Convertible bid strengthens, but quietly on holiday; Take-Two expands slightly dollar neutral

By Rebecca Melvin

New York, Nov. 11 - The convertible bond market saw a somewhat stronger bid on Friday fueled by an updraft in equities, but with the bond market closed in observance of Veterans Day, converts remained fairly quiet, market sources said.

Take-Two Interactive Software Inc.'s newly priced 1.75% convertibles due 2016 gained ground, expanding by about 0.25 points to 0.5 points on a dollar-neutral basis on their debut in secondary market trading, with the underlying shares also moving higher.

Take-Two's existing 4.375% convertibles due 2014, which are in the money, jumped nearly 5 points to trade at 152.5 around midsession, according to Trace data.

"On the margin, it was better to buy with shares up and with no one in the credit markets to rain on the parade. But overall it was fairly quiet," a New York-based trader said.

Better to buy means the market's bid is stronger, but the offer side is possibly nebulous.

The equity markets were pulled higher by developments viewed as positive for euro zone debt. Italy's senate approved that nation's 2012 budget bill, and the lower house of parliament was expected to pass it on Saturday. Having a budget in place puts prime minister Silvio Berlusconi a step closer to resigning.

Meanwhile, Italian bond yields retreated further from the alarming 7.4% level notched on Wednesday, a euro-era high.

In Greece, new prime minister Lucas Papademos appointed a cabinet on Friday.

Markets were cheered also by a better-than-expected reading in the United States of the Thomson Reuters/University of Michigan's preliminary consumer sentiment index for November, which hit 64.2, up from 60.9 in October. The median forecast of economists polled was 61.5.

A standout loser in equities on Friday was E*Trade Financial Corp., which announced that it has ruled out a potential sale of itself and will continue to execute its business plan. Shares fell 4.5% on that word against a 2% gain on average in equity indexes. E*Trade's 0% convertibles due 2019 have only about $90 million left outstanding, and they were not seen in trade.

"There have been no round-lot trades in months," a New York-based sellside trader said.

For the week, the convertibles market had about an equal number of winners and losers. One of the big winners for hedged players was Rovi Corp., which improved after the Santa Clara, Calif. -based digital entertainment company released a much lower revenue outlook for 2012 than analysts had been expecting.

A big loser for the week for both outright and hedged players was ATP Oil & Gas Corp. The ATP 8% convertible perpetual preferred shares fell about 15% week to date on an outright basis, and about 0.8% week to date on a hedged basis, according to Citigroup's convertibles sales and trading desk commentary published early Friday.

Investors are worried about the Houston-based offshore oil producer's heavy debt load and cash deficit.

Greenbrier Cos. Inc. convertibles traded on Friday at 96.5 versus an underlying share price of $23.20. Shares of the Lake Oswego, Ore.-based railcar manufacturer jumped $1.28, or almost 6%, to $23.63, extending gains notched this week since reporting better-than-expected quarterly results due to high rail car demand.

New Take-Two expands

Take-Two's newly priced 1.75% convertibles due 2016 traded early in the session around 101 versus an underlying share price of $14.71.

Later, the paper was quoted at 101.5 bid, 102 offered versus an underlying share price of $14. 80, representing an improvement on a dollar neutral basis of 0.5 points, a syndicate source said.

A second source said the new paper at 101.75 versus an underlying share price of $14.80 was about 0.25 points better on a dollar-neutral basis.

Shares of the New York-based video game publisher settled up 33 cents, or nearly 2.3%, at $14.74 apiece at the close.

The Take-Two convertibles priced late Thursday and were upsized by $20 million to $220 million. The deal came at the cheap end of coupon talk, which was 1.25% to 1.75%, and at the midpoint of premium talk, which was 30% to 35%.

J.P. Morgan Securities LLC and Barclays Capital Inc. were the underwriters.

The new paper traded at about where it was offered in the gray market on Thursday as players valued it up using credit spreads around 600 basis points over Libor and around 35% to 40% volatility.

Those valuations appear to have been right on the money. Sources said the 600 bps spread was less aggressive than what the underwriter had gone out with when marketing the deal, which was a 500 bps spread.

One source said he had been struggling to determine a sensible pairing of assumptions due to questions about what demand is like in the market right now given so much macro uncertainty and uncertainty as well about the prospects for the individual company.

"The stock has had a decent run," the source said, suggesting that demand from the outright investors might have been a little bit weaker than if there were more room for the shares to move.

Shares moved up from just over $12 per share at the beginning of October to just over $16 by the end of October. Then they backed off a bit.

In addition, the cash flows for this type of technology company are "lumpy," in that they are tied to the timing of game releases, the source said.

"The third quarter versus the last year's quarter is down 56%, but that might just be due to the timing of their games. Still that's not great from a credit standpoint. Down years could hurt pretty bad, and there's not a lot of to compare it to with this kind of a company," the source said.

The notes have contingent conversion at a price hurdle of 130% and are non-callable, with no puts except a change-of-control put.

Proceeds will be used for general corporate purposes, which may include acquisitions, other strategic investments and to repay indebtedness.

Mentioned in this article:

ATP Oil and Gas Corp. Nasdaq: ATPG

E*Trade Financial Corp. Nasdaq: ETFC

Greenbrier Cos. Inc. NYSE: GBX

Rovi Corp. Nasdaq: ROVI

Take-Two Interactive Software Inc. Nasdaq: TTWO

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