375% mandatory convertible preferreds were up about 0.375 point on Monday at 33.65 versus an underlying share price of about $9.80.

Alcoa shares fell about 4% in after-hours trading, after closing up 34 cents, or 3.5%, to $9.74 in the regular session.

There were outright buyers of the Alcoa preferreds in the market ahead of the earnings statement, a trader said. And the convertibles were called 2% rich with shares higher by nearly 4% in the regular session.

The preferreds were “pretty active,” the trader said.

The New York-based aluminum producer reported first-quarter earnings of $16 million, or break-even on per-share basis, compared with earnings of $195 million, or 14 cents a share, in the year-earlier period. Excluding onetime items, earnings were down to 7 cents per share from 28 cents per share.

Revenue fell 15% to $4.9 billion. Even though it was up from organic growth and acquisitions, those gains were offset by a decline in alumina and aluminum pricing, foreign exchange and divested or closed facilities.

The earnings came in below forecasts’ forecasts. According to analysts polled by Thomson Reuters, the company was expected to earn 2 cents per share on $5.14 billion of revenue.

The company remains on track to split into two companies later this year, with the spun off business to be focused on aerospace and autos and most of the debt expected to be left with the old business.

Investors are interested to understand how the debt is going to be split up between the two companies and how much is going to be left with the old company.

After the market close, Alcoa said that its first-quarter earnings fell 92% amid ongoing weak aluminum prices and will lay off 2,000 workers. It also lowered its 2016 outlook for the aerospace market. It projects growth of 6% to 8%, compared to a previous estimate of 8% to 9%.

The faster-growing aerospace and automotive goods businesses will be spun off into a company to be named Arconic.

For 2016, Alcoa projects a global aluminum deficit of about 1.1 million metric tons as 5% growth in global aluminum demand offsets an expected 2% increase in global aluminum supply. The company had expected global aluminum demand to increase 6% and aluminum supply growth of 3%.

Allergan trades in line

Allergan’s 5.5% mandatory convertibles were down about $20.00, or 2.3%, at $835.00 with Allergan shares ending down $7.63, or 3.2%, to $228.37.

The Allergan preferreds were “trading in line to slightly better from Friday. It has been one of the most active names for the fifth day,” the trader said.

Mentioned in this article:

Alcoa Inc. NYSE: AA

Allergan plc NYSE: AGN

Allergan preferred NYSE: AGN-PA

Chesapeake Energy Corp. NYSE: CHK

Yahoo! Inc. Nasdaq: YHOO

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