Convertibles quiet as equities dip: MF Global drops on bankruptcy; Peabody slips; Trex higher

By Rebecca Melvin

New York, Oct. 31 - The convertible bond market was relatively quiet on Monday despite a weird brew of ingredients including month end, sharply lower equities, and trading ranks thinned by the Halloween holiday and a freak weekend snowstorm that left many Northeastern communities still without power and other services on Monday.

"It was pretty quiet," a New York-based sellside analyst said. "You had guys coming in late and leaving early; they were probably going to take care of some combination of tree branches in their driveways and going out for candy with the kids."

MF Global Holdings Ltd. was the name of the day once again as its three convertible bond issues fell sharply in very active trade after the New York-based broker-dealer succumbed to a bankruptcy filing amid efforts to right itself from under the staggering weight of losses related to more than $6 billion in European debt.

Traders have focused on the paper for the better part of two weeks. Last week the stock slid 67% and trading of shares was suspended on Monday.

Much of the MF paper had moved over to trade on distressed and bankruptcy desks last week, so there wasn't a significant shift in trading after the filing. Nevertheless, the three convertible bonds were the top three traders by volume, according to Trace data around midday.

Peabody Energy Corp. was down a couple of points outright along with the underlying shares of the St. Louis-based coal producer, which were lower with a sector move to the downside following strength last week when investors were buying riskier assets like energy assets.

Trex Co. Inc., a relatively low delta name, was higher with a jump in shares. The construction-equipment maker's convertible issue is starting to draw interest as its shares inch up to the level of the conversion price about eight months ahead of maturity.

Convertible players were marking their books on the last day of the month, but not doing a lot of significant trading, having made those kinds of moves on Friday, a New York-based trader said.

Despite the drag on equities on Monday, stocks are up more than 10% for the month. Those moves will translate handsomely for convertible outright holders' October performance, but for hedged, or convertible arb players, performance isn't expected to be as strong.

MF Global drags lower

MF's 3.375% convertibles due 2018 traded down to about 40 on Friday, having gone out at about 45.5 bid, 46 on Friday. Those bonds had slid pretty much all week last week from about 65.5 on Monday.

MF's 1.875% convertibles due 2016 moved down to about 40 as well and were also seen with a 39 handle.

MF's 9% convertible due 2038, which is a less liquid and smaller issue, had been holding up a little better than the other two previously. But it too sank to about 40, representing a bigger outright move of about 14 points, compared to the other bonds' approximately 7 point move lower.

The downdraft follows on the heels of the MF Global's bonds being the worst performers for the week on an outright basis last week.

The fall was sudden and surprising as MF Global was one of the leading brokers in markets for listed derivatives and one of 20 primary dealers authorized to trade U.S. government securities with the Federal Reserve Bank of New York.

Early Monday, MF confirmed that the New York Federal Reserve had suspended MF Global's designation as a primary dealer.

The filing came amid talks with potential buyers of various MF assets. Interactive Brokers Group Inc. was reported to be a potential buyer.

Jon Corzine, former governor of New Jersey and former chief executive of Goldman Sachs & Co., had intended to transform the offspring of Man Group into a firm that looked a lot like Goldman, moving away from a brokerage and toward an investment bank.

Trex adds as optionality eyed

Trex's 6% convertibles due July 2012 traded at 104.5 versus an underlying share price of $18.70 on Monday, which compares to Friday when the paper was at 101.75 versus an underlying share price of $16.95, according to a market source.

Shares of the Winchester, Va.-based wood-alternative decking, railing and fencing company jumped sharply on positive third quarter earnings, but pared some its gains going into the close, ending the day up $1.54, or 9%, to $18.48.

During the session the stock was up as much as 15%. A market source said that the paper is getting interesting as it edges toward its conversion price of $21.78 at the same time as the bonds' maturity gets closer.

"These bonds mature next summer and at this point as they get close to their conversion price they will trade with more delta," the market source said.

The optionality of the convertible increases as the stock goes up. At this point it is 17% below the conversion rate. But if it exceeds the conversion price, then holders could convert out of the paper at maturity instead of accepting par in cash.

If the bond was way out of the money, it would simply trade like a credit, and holders would receive par at maturity. But if the stock goes to $25 by July, the bond is worth about 10 points more than that.

"It's getting interesting," the source said. But then again it is a small issue of less than $100 million and limited as to how many can get involved in the name.

In reporting third-quarter earnings on Monday, the decking material maker said it had repurchased $5.6 million of the convertible notes.

It also said it sees first quarter sales exceeding the year-ago period by at least 25%.

Mentioned in this article:

MF Global Holdings Ltd. NYSE: MF

Peabody Energy Corp. NYSE: BTU

Trex Co. Inc. Nasdaq: TREX

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