Ford falls as rescue hopes dim; Chesapeake, Transocean, Prudential see strength; Sepracor trading picks up

By Kenneth Lim

Boston, Nov. 19 - The convertible market was dragged lower outright on Wednesday as equities fell across the board, but the bonds held firm on a dollar-neutral basis, market sources said.

Ford Motor Co. fell as its stock tanked further amid concerns that a proposed industry bailout by the U.S. government would not be approved anytime soon.

Energy names were actively bid in the morning, but interest waned as the stock market selldown took its toll.

Bonds hold against stock slide

The convertible market in general remained steady on a dollar-neutral basis despite the equity slide, but sentiment remains weak, a desk analyst said.

"A lot of them are the same dollar-neutral, but things are still better for sale," the analyst said. "People are not buying. Things are coming in. Compared to the high yield market, things are doing better, but it's still tough out there."

Sepracor, Inc.'s zero-coupon convertible due 2024 saw a slight pickup in trading volume, but market sources did not see any catalyst on the news front.

The convertible slipped about 3/8 point to trade at 89 against a stock price of $13.60 on Wednesday. Sepracor common stock closed at $13.27, down by 6.62% or $0.94.

Sepracor is a Marlborough, Mass.-based pharmaceutical company.

"One of the names that was active were the Sepracor zeros," a sellside convertible analyst said. "Good two-way flow. Not really sure what was going on there."

Prudential Financial, Inc. saw its floating-rate convertibles improve slightly as their put dates approach.

The Prudential Libor minus 240 basis points convertible due 2036 and putable in December traded at 97.75 against a stock price of $17 after flirting with above-98 levels. The Prudential Libor minus 163 bps convertible due 2037 was 87.5 versus a $17 stock price.

Share of Newark, N.J.-based Prudential, a life insurer, closed at $17.01, down by 14.57% or $2.90.

"Bond that are trading that are holding up are the Prudential '36s and '37s," a convertible analyst said. "The 36s have moved up to 98ish, they were 97.5. It's a one-month paper. The '37 bonds have been weaker the last couple of weeks, but they were kind of in line, 88ish, maybe a little weaker."

Ford slides lower

Ford's 4.25% convertible due 2036 dropped about 3.5 points outright as investors sold on concern that U.S. automakers would be unable to get government aid.

The convertible traded at 17 versus a stock price of $1.25 on Wednesday. Ford common stock fell 25% or $0.42 to close at $1.26.

Ford is a Dearborn, Mich.-based vehicle manufacturer.

The underlying equity tanked Wednesday as chief executives of the Big Three U.S. automakers testified before Congress and said that a proposed $25 billion bailout package was desperately needed. But Congress did not appear to make any progress toward approving any rescue plan.

The Ford convertibles did not hold up against the pressure.

"I don't think there's much of a credit story here anymore," a convertible analyst said. "They're just so far in junk territory."

The biggest concern for convertible holders at the moment was bankruptcy, the analyst said.

"Compared to a year ago, the risk of default is significantly higher now," the analyst said. "It is a very big concern. The auto companies are just bleeding obscene amounts of cash. With the poor economy, their sales can't keep up, and credit is really expensive, so they can't raise more cash, so the outlook is really bleak. I guess what's going on in Washington now is just the latest hit."

Oil and gas sees early interest

Oil and gas names like Chesapeake Energy Corp. and Transocean Inc. enjoyed some strength early Wednesday, but succumbed to broad downward pressure in the stock markets.

"We saw good two-way flow with Chesapeake," a sellside convertible analyst said. "It was down a bit but relative to the market it held pretty well. Some of the other energy names...right off the bat in the morning, saw good outright buy interest in energy names."

A convertible trader said the interest in the energy space was probably a technical move.

"It's just technicals," the trader said. "Most of these have come down and I think people were looking for a recovery. But it's hard to go against the rest of the market when everything else is getting dumped."

Chesapeake's 2.25% convertible due 2038 traded at 53 against a stock price of $19.95 on Wednesday, lower by about 2 points outright, but the note was seen changing hands about a point higher earlier in the day. The Chesapeake 2.5% convertible due 2037 also slipped about 2 points outright to trade at 63.25 against the same stock price.

Chesapeake common stock closed at $19.30, lower by 8.57% or $1.81.

Chesapeake is an Oklahoma City-based natural gas producer.

Transocean's series B 1.5% convertible due 2037 was flat at 81 versus a $68.85 stock price. The Transocean 1.625% convertible due 2038 was also mostly unchanged at 86.75 at the same stock price.

Common shares of Houston-based Transocean, an offshore drilling contractor, declined by 4.82% or $3.39 to close at $66.97.

Mentioned in this article

Chesapeake Energy Corp. NYSE: CHK

Ford Motor Co. NYSE: F

Prudential Financial, Inc. NYSE: PRU

Sepracor Inc. Nasdaq: SEPR

Transocean, Inc. NYSE: RIG

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