AMR, UAL in line with lower shares amid higher oil prices; Peabody comes in on hedge

By Rebecca Melvin

New York, April 8 - The convertible bond market felt heavier on Friday as equity markets, which hugged the flat line for much of the session, nosed into negative territory by the close, as oil prices surged.

Much of the day's trading in convertibles was geared toward the beginning of the day, however, market sources said.

Higher commodities and materials have been a theme for the broader markets in recent weeks but didn't seem to affect the convertibles market at all this week until Friday.

On Friday, a pair of airline convertibles, AMR Corp.'s 6.25% convertibles due 2014 and United Continental Holdings Inc.'s 4.5% convertibles of 2021, were reported in trade by one sellsider at pricing that was just before most of the day's down move. The prices reported were slightly weaker in line with underlying shares.

Higher crude oil, which rose above $113 per barrel in New York for the first time in more than two years, is a concern as it threatens to weigh on the bottom lines of the carriers.

Both New York crude and Brent crude, which pushed over $126, gained 3% and 4%, respectively, amid concerns that Libya's output won't rebound when the fighting ends, according to reports.

Oil prices in New York have risen 34% since anti-government protests began in Libya on Feb. 15.

Also in trade, Peabody Energy Corp.'s convertibles underperformed on a hedged basis in comparison with the underlying shares that slipped into negative territory toward the end of the session.

Newmont Mining Corp.'s three convertible bonds remained active as gold prices notched another record high, with the convertibles trading essentially flat along with underlying shares.

The Denver-based gold and copper producer announced plans Thursday to boost gold output by 2017 by developing global assets and announced plans to begin to tie its stock dividends to the price of gold instead of to cash flows or profits.

Elsewhere, Eastman Kodak Co. was active and flat on a hedged basis on the cusp of the high end of its value, which is based on optimism that the digital photography company will continue to see favorable rulings on its patent infringement suits, which will in turn, continue to enforce royalties that support the company. The company has been struggling with its product line, a New York-based sellside analyst said.

The week's action was fairly lackluster with a dearth of new issuance cited for keeping some market players sidelined.

The week's sole new offering was a $150 million deal from Fifth Street Finance Corp., which priced convertibles to yield 5.375% with a 10% initial conversion premium.

In overseas action, the end of the week brought two $500 million deals from two companies based in Hong Kong.

Both companies, luxury hotel company Shangri-La Asia Ltd. and land development company Agile Property Holdings Ltd., priced U.S. dollar-denominated convertibles under Regulation S.

AMR, UAL in line

AMR's 6.25% convertibles due 2014 traded at 98.75 versus a share price of $5.90 early in the session, which was lower, in line with the previous day's levels. On Thursday, the AMR 6.25% convertibles traded at 99 versus a share price of $6.03.

Shares continued to move lower through the session, pressured by lower oil. And the AMR convertibles printed at a low mark of 97.3, according to Trace data.

Shares of the Fort Worth, Texas-based airline closed at $5.77, which was down 27 cents, or 4.5%, on the day.

UAL's 4.5% convertibles due 2021 traded between 98.945 and 100.925, according to Trace data. One sellsider reported at trade at 101 versus a share price of $20.00.

The UAL 6% convertible senior notes due 2029 traded down 18 point to 245.6, according to Trace data.

Shares of Chicago-based UAL fell $1.21, or 6%, to $19.79.

Peabody in 0.5 point on hedge

Peabody Energy's 4.75% convertibles due 2066 traded at 128 versus a share price of $68.05 on Friday, compared to 130 versus a share price of $69.55 on Thursday, according to a New York-based sellside desk analyst.

A New York-based sellside analyst said, "Coal names eased a little bit, but haven't performed extremely well in the last two months."

"Right after the quake in Japan, there was speculation that coal would be a big replacement fuel to a lot of countries concerned with the safely of nuclear plants," the analyst said.

Now, there's "profit-taking in those stocks, and I think today there's not much news going on. Fundamental hedge funds are taking advantage of the pull back and getting back in the names," the analyst said.

Newmont little changed

Newmont Mining's 1.25% convertibles due 2014, or A paper, was seen little changed at 137.255 on Friday from 137.55 on Thursday.

Newmont Mining's 1.625% convertibles due 2017, or the B paper, was seen around 141 to 142, which was unchanged to weaker.

Newmont's 3% convertibles due 2012 were seen steady at 127.

The paper had moved up Thursday when the company had its analysts' day.

"They said they were going to establish a dividend policy linked to gold prices, and that means the dividend has a lot to grow and it's good for the convertibles," a New York-based sellside analyst said.

There's also been a trend of consistency among gold miners, with companies like Goldcorp Inc., for example; and "markets like seeing the ramp up of production by these miners," the analyst said.

Mentioned in this article

AMR Corp. NYSE: AMR

Eastman Kodak Co. NYSE: EK

Newmont Mining Corp. NYSE: NEM

Peabody Energy Corp. NYSE: BTU

United Continental Holdings Inc. NYSE: UAL

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