Convertibles begin to quiet down ahead of holidays; Spectrum edges up; Ford off on outlook

By Rebecca Melvin

New York, Dec. 18 - The pre-holiday slowdown hit the convertibles market on Wednesday, and trading quieted considerably, market sources said.

"The year's over," a New York-based trader said.

In the primary market, no new issues were launched, but Spectrum Pharmaceuticals Inc.'s newly priced 2.75% convertibles traded just above par in the early going after the Henderson, Nev.-based biopharmaceutical company priced $100 million of the five-year notes at the cheap end of talk late Tuesday.

The Spectrum 2.75% convertibles were first 100.5 bid, 101.5 offered out of the chute and subsequently traded at 100 bid, 100.5 offered.

Spectrum shares were lower by about a nickel, or 0.6%, at $8.20 at late morning and ended lower by only 2 cents at $8.24. The shares had fallen 9% on Tuesday.

Back in established issues, Ford Motor Co. was in focus with the Ford 4.25% convertibles due 2016 seen down 6.7 points at 191, according to Trace data, after the Dearborn, Mich.-based auto maker released 2014 profit guidance that was lower than 2013's expected result.

Also Archer-Daniels-Midland Co. was trading amid no particular news, a New York-based trader said.

"Guys are just positioning for 2014 and cleaning up whatever they don't like," he said.

Goldcorp Inc. was also seen in trade, and that issue, which has been a little weaker, found stability as a buyer stepped in at 100.30, which was the offer side of the 100.28 bid, 100.30 offered level for the BBB-rated convertibles.

Stock markets jumped after the Federal Reserve announced its first reduction of its asset-purchasing policy following a two-day policy meeting.

Federal Reserve said it is cutting its monthly purchases by $10 billion to $75 billion, including $35 billion in mortgage backed asset purchases, down from $40 billion. It also said that it would likely keep its key interest rate lower for longer than previously promised, and beyond when the unemployment rate falls to 6.5%.

Fed chairman Ben Bernanke, who will be replaced by Janet Yellen in January, said that the committee plans to make moderate steps to phase out the program throughout most of 2014 contingent on economic performance.

The move surprised some investors and sent shares sharply higher after what had been a lackluster session up to that point. The S&P 500 stock index gained 29.65 points, or 1.7%, to 1,810.65, the Dow Jones industrial average added 292.71 points, or 1.8%, to 16,167.97 and the Nasdaq stock market added 46.38 points, or 1.2%, to 4,070.06.

New Spectrum edges up

Spectrum's 2.75% convertibles traded at 100 bid, 100.5 offered with the underlying shares down 5 cents.

Spectrum shares closed 2 cents lower at $8.24.

The bonds appeared to trade mostly outright.

Spectrum priced $100 million of five-year convertibles at par after the market close Tuesday to yield 2.75% with an initial conversion premium of 27.5%. Pricing came at the cheap end of talk, which was for a coupon of 2.25% to 2.75% and a premium of 27.5% to 32.5%.

The deal has a $20 million over-allotment option.

Jefferies LLC and RBC Capital Markets LLC were joint bookrunners of the Rule 144A offering, with co-managers HC Wainwright & Co. LLC and Roth Capital Partners.

In connection with the non-callable notes, the company has entered into convertible note hedge and warrant transactions with RBC Capital with the aim of reducing potential dilution of their common stock upon conversion of the bonds. The strike price on the warrant transactions is $14.03, which boosts the initial conversion premium from the issuer's perspective to 70%.

The net cost of the call spread will be paid for with proceeds of the bond sale. Remaining proceeds will be used for general corporate purposes, which may include working capital, research and development, clinical studies and business development.

Henderson, Nev.-based Spectrum is a biopharmaceutical company that develops and acquires drug products primarily in the area of hematology and oncology.

Ford lower on outlook

Ford's 4.25% convertibles traded lower early Wednesday to 191 with the shares down nearly 7%.

Ford shares closed down $1.05, or 6.3%, at $15.65.

The equity-sensitive issue is primarily owned by outright investors, and it is a difficult name to hedge, a New York-based trader said.

The auto maker released an outlook in which it said it now expects total company pre-tax profit, excluding items, of $7 billion to $8 billion for 2014. That's down from an expected $8.5 billion in 2013.

Ford also expects North America 2014 pre-tax profit to be lower than in 2013, with an operating margin ranging from 8% to 9%, consistent with the company's targeted ongoing range of 8% to 10%.

The company also expects special item charges in Europe in 2014 of $400 million to $500 million, mainly related to personnel separations; these charges will not be reported in operating results, and the company's results in Europe are expected to improve compared to 2013.

Mentioned in this article:

Archer-Daniels-Midland Co. NYSE: ADM

Ford Motor Co. NYSE: F

Goldcorp Inc. NYSE: GG

Spectrum Pharmaceuticals Inc. Nasdaq: SPPI

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