Convertibles action crimped by low vol., vacations; Cephalon, Human Genome gain; Ford off

By Rebecca Melvin

New York, April 9 - Convertible bond market trading was doused again on Friday due to a combination of factors, not the least of which was a lack of volatility, market participants said.

The CBOE volatility index fell 2% to 16.14 on Friday.

"My guess is the lack of volatility has made everyone believe there won't be any more, ever again. The crowd says the market is headed higher, with many names above par, so I guess there's not enough nervousness for investors to hedge anything," a New York-based sellside trader said.

That may mean it's "probably time to do so," the sellsider added.

Friday's session capped off a post-holiday week of tepid volume as other factors like extended vacations from the Passover and Easter holidays and the distraction of the Masters Golf Tournament contributed to a lack of participation. In addition, valuations are high at this point, which has crimped demand too, they said.

Of names that were in trade there didn't seem to be any noticeable themes.

Cephalon Inc. convertibles gained in tandem with their underlying shares after the Frazer, Pa.-based biotechnology company said that it concluded a previously announced acquisition of Swiss drugmaker Mepha.

Rockville, Md.-based biopharmaceutical company Human Genome Sciences Inc. was steady to higher in trade. The company's 2.25% convertibles due 2011 traded at 116 versus a share price of $32.80.

Ford Motor Co., which is a regular feature of trade, remained weaker as it has been the case for at least the past week.

While not mentioned in trade, another name in the autosphere, parts supplier ArvinMeritor Inc., saw a downgrade of its shares by Standard & Poor's to "strong sell" from "hold," based on its valuation. ArvinMeritor convertibles were mixed, according to Trace data.

Fellow auto parts maker TRW Automotive Holdings Corp. convertibles were not heard in trade on Friday but gained for the week.

Meanwhile, Chicago-based Equity Residential traded in decent volume Friday and up about half a point at 101.375.

Slower week

"It was definitely a slower week," a West Coast-based sellside trader said, adding, "We had a spate of new issues the previous weeks and that has temporarily died down. Valuations are less attractive after a fairly healthy run-up. Vols have come in also, and the Masters golf has attracted a fair amount of attention and has been televised during business hours."

Other than Telvent GIT SA's newly priced 5.5% convertibles, which jumped to as high as 106.5 on their debut Wednesday as their underlying shares rose, there was no other activity in the U.S. primary market for the post-holiday week.

Equities ran higher on Friday, with the Dow Jones Industrial Average stopping just short of the 11,000 mark, at 10,997.35, which was up 70.28 points, or 0.6%.

The Dow's rise Friday gives the index its sixth straight weekly gain, and possibly flags caution going into another earnings season starting up next week.

Cephalon lifts

Cephalon's 2.5% convertibles due 2014 traded up to 116.875, which was nearly 2 points above previous levels, while shares of the Frazer, Pa.-based company rose $1.45, or 2%, to $68.23 on Friday.

The company said that Mepha is now a wholly owned subsidiary of Cephalon. The purchase price paid was CHF 662.4 million, which may be subject to further post-closing adjustments.

The acquisition expands Cephalon's presence in Europe and is expected to contribute to its long-term growth.

Cephalon was a hedge name that performed well for investors in 2009. Its bumpy ride made it a lucrative play.

But convertibles players have felt the decline of volatility this year. "Equity volatility is creeping to zero," a Connecticut-based convertibles trader said.

Ford still weaker

Ford's 4.25% convertibles due 2016 traded Friday at 150.25 versus a share price of $12.65, which was little changed from Thursday. The paper has come down in the last two weeks from north of 165.

The older Ford 4.25% convertibles due 2036 were also in the 150 range.

Ford's convertibles are representative of those deep in-the-money names that continue to suffer recently.

ArvinMeritor's 4.625% convertibles due 2026 have been creeping up since last year and are currently 98.8, which was up 1.548 points from Thursday.

ArvinMeritor's 4% convertibles due 2027 were last at 87.24, but they were not seen in trade on Friday.

Standard & Poor's has cut its opinion on shares of the auto parts supplier to "strong sell" from "hold." It also raised its target price by $1 to $12 with the shares above its target price. Still S&P expects higher full-year earnings per share, with risks to that estimate including a more robust dollar against the euro and greater raw materials costs.

TRW's 3.5% convertibles due 2015 were in trade on Thursday at 127.25 versus a share price of $31.35. The paper was not indicated to have moved on Friday and its underlying shares were essentially unchanged at $31.40. But on Tuesday, TRW's convertibles changed hands at 125.5 versus a share price of $30.65, and on Monday they traded at 125 versus a share price of $30.60.

Mentioned in this article:

ArvinMeritor Inc. NYSE: ARM

Cephalon Inc. Nasdaq: CEPH

Equity Residential NYSE: EQR

Ford Motor Co. NYSE: F

Human Genome Sciences Inc. Nasdaq: HGSI

TRW Automotive Holdings Corp. NYSE: TRW

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