Convertibles slightly cheaper but outperform shares; Navistar gains; Tyson adds with stock

By Rebecca Melvin

New York, Feb. 5 - The convertible bond market was slightly cheaper on Friday although many issues were spreading out, or expanding, on a hedged basis as bond floors supported paper and kept losses at a minimum compared to their underlying shares.

"There was some selling, and some, but not too much, cheapening," a New York-based sellsider said. "Certainly there was no panic that had people piling on. But everyone has been waiting for this, and they are being careful."

Given where pricing is, "investors who were half or less invested are starting to salivate," the sellsider said.

In fact, some of the investment-grade names that had started to cheapen in recent weeks widened in what was viewed as a flight to quality, a New York-based sellside desk analyst said.

Shorter-dated and better-quality paper was stronger than longer-dated and lesser credits. But even paper due in 2014 was spreading out, according to the sellsider.

Navistar International Corp. convertibles improved again on Friday after expanding by 0.5 point to 0.75 point on Thursday, according to a New York-based sellside trader.

Tyson Foods Inc. convertibles traded higher in tandem with their underlying shares after the Springdale, Ark.-based meat producer posted quarterly results that were better than expected.

D.R. Horton Inc., which posted an encouraging quarterly profit on Tuesday, saw its convertibles remain firm despite a drop in their underlying shares.

Several gold names were in trade amid a jump in their underlying shares of 5% to 7%. Names in trade were GoldCorp Inc., a Vancouver, B.C.-based gold company, Toronto-based mining company Kinross Gold Corp. and Phoenix-based mining concern Freeport-McRoRan Copper & Gold Inc.

Volatility returned to the broader markets this week, and Friday's Labor Department jobs report didn't help clear muddy waters very much, sources said.

January's unemployment rate showed an unexpected decline to 9.7% from 10%, the first drop in seven months. But the government also raised its estimate on jobs lost during the recession to 8.4 million, up from 7.2 million previously estimated.

"When I looked at [the jobs numbers], I didn't think they were all that bad. It was a pretty small decline in non-farm payrolls. Yesterday was a negative surprise, but when you looked at it, there was a silver lining," a sellsider said.

Questions surrounding the sovereign debt of Portugal, Spain and Greece continued to weigh on international markets.

Lack of new issues

The week's primary market brought BPZ Resources Inc.'s $140 million of 6.5% convertible unsecured senior notes. The deal was thought to have been bought by outright players, who were not interested in selling, so the paper was not seen in secondary dealings.

A Portland, Ore.-based bank holding company, Umpqua Holdings Corp. also priced an issue of $181.5 million of convertible common equivalent securities, which was paper in the vein of Bank of America Corp.'s super-sized $19.29 billion of convertible common equivalent securities priced Dec. 3.

In Europe, OAO TMK launched and priced an upsized $412 million of five-year convertible bonds at par to yield 5.25%.

International secondary quiet

In London, the convertible market had a quiet session, a sellside trader said.

"I think the markets were very weak this morning," the trader said.

TMK's new 5.25% convertibles due 2015 traded as low as 97 early in the day but improved to 98.5 to 99 later in the day. TMK's London-traded Global Depositary Receipts closed at $17.39 on Friday, lower by 36 cents or 2.03%.

"They've gotten a bit better as the day has progressed," the trader said.

Navistar active

Navistar's 3% convertibles due 2014 were at 102.125 bid, 102.625 offered versus a share price of $38.41, according to a sellsider, which compared to 104 versus a share price of $39.40 on Thursday, he said.

Shares of the Warrenville, Ill.-based truck and chassis maker settled slightly lower by 17 cents, or less than half a percentage point, at $38.24 on Friday.

Navistar is a play for hedged investors. They can set it up on a delta neutral hedge of about 70% or so, a sellsider said, and they can "cash flow out the position and trade the stock around a little."

The paper is particularly attractive with the shares at these levels, which is right about at the midpoint of where the common stock has been trading for the last six months.

Whether a particular issue is getting better or worse right now with the downturn in stocks depends on the structure of the bond and its credit quality and things like where the price lines up with the strike price of the convertible, plus its bond floor, a sellsider said.

Sometimes it's a question of "pure math and not so much supply and demand as to which ones will start to open up and which ones won't," a New York-based sellsider said.

Tyson moves up with shares

Tyson's 3.25% convertibles due 2013 traded at 113.5 versus a share price of $15.00 on Friday. The paper was also seen trading at 112.75, compared to 106.25 on Thursday, when the stock settled at $13.99.

The meat producer's common stock settled up 66 cents, or 4.7%, at $14.65 on Friday.

For its first fiscal quarter ended Jan. 2, the company returned to a profit, earning $160 million, or 42 cents per share, on sales of $6.64 billion, compared with a loss of $102 million, or 27 cents a share, on sales of $6.52 billion in the year-earlier period.

Tyson executives said the company's results were boosted by lower grain costs, price hedging, improved production processes and improved consumption.

D.R. Horton holds steady

D.R. Horton's 2% convertible senior notes due 2014 traded at 121 versus a share price of $13.20 on Friday, compared to 121.25 versus a share price of $13.25 on Thursday and compared to 120.125 versus a share price of $13.10 on Tuesday.

Shares of the Fort Worth-based homebuilder lost 54 cents, or 4%, to close at $12.67 on Friday.

Kenneth Lim contributed to this report

Mentioned in this article:

Beazer Homes USA Inc. NYSE: BZH

D.R. Horton Inc. NYSE: DHI

Freeport-McMoRan Copper & Gold Inc. NYSE: FCX

GoldCorp Inc. NYSE: GG

Kinross Gold Corp. NYSE: KGC

Navistar International Corp. NYSE: NAV

Tyson Foods Inc. NYSE: TSN

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