Convertibles improve; Allegheny Technologies, Cemex trade; Microsoft lower dollar neutral

By Rebecca Melvin

New York, June 28 - The convertible bond market was better on a dollar-neutral basis Tuesday, following the broader markets higher on a "risk on" day, as uncertainty still loomed.

"It sounds like things were definitely better on a dollar-neutral basis; stuff was better to buy," a New York-based sellside analyst said, explaining that the broader "risk on" day applied to convertibles also, although there wasn't an abundance of name-specific action.

Prior to Tuesday, convertible bonds were looking 0.25 point to 0.5 point lower across the board, but the decline hadn't been significant enough to make many convertible names more interesting to investors in terms of cheapness, sources said

"It's really name specific. Things were really rich before, and now they're basically normalizing, but people aren't jumping out of their shoes to buy stuff," the analyst said.

Several energy and basic materials names were hitting the convertibles tape on Tuesday as they were in the broader markets, and those convertibles were higher outright, but not necessarily improved on a dollar-neutral, or hedged, basis.

There was strong volume in Allegheny Technologies Inc. with those bonds up 3 points outright near the end of the session and with the underlying shares of the Pittsburgh-based specialty metals producer having gained 4%.

Cemex SAB de CV was heard in trade. The recently priced B tranche, or the 3.75% convertibles due 2018, traded at 96 versus an underlying share price of $8.30, with previous trades cited around 95.

Microsoft Corp. was quoted in trade again at 102 versus an underlying share price of $25.25. The bond has traded consistently in recent days, but with shares of the Redmond, Wash.-based software giant pushing higher in this week's equity rally, it meant that on a dollar-neutral basis, the convertibles were falling.

"Those bonds historically have traded rich. They are more or less normalizing [now]," an analyst said.

World Acceptance Corp. was in trade again Tuesday and steady to higher after the convertibles of the Greenville, S.C.-based consumer finance business changed hands actively on Monday.

Sino-Forest Corp. was called about a point better but languished in illiquid trade as shares of the Canadian-Chinese timber company jumped 13% on the Toronto Stock Exchange.

Muddy Waters LLC, which torpedoed Sino-Forest with its June 2 research report alleging fraud, published a negative open letter on Tuesday about Shanghai-based Spreadtrum Communications Inc., a non-convertibles name, driving those shares down by as much as 34% intraday only to have the Spreadtrum shares recover nearly all of the slide to end the day down 3.4%.

Normalizing pricing

The prior weeks' pull back hit convertibles like it did the broader markets but didn't seem to put convertibles in a more compelling light for investors. Instead convertibles appeared to be trading in line.

"Energy is up because oil is up and equities are up, on a 'risk on' day," a New York-based sellside convertibles analyst said.

Pricing looks "kind of fair," he said of convertibles.

A second source said that some convertibles looked a bit cheaper with the market up and volatility creeping in, but in general it was an insignificant amount, and the market was very quiet.

Uncertainty continues to loom. "Thursday and Friday could be interesting, with the Greek austerity votes and European reaction. "The market should develop a little bit more clarity by then," the analyst said.

Longer term, the U.S. is facing its own set of uncertainties as among other things the question of whether to raise the debt ceiling is debated ahead of an Aug. 2 vote.

"A lot of people are sitting on their hands, and volumes are light" in the midst of the uncertainties, the analyst said.

Allegheny adds outright

Allegheny Technologies' 4.25% convertibles due 2014 traded as high as 161.625 and as low as 156.5 on Tuesday, according to Trace data, and ended the session right around 161, which was up 3 points on the day.

The paper is down from April when it was touching 180.

Allegheny shares added $2.52, or 4.3%, to $61.63 in greater-than-average volume on Tuesday.

"ATI was active before the bell," a trader said, and as of midsession $29 million of the market's total $225 million was accounted for by Allegheny.

Cemex adds

Cemex's convertibles added 05 point to a point. Cemex's 3.75% convertibles due 2018, or the B tranche, traded at 96 versus an underlying share price of $10.25. The paper was quoted at 96 at the end of the session compared to 95 on Monday, according to a pricing source.

Cemex's 3.25% convertibles due 2016 were seen also settling at 96 compared to 95, and the Cemex 4.875% convertibles due 2015 were seen up about a half a point at 95.2 compared to 94.65.

Shares of Cemex were up 13 cents, 1.6%, to $8.28.

The Cemex Bs have a premium of about 26%, or 20 points, a sellside desk analyst said.

The Mexican-based cement giant last week pulled a planned $650 million straight bond issue due to market conditions. But what that said about the company was unclear. "That could mean the company will come back in two weeks or two months and try again," a New York-based trader said.

World Acceptance in trade

World Acceptance's 3% convertibles due in October were seen settling at about 107.8, according to a pricing source. On Monday one trader saw the paper at 107.87 to 107.91 versus a share price of $64.35 early in the session, and later at 107.48 versus a share price of $64.40.

"It is a very short play, but an interesting one," the trader said. "If you get a good move in the stock, you're going to make money either way."

The paper has an Oct. 1 maturity with options in August and October. But waiting until October might be too late, the trader said.

The bond is only 4 points over parity. Parity is 103 and they are trading at 107.

"It's a small premium close to par," the trader said, adding that such names are few and far between.

Mentioned in this article:

Allegheny Technologies Inc. NYSE: ATI

Cemex SAB de CV NYSE: CX

Microsoft Corp. Nasdaq: MSFT

Sino-Forest Corp. Toronto: TRE

World Acceptance Corp. Nasdaq: WRLD

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