Convertibles see limited bargain hunting; Vertex up on short covering; high grade firms

By Rebecca Melvin

New York, Aug. 5 - Convertible bonds improved somewhat Friday, buoyed by bargain hunters and with at least one name helped by short covering, as equities bounced at the open but acted like a bucking bronco the rest of the session.

For the week however, the convertible bond universe was called down about 0.75 point to 1 point as the equity markets sold off in heavy volume.

"It's cheaper. Clearly there was selling pressure as you would expect, but some things got better today; there was some short covering," a New York-based trader said Friday.

Specifically, Vertex Pharmaceuticals Inc. improved by about 0.75 point early in the day on short covering, he said.

Vornado Realty Trust's 3.875% exchangeables due 2025 were down about a point outright but were a little better on a hedged basis.

Dendreon Corp. stopped hemorrhaging and ticked up 0.25 point after a breathtaking 25-point slide in the 2.875% convertibles on Thursday. Dendreon had been a hedged play, but was now thought to be predominantly in outright hands, a New York-based trader said.

PMI Group Inc. fell again, to trade at 29 from 35, but that paper was seen moving off into distressed circles primarily.

"No one is really paying any attention to that anymore," a trader said of PMI. On Thursday, the third-largest U.S. mortgage insurer warned that it couldn't write new mortgage insurance in a number of states due to its failure to meet regulators' capital requirements. Traders speculated that the company was headed toward bankruptcy.

Otherwise, investment-grade names made up the bulk of the day's trades and that paper, due to its scarcity value and protective qualities, held up pretty well through the week despite the heavy downdraft in equities.

Bellwether Intel Corp. saw both of its convertible bonds in trade, with the Intel 3.25% convertibles of 2039 trading little changed at 114 bid, 116 offered.

"As market volatility persists and investors flee to quality, we continue to see convertible arbitrage outperform outright strategies and investment-grade converts outperform high-yield names," according to Citigroup's convertibles sales and trading desk.

The Citi team said that performance in the past week was highly correlated to equities, with convertible arbitrage outperforming outright players, but the whole asset class underperformed fixed income.

Looking at the jobs data

Jobs data for July came in better than expected and worked as a tonic to relieve market angst enough to foster an early bounce. Nonfarm payrolls increased 117,000, the Labor Department said Friday, which was above the 85,000 gain that markets expected. The unemployment rate dipped to 9.1% from 9.2% in June.

The payrolls count for May and June was revised to show 56,000 more jobs added than previously reported.

Non-farm employment in July came from the private sector, where payrolls rose 154,000 - an acceleration from June's 80,000 increase and more than the 115,000 expected by economists.

Government payrolls dropped 37,000 in July, a ninth straight month of job losses. The drop was mostly due to a government shutdown in Minnesota that left thousands of state workers without paychecks during the survey period for July payrolls.

There was no new issuance in the past week, and in fact given the headwinds, recent new issues have struggled. Micron Technology Inc.'s new issues and MF Global Holdings Ltd. were unable to break par on their late July debuts and are trading in the mid 90s now, Citigroup noted.

Market clams up

Convertible market activity has become transparent in recent months and only more so as market volatility has spiked, one trader noted.

"Price transparency is poor and it's difficult for people to gauge," he said.

There seems to be volume, he said, but the previous practices of sending out markets early in the day and buysiders having three or four from which to choose seems to be a thing of the past.

It makes trading especially hard when markets are turning quickly. Dealers that have to buy stock in tandem with a convertible trade take longer, and potential buyers don't know for sure what the final price of their bonds will be.

"They are probably going to buy stock, and that takes time, and with the stock whipping around, the customer doesn't know what he's going to get done at," a trader said.

Vertex improves on swap

Vertex's 3.35% convertibles due 2015 traded at between 114 to 117, with a late trade in the middle at 116. Shares of the Cambridge, Mass.-based biopharmaceutical company bounced higher but came off pretty quickly and ended the day down $1.19, or 2.7%, at $43.00.

"Vertex - that was definitely better today by about 0.75 point. I specifically heard that someone was short and there was cover. The stock had a little rally at the open; it gapped up and then came back down," a trader said.

The fake out was easy to happen in these markets. And it affected outrights too as outright players wanted to come in and buy early today, worried about missing the lower prices, and then equities began to sell off again.

Vornado a little better

Vornado's 3.875% convertibles due 2025 saw action on Friday, trading at 105, which was seen a little better. The underlying shares of the New York-based real estate investment trust ended down $2.33, or 2.8%, at $80.78.

The name is primarily outright, with yield there too, a trader said.

A second trader said that they are a good credit as they get closer to par.

Intel steady in trade

Intel's 3.25% convertibles due 2039 traded at 114 bid, 116 offered. The older Intel 2.95% convertibles due 2035 printed at 103.275.

Shares of the Santa Clara, Calif.-based chipmaker followed the broader markets up and down during the session but ended little changed at $20.79.

"The investment-grade names have been more stable. To the extent that there's been a flight to quality, there's always good demand for that stuff. There's not that much around and whenever something comes that's investment-grade it does well," a trader said.

In general, investment-grade paper on Thursday moved only about 7 basis points compared to high yield's 50 bps to 60 bps. "On a five-year bond that's only about 0.25 point," the trader said.

Mentioned in this article:

Dendreon Corp. Nasdaq: DNDN

Intel Corp. Nasdaq: INTC

MF Global Holdings Ltd. NYSE: MF

Micron Technology Inc. Nasdaq: MU

PMI Corp. NYSE: PMI

Vertex Pharmaceuticals Inc. Nasdaq: VRTX

Vornado Realty Trust NYSE: VNO

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