Regis trades lower outright, adds on hedge; Steel Dynamics in line on hedge; Ford in focus

By Rebecca Melvin

New York, Jan. 27 - U.S. convertibles players were primarily focused on news affecting specific companies on Monday, while attention was also paid to the broader markets as equities wavered but ultimately ended lower following a pullback late last week.

"Everybody has their shopping list with names on it that they want to buy or sell," an East Coast-based buysider said of Monday's session.

Regis Corp.'s convertibles traded lower on an outright basis, but expanded by about 0.5 point on a dollar-neutral, or hedged, basis, assuming a 30% delta, after the Minneapolis-based hair salon operator reported disappointing earnings that missed estimates. Regis shares slumped 10%.

Rayonier Inc.'s 4.5% exchangeables due 2015 were quiet after news that the Jacksonville, Fla.-based forest products, fiber business and real estate investment trust plans to spin off its fiber business and become two public companies. The company also reported quarterly earnings. Rayonier shares surged 10%.

Exelixis Inc.'s 4.25% convertibles due 2019, which were active on Friday, traded down on Monday on an outright basis but were still seen to have improved since last week when the company completed a secondary stock offering that freed up more shares and improved market players' ability to borrow the shares.

Steel Dynamics Inc.'s convertibles were lower outright, but flat, or in line, on a hedged basis with the underlying shares of the Fort Wayne, Ind.-based steel company. The bonds were expected to be active on Tuesday in reaction to any stock movement associated with earnings to be released after Monday's market close.

Fellow steel sector name AK Steel Holding Corp. was expected to release quarterly earnings ahead of the market open on Tuesday.

Traders will also be watching the 4.25% convertibles of Ford Motor Co. after the automaker releases earnings. The Ford 4.25% convertibles were seen around 185.25 bid, 186.25 offered with the underlying shares at $15.71, which was Monday's close.

The Ford bonds will be active on Tuesday but "they are pretty rich and not yet a name that hedged players would be particularly interested in," a New York-based trader said.

Overall, the convertibles market was seen steady at fair to rich valuation.

"It's not exceptionally rich," a market source said. "Investment-grade is still rich as it has been for years, but you can still find more value in smaller- and mid-cap names."

He said that market players were not overly concerned about a pullback in equities, and that they would simply be filling their shopping lists, with both those names that they want to sell and those they want to buy based on the needs of their portfolios.

Meanwhile, the question that remains is whether volatility is mispriced right now, he said. "It's still low; and it has been underpriced for a long time. And while it may be more difficult for convertible arb guys right now, if there is a pickup in that space, it is one of the better-performing hedge fund disciplines historically."

Regis adds on hedge

Regis' 4.5% convertibles due July 15, 2014 were seen late Monday at 101.25 bid, 102 offered versus an underlying share price of $12.09, a New York-based trader said. That was lower on an outright basis by about 2.25 points but better on a dollar-neutral basis by 0.5 point if holders went into the day on a 30% delta, he said.

Previously the bonds were higher outright at 103.5 bid, 104.25 offered versus an underlying share price of $13.42.

Earlier Monday, a trader said that the Regis bonds were better by about a point on a dollar-neutral basis assuming a 20% delta.

A third source said that given that Regis is a lower delta name, it isn't really going to be dragged around by the shares that much. Shares dropped $1.33, or 9.9%, to $12.09 on Monday.

After that move, holders are more likely on a 15% to 20% delta now, a trader said.

The drop occurred on the heels of Regis' quarterly report, which missed estimates on both the top and bottom lines.

Regis lost $110 million for the quarter on sales that fell 7.5% to $468.4 million. Same-store sales declined 6.2%.

Steel Dynamics 'in line'

Steel dynamics' 5.125% convertibles due June 15, 2014 were seen at 105.75 bid, 106.75 offered with the underlying shares at $16.60 Monday afternoon. Previously the bonds were at 107 bid, 108 offered, a New York-based trader said.

The move was essentially flat on a dollar-neutral basis, with holders generally on a 50% delta hedge, the trader said.

Shares of the Fort Wayne, Ind.-based steel products maker fell 48 cents, or 2.8%, to $16.48 for the session prior to its earnings report coming out.

Steel Dynamics was expected to be active on Tuesday. Shares have risen 22% in the past six months.

Also expected to trade actively on Tuesday were Ford's 4.25% convertibles on the automaker's earnings report.

Also active on Monday were Alpha Natural Resources Inc.'s 4.875% convertibles, which were lower outright, having traded down 2.9 points, to 97.108, according to Trace data, but flat, or in line, on a dollar-neutral basis, a trader said.

"They've done the right things in terms of liquidity and have pushed their debt obligations out. Now we just have to wait for a turnaround in the coal sector," the trader said.

Mentioned in this article:

AK Steel Holding Corp. NYSE: AKS

Alpha Natural Resources Inc. NYSE: ANR

Ford Motor Co. NYSE: F

Exelixis Inc. Nasdaq: EXEL

Rayonier Inc. NYSE: RYN

Regis Corp. NYSE: RGS

Steel Dynamics Inc. Nasdaq: STLD

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