Convertibles weaken; Jefferies lower in heavy volume; Kodak falls; Liberty Global slips

By Rebecca Melvin

New York, Jan. 28 - After a somewhat better Wednesday, the convertible market gave way again to weakness Thursday amid renewed selling in stocks, market players said.

"There were more bids yesterday than there had been for a good week. Today is right back to no bid," a New York-based sellsider said Thursday.

Among the day's top-volume trading names was Jefferies Group Inc., which saw its 3.875% convertibles lower by 0.5 point at 101.5 versus a share price of $26.70, compared to 102 versus a share price of $26.75 on Wednesday.

Eastman Kodak Co. convertibles "got killed" even though their underlying stock zoomed up in heavy volume after the digital photography company reported it swung to a fourth-quarter profit on higher revenue.

Ford Motor Co. convertibles were up 1.25 points on a 10-cent stock rise in its underlying shares after the Dearborn, Mich.-based automaker swung to its first annual profit since 2005.

Liberty Global Inc.'s 4.5% convertibles were down a little after the cable and broadband provider said that it completed a previously announced acquisition of Germany's second-largest cable company.

Toronto-based gold mining company Barrick Gold Corp. also saw its Placer Dome 2.75% convertibles due 2023 active and among the day's top traders.

Stock markets ended on a downbeat as investors appeared to shrug off seemingly positive earnings news. Losses were especially pronounced among large-cap technology issues.

The Nasdaq Stock Market ended down 42.4 points, or 1.9%, at 2,179.00. The Dow Jones Industrial Average fell 115.70 points, or 1.1%, to settle at 10,120.46, and the S&P 500 index lost almost 13 points, or 1.1%, to close at 1,084.53.

At the end of the session, the U.S. Senate approved the nomination of Ben Bernanke for a second four-year term as chairman of the Federal Reserve.

The confirmation came under fire last week when a number of senators voiced opposition to the choice and raised doubts about whether Bernanke could be confirmed.

The 70-30 Senate vote in favor of Bernanke's nomination should soothe markets, which dropped when the confirmation was in doubt.

The convertible bond market also faces pressure from redemption needs, and that has certainly had a big impact on pricing in the past week, a New York-based sellside analyst said Thursday.

Anecdotally, there have been a few large hedge funds out there as sellers, including Citadel and Vicis Capital having to sell positions to satisfy redemptions, sources said.

In addition, dealers flush with inventory may have been a lesser factor in the slide, a New York-based sellsider said.

"There also seems to be a concern that this has further to go," the sellsider said.

Kodak down after good earnings

Kodak's 7% convertibles due 2017 traded early at 107.75 bid, 108.25 offered versus a share price of $5.50. The paper traded actively and late in the session was lower at 105 bid, 106 offered versus the same share price.

In convertibles trading, the paper dropped 0.5 point right off the bat to 107.25, bid 107.75 offered after the initial trades at 107.75 bid, 108.25 offered.

"They got killed. I don't have any idea why," a New York-based sellside trader said. "They were tumbling against the same hedge."

In contrast, shares of the Rochester, N.Y.-based digital photography company shot up $1.17, or 25%, to $5.92 in extremely heavy volume.

Kodak earnings from continuing operations in the fourth quarter were $430 million, or $1.36 per share, compared to a loss of $914 million, or $3.40 a share, in the year-earlier period.

Revenue was $2.582 billion, a sequential increase of 45% from the third quarter of 2009 and a 6% increase from the year-ago quarter, including 4% of favorable foreign exchange impact.

Revenue from digital businesses totaled $1.991 billion, a 12% increase from $1.779 billion in the prior-year quarter, resulting from the combination of an increase in non- recurring intellectual property licensing revenue and increased demand for consumer inkjet printer systems, kiosk media and digital plates.

But revenue from the company's traditional business decreased 10% to $589 million for the fourth quarter.

Antonio Perez, Kodak chairman and chief executive, said in a news release, "Despite a difficult economic environment, we delivered in 2009. Our momentum is returning and our strategy is paying off. During 2009, we generated significant traction with our key digital businesses, we achieved sustainable operational improvements across the company, our earnings improved substantially, and we ended the year with more than $2.0 billion in cash on our balance sheet."

Liberty Global a little lower

Liberty Global's 4.5% convertibles were seen at 117.875 versus a share price of $24.87 toward the end of the session Thursday, compared to 118.75 a day earlier.

Shares of the Englewood, Colo.-based cable and broadband provider ended down 34 cents, or 1.3%, at $24.95.

The fact that the shares came off probably had to do more with the overall market than with the company's news today that it had completed an agreement originally announced in November to acquire Germany's second-largest cable operator, Unitymedia, for $5.2 billion to be funded largely through debt.

"Our analysts believe that it's positive for the stock," an analyst said of the acquisition news.

The Liberty Global capital structure is complex and possibly a deterrent for investors, which is why a research report from Barclays Capital analysts may have shed light on the situation on Thursday.

Liberty recommended

Barclays Capital analysts Kannan Venkateshwar and Venu Krishna wrote in a note that the Liberty Global convertibles look like an attractive equity alternative, given the proximity of the current stock price level to the strike and its high delta of 83%.

Investors should go long these convertibles, the analysts said.

The bonds, which were issued in November, are convertible at a stock price of $26.54, and on Thursday afternoon the international cable and broadband provider's shares stood at about $25.00.

They provide an income pickup of 3.8% relative to equity and a relatively defensive 1.5:1 risk/reward profile, with 80% of the upside and 55% of the downside, for a plus or minus 25% move in equity over a one-year investment horizon, the analysts said.

Liberty stock is trading cheap to its sector despite better fundamentals, the Barclays analysts said, and they predict that the stock will outperform in the long run, despite Thursday's downtick.

In addition to its acquisition of the German entity, Liberty Global also recently announced the sale of its Japanese operations for $4 billion in cash and a favorable resolution of its Chilean minority buyout, which effectively saves about $300 million to $350 million in cash.

While the $4 billion sale of its Japanese operations should help liquidity, it is unlikely to lower leverage given that the company's Japanese operations accounted for about 29% of Liberty Global's EBITDA, but only a relatively small amount of debt, the analysts noted.

There are $935 million of the 4.5% convertibles outstanding, and they are trading at about 118. They have a current yield is 3.8%, a yield to maturity of 1.6% and a premium of 23.7%.

Given that the credit markets remain open and the outlook for issuance is positive, the analysts don't expect Liberty Global would have problems in "terming out" near-term maturities.

The company has about $638 million in debt coming due next year. The analysts said that this year they expect the company to work on terming out maturities further, in line with what it did during 2009, when $8.5 billion was termed out.

On Wednesday, Standard & Poor's said it maintained the B+ long-term corporate credit rating on Liberty Global and its subsidiaries on CreditWatch, where it was placed with negative implications on Nov. 13.

The update follows the announcement that Liberty Global agreed to sell its 37.8% ownership interest in Jupiter Telecommunications Co., Ltd. (unrated), according to the agency. The announcement follows a statement by Liberty Global in November 2009 that it plans to acquire 100% of the shares of Unitymedia for an equity purchase price of $2 billion.

Mentioned in this article:

Barrick Gold Corp. NYSE: ABX

Eastman Kodak Co. NYSE: EK

Ford Motor Co. NYSE: F

Jefferies Group Inc. NYSE: JEF

Liberty Global Inc. Nasdaq: LBTYK

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