HealthCare REIT trades mixed; Amerigroup extends gains dollar neutral; MF Global slips

By Rebecca Melvin

New York, Aug. 1 - The convertible bond market held in pretty well on Monday as equities came under several bouts of heavy selling in the face of persistent doubts about whether a deal to raise the U.S. debt ceiling would get through Congress and as economic data came in weaker than expected.

Health care names were in focus, though not necessarily pharmaceutical names. Instead managed health care names and health care real estate investment trusts were in trade on news that Medicare will cut its payment rates to skilled nursing care facilities by 11% in the next fiscal year.

HealthCare REIT Inc., which is "the health care REIT," a New York-based convertibles trader said, saw several of its four convertibles issues trade mixed but still looking attractive from a convertibles market player's perspective.

Another big mover was Amerigroup Corp., which looked to have gained 2 points dollar neutral on Monday in a continuation of a move from Friday when the convertible was deemed one of the day's best performers.

Shares of the Virginia Beach, Va.-based managed health care company continued to slide on Monday after dropping on Friday.

Two new issues that debuted in the market on Friday were mixed on Monday. MF Global Holdings Ltd.'s new 3.375% convertibles slipped further below par as the New York-based commodities and derivatives broker-dealer's shares followed the broader markets lower; but Chart Industries Inc.'s new 2% convertibles traded higher.

Another recent issue, Micron Technology Inc.'s 1.5% A tranche convertible due 2031 traded at 96.25 versus an underlying share price of $7.30. Those convertibles priced initially on July 21.

Trex Co. Inc. was another name in trade, with the Trex 6% convertibles due 2012 of the Winchester, Va.-based maker of composite building materials trading at 111 versus an underlying share price of $20.00 on Monday, compared to 112 bid, 113 offered versus an underlying share price of $20.90 on Friday.

Overall, convertibles saw normal-ish volume in what was deemed a "frustrating" day as equities whipsawed. The stock markets started the session sharply higher, then dropped amid weak economic data and confusing reports about the debt deal, and then finally recouped some ground but still ended in the red - marking the seventh straight day of losses for the equity markets.

There were three big swings in the equity markets intraday.

"Everybody loves a 40-point day in the S&P," a New York-based trader said facetiously.

A second trader said, "I heard a few bids around. There were plenty of people on TV last week declaring what a positive event a debt agreement would be for equities." He also pointed out a drop in Spanish and Italian bonds late in the European trading day.

Contributing to soured sentiment were disappointing data from the Institute for Supply Management, which put its manufacturing reading for July down to 50.9 from 55.3 in June. That's the lowest reading since July 2009. Any level above 50 indicates growth, however.

Various reports came out on the debt deal, including the Congressional Budget Office's scoring of the plan, which said it doesn't cut debt as much as advertised by plan proponents.

Amerigroup expands again

Amerigroup's 2% convertibles due 2012 traded at 118 bid, 119 offered versus an underlying share price of $48.06, which was down from 127 versus a stock price of $52.00 on Friday. But that marked a 2-point climb on a dollar-neutral basis.

Amerigroup's shares fell another nearly $7, or 13%, to $48.06 on Monday, after sliding $12.41, or 18%, to $55.00 on Friday.

"Amerigroup stock continues to go down, and the synthetic put has more value than it had last week," a New York-based sellside trader said.

A synthetic put is a way of expressing what happens when you own the convertible, which is short dated, and short the common stock, and the common stock continues to move lower.

"Because they are so short dated, you have a supposed limitation of how far they can go down," the trader said of the bonds, which wouldn't be expected to go below par.

"It's a way of creating a synthetic put on AGP common stock," the trader said.

The bonds expanded about 2 points, a second trader said. And the paper, which matures in less than one year in May 2012, "isn't as short as some other stuff," he said. "Two days ago these bonds were trading 1 point to 1.5 points on a very heavy delta; now they are 5.5 to 6 points."

After dropping on Friday due to weaker-than-expected second-quarter results, and news that it had been asked to send back duplicative Medicaid reimbursements in Georgia, the Amerigroup shares were shocked again on word on Monday of heavy cuts in Medicare payments to nursing-home operators, which stoked concern about potential Medicaid reductions.

Health Care REIT

HealthCare REIT's 4.75% convertibles due 2026 traded a little better on Monday at close to par.

The HealthCare REIT preferreds, a perpetual 6.5% convertible, were in a little bit, but still attractive, a New York-based trader said.

HealthCare REIT's 3% convertibles due 2029 moved up slightly, while the HealthCare REIT 4.75% convertibles due 2027 weren't seen in trade.

Shares of the Toledo, Ohio-based health care property investor fell $4.47, or 8.5%, to $48.31 on Monday.

The two 4.75% convertibles are the issues that are most lightly traded typically.

"The preferreds are the longest dated, being perpetual, and I would be a buyer from here. It's a solid credit, and these set up nicely," the trader said.

He also pointed to Ventas Inc.'s convertibles as a high-delta name that looks attractive at these levels.

"If we continue to see weakness in the health care market, this name looks interesting. We need the stock to go down a little further like 15%," he said.

Ventas was wrapped around parity at 121.75 bid, 122.5 offered, he said.

Mentioned in this article:

Amerigroup Corp. NYSE: AGP

Chart Industries Inc. Nasdaq: GTLS

MF Global Holdings Ltd. NYSE: MF

HealthCare REIT Inc. NYSE: HCN

Micron Technology Inc. NYSE: MU

Trex Co. Inc. Nasdaq: TREX

Ventas Inc. NYSE: VTR

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