Convertibles firm slightly; Tyson, United Rentals recouping; Microsoft little changed

By Rebecca Melvin

New York, Aug. 12 - Convertible bonds firmed slightly on Friday but were generally quiet and left lower for the week.

Equities alternatively sold off heavily or rallied much of the week and knocked the convertibles space down a rung from its overbought status.

There is more scope for valuations to come down, sources said. But that's unlikely to happen given the lack of a forward new issue calendar.

"They definitely came in; and there's a lot of room for it to come in even more, but with no supply, it's hard to replace anything," a sellsider said of convertibles.

Some names were staging a recovery, including Tyson Foods Inc. and United Rentals Inc., which were both among the week's best performers on a delta-neutral basis.

Investment-grade issues, which represent havens of safety, changed hands with little price movement on Friday.

Referred to as "sleepy names" by one trader, the high-grade issues included Medtronic Inc.'s 1.625% convertibles due 2013, which were steady right around par, and Amgen Inc.'s 0.375% convertibles due 2013, which have been toggling around 99. Transocean Ltd. was also mentioned in trade.

Microsoft Corp.'s 0% convertibles traded at 101.5, and a few other technology names also changed hands, including Chandler, Ariz.-based semiconductor producer Microchip Technology Inc., which saw its 2.125% convertibles due 2037 trade at 119 versus an underlying price of $30.35, and San Jose, Calif.-based Xilinx Inc., which saw its 2.625% convertibles due 2017 trade at 121 versus an underlying share price of $30.35.

Microsoft looked to have treaded water during the throes of the last week, which opened with a sickening sell-off in reaction to Standard & Poor's ratings downgrade of U.S. debt to AA+ from AAA last Friday.

"...not even a weekend [European Central Bank] announcement of Italian and Spanish debt purchases could prevent the S&P 500 from selling off 6.65% on Monday," Citigroup's convertibles trading desk noted in commentary on Friday.

On Tuesday, the Federal Open Market Committee pledged in an unprecedented move to keep interest rates at near 0% until at least the middle of 2013, and markets gained.

From there, markets tanked on Wednesday and then fell before rallying on Thursday.

On Friday, equities rallied gently and the convertibles market was quiet. The Dow Jones Industrial Average gained 125.71 points, or 1%, to 11,269.02; the S&P's 500 index added 6.17 points, or 0.53%, to 1,178.81; and the Nasdaq Composite Index rose 15.3 points, or 0.6%, to 2,507.98.

The VIX index closed Friday at about 36 points, which was down from Thursday but up about 5 points from a week ago. For the week, no new deals were launched or priced.

During the week overall, convertibles mostly tracked equities.

"Hedge funds investors continue to like certain high-delta auto and industrial converts, such as Hertz Global Holdings Inc., United Rentals Inc. and Ford Motor Co., which trade as a synthetic put when hedged with short stock," according to Citigroup.

A synthetic put is a means of protecting on the downside by being long a call and short the stock.

"In general, short dated, strong credit names outperformed high beta, long dated issues," Citigroup said.

Tyson rebounding

Tyson's 3.25% convertibles due 2013 traded at 121.5 on Friday, which was up from 119 Thursday and 117 versus an underlying share price of $16.40 on Wednesday. On Monday it fell to about 112.

The issue, which matures in 26 months, was up about a point dollar neutral as of late Thursday.

The Springdale, Ark.-based company's $458 million convertible has a BB rating from S&P, and the producer of chicken, beef, pork and prepared foods is a $6.2 billion market capitalization company.

"Given what we believe is a solid credit - the $315 million 8.25% straight bonds mature in six weeks, but Tyson's $1.1 billion in cash easily covers the liability - the convert represents a cheap vol. play, Citigroup said.

"We prefer the Tyson 3.25% to the Smithfield Foods 4% converts, also maturing in 2013, given Tyson's stronger credit profile," Ciitgroup said.

For its fiscal third quarter, reported Monday, Tyson's net income fell on higher grain costs and lagging results from its chicken business, which suffers from oversupply in the poultry industry.

Net income fell to $196 million, or 51 cents per share, in the three months ended July 2, down from $248 million, or 65 cents per share, a year earlier. Revenue rose 11% to $8.25 billion from $7.44 billion a year ago.

Microsoft treads water

Microsoft's 0% convertibles due 2013 traded at 101.5 versus a share price of $25.20 on Friday, which compared to 102.25 versus a share price of $25.60 a week ago.

Shares of the Redmond, Wash.-based software giant spent a good percentage of the session just north of the flat line, but slipped into the red at the close, to end down 9 cents, or 0.4%, at $25.10.

The "0% looks to have merely held its ground as some holders looked to redeploy capital from the most liquid investment-grade names into other names that have cheapened significantly," Citigroup's trading desk said in commentary Friday.

The 0%, relatively short dated paper has a negative 1.1% yield to put and a 35% premium. Nevertheless, the Citi desk predicts that Microsoft's $1.25 billion issue, which is AAA rated, along with other AAA names will become crowded trades as investors look to rotate into healthy companies with low macroeconomic betas.

Microsoft is a $210 billion market cap software developer and marketing company. The 0% convertible carries an Aaa/AAA rating. It matures in mid-2013, and there is no debt outstanding ahead of it.

By way of comparison, Amgen's 0.375% convertible is a $2.5 billion issue and rated A3/A+.

Amgen has no debt due ahead of the convertible and has more than $15 billion in cash on its balance sheet.

The Amgen paper matures in 1.5 years and has a 0.56% yield to maturity with a 52% premium.

Mentioned in this article:

Amgen Inc. Nasdaq: AMGN

Ford Motor Co. NYSE: F

Hertz Global Holdings Inc. NYSE: HRZ

Medtronic Inc. NYSE: MDT

Microchip Technology Inc. Nasdaq: MCHP

Microsoft Corp. Nasdaq: MSFT

Transocean Ltd. NYSE: RIG

United Rentals Inc. NYSE: URI

Xilinx Inc. Nasdaq: XLNX

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