Convertibles sink; long-dated, yield names sag; Ryland comes in; Navistar retraces losses

By Rebecca Melvin

New York, June 20 - The convertible bond market traded down Thursday along with a sell-off in stocks and as the high-yield market continued to grind lower after the Federal Reserve outlined monetary plans following a two-day policy meeting Wednesday.

Federal Reserve chairman Ben Bernanke predicted continued modest economic improvement and tapering of accommodative policies as targets for improvement are met.

Some longer-dated convertible yield names, including Tibco Software Inc., came in as market players anticipated rising rates, and as the high-yield market came in more than a point on Wednesday and 1.125 points on Thursday, a New York-based trader said.

"The long end is not the place to be with a Treasury move," a West Coast-based trader said.

Elsewhere, Ryland Group Inc.'s five-week-old 0.25% convertibles dropped about 4 points on an outright basis and about a point on a dollar-neutral basis into the upper 80s as the underlying shares of the Westlake Village, Calif.-based homebuilder and mortgage finance company plunged 10%.

Other convertibles were active amid steep drops in their underlying shares included Stillwater Mining Co. and Navistar International Corp.

Shares of Stillwater, a Billings, Mont.-based platinum and palladium mining company, were down 88 cents, or 7.6%, to $10.71, and Navistar fell $3.35, or 11%. But Navistar convertibles recouped early losses to end the day higher by 0.75 point, according to Trace data.

Archer Daniels Midland Co.'s convertibles also came in 0.75 point amid a milder stock drop of 1.95%. The Archer 0.875% convertibles due 2014 traded down to 100.60 from 101.25ish, with the shares lower by 58 cents at $32.68

In the primary market, FuelCell Energy Inc. announced that it had priced $38 million of five-year convertible senior notes at par to yield 8% with an initial conversion premium of 14%.

The FuelCell deal was "over-the-wall," or marketed to select investors entitled to view company financials in exchange for non-disclosure commitments. FuelCell's deal followed news of SolarCity Corp.'s registered $175 million of convertibles, a deal suspected as being over-the-wall, unveiled Tuesday.

In general, the convert space was lower, but not overly active, market sources said.

In addition to lower bonds, stock markets were sharply lower for a second day after the Fed predicted an improving economy, which will likely lead to higher rates.

"With rates going up and stocks going down, you're never going to be hedged enough," a New York-based trader said. "Short term, you can do OK, but not for longer durations."

"If the economy improves, stocks will rally, and rates will continue higher and guys are looking like they are going to get hit from two directions," he said.

"You can protect against the upside of stock but it's expensive," he said.

But on Thursday, stocks were 2%-plus lower. The S&P 500 stock index fell 40.74 points, or 2.5%, to 1,588.19, the Dow Jones industrial average fell 353.87 points, or 2.3%, to 14,758.32, and the Nasdaq stock market slumped 78.57 points, or 2.3%, to 3,364.64.

Tibco comes in

Tibco's 2.25% convertibles due 2032, of which about $600 million priced a year ago in April, was trading in about 0.5 point on an outright basis to 97.50, which was down from 98, or even 98.25, a New York-based trader said.

Shares of the Palo Alto-based business software and services company were moderately lower by 37 cents, or 1.7%, to $21.01.

The Tibco convertibles have a call/put in May 2017.

"A rising rate environment is bad for bonds. The longer duration you have, the more leverage you have to rate moves," a trader said.

Ryland comes 'in' a point

Ryland's 0.25% convertibles due 2019, which priced about five weeks ago, dropped more than 4 points to the upper 80s on an outright basis, and on a dollar-neutral basis they were in about a point.

The notes were seen at 88.375 bid, 89.375 offered versus a share price of $38.85 at about midsession.

The convertibles trade on a 50% delta.

Ryland shares fell $4.35, or 10%, to $38.65 in trade.

"With high yield continuing to grind lower, it's affecting the convert space," a New York-based trader said.

Lower high-yield and a general risk-off tone have driven what's happening in convertibles, he said.

The Ryland convertible was priced aggressively and not expected to do well or perform correctly from the start, a second trader said.

"We will continue to have issuance like this. Anything priced tomorrow is not going to perform well. But anything priced a year from now will do well as terms will gradually get better," the trader said.

The trader also said he didn't believe that the economy was improving or that the housing market was improving significantly.

"Those who are really bullish on the housing market, saying it's the best it's been in 20 years, are the same ones who said housing was going to start going up again in 2007. The housing market got beat up in the second half of that year; they were wrong," he said.

Navistar retraces losses

Navistar's 3% convertibles due 2014 traded down several points to as low as 95 on Thursday but ended higher at 98.85, which was up 0.75 point on the day, according to Trace data.

The moves early were an extension of selling on Wednesday when the bonds were also lower.

"We're just watching it go down," a trader said on Wednesday, when a large seller was in the market. But on Thursday pricing rebounded.

Navistar shares ended at their lows, however, plunging after the engine and truck maker said that its West Point, Miss., plant is suspending production as the tightened federal budget and drawdown in combat in Afghanistan has led to lower demand for defense vehicles.

FuelCell prices $38 million

FuelCell's registered deal was done privately via Lazard Capital Markets LLC as bookrunning manager and Stifel, Nicolaus & Co. as co-lead manager.

The $38 million of bonds are non-callable with no puts. They are freely convertible and have voluntary conversion make-whole payments. There is takeover protection.

Proceeds are intended for working capital and general corporate purposes.

Danbury, Conn.-based FuelCell is a maker of fuel cells for commercial, industrial, government and utility customers.

Mentioned in this article:

Archer Daniels Midland Co. NYSE: ADM

FuelCell Energy Inc. Nasdaq: FCEL

Ryland Group Inc. NYSE: RYL

SolarCity Corp. Nasdaq: SCTY

Tibco Software Inc. Nasdaq: TIBX

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