VeriSign tumbles outright, adds on hedge; EMC active after earnings; Coinstar off on hedge

By Rebecca Melvin

New York, Oct. 26 - The convertible bond market saw volume Friday in a few names that are generally not traded actively.

VeriSign Inc.'s longer-dated convertibles fell outright but edged higher on a dollar-neutral, or hedged, basis at the heavier percentage deltas after news that regulators have delayed review of the contract under which the company operates as a registry of Web domain names.

EMC Corp.'s short-dated convertibles continued to trade actively following earnings posted earlier this week in which the Hopkinton, Mass.-based data storage and software company cut full-year guidance.

The pricing of both VeriSign and EMC convertibles are only a few points above parity.

Coinstar Inc.'s convertibles were up about 6 points outright but down on a hedged basis by about 0.5 point after the Bellevue, Wash.-based operator of coin-counting machines and video rental kiosks cut full-year guidance.

Elsewhere, market players were keeping an eye on Hertz Global Holdings Inc., which is awaiting antitrust regulatory approval on its planned buyout of rival Dollar Thrifty Automotive Group Inc.

Quantum Corp.'s newly priced 4.5% convertibles were not heard in secondary market action after the provider of storage, backup, recovery and archive services priced $60 million of the five-year paper beyond the cheap end of talk for the coupon late Thursday.

While equities were volatile in the past week, "anything that moved in the convert market was name specific," a New York-based analyst said.

"Outside of the themes that have been in play for the last three years, there was nothing drastic going on one way or the other," the analyst said.

Many investors are in a wait-and-see mode as they seek more clarity on the U.S. presidential elections and the fiscal cliff, he said.

Political uncertainty is "putting people on hold from a risk perspective, not just in convertibles, but across the board," he said.

The business climate is likely to remain conservative until uncertainty regarding the fiscal cliff and the related debt ceiling debate is reduced, he said.

In the meanwhile, earnings and guidance have been coming in "pretty poor." And the negative feedback loop between asset prices and confidence will continue heading into what is likely to be a volatile quarter, he said.

Uncertainty for VeriSign

VeriSign's 3.25% convertibles due 2037 traded down to about 126, compared to 147 on Thursday, according to a New York-based sellside analyst. But the convertibles were better on a dollar-neutral basis by about 0.75 point on a delta in the upper 80s, or about 88%.

A second analyst said the VeriSign convertibles were lower by about 0.25 point on hedge using a lower delta.

VeriSign shares fell as much as 20% during the session and closed lower by $7.21, or 15.5%, at $39.39 in very heavy volume.

An analyst said, "The convertible doesn't move around a lot and even Friday's 20% move in the stock, produced only about a 0.5 point move in the bond."

"These bonds are super long dated, and are treated like preferred securities. It is a really high delta name at only a few points over parity," the analyst said of the bond with a relatively uninteresting profile.

VeriSign warned that the U.S. Commerce Department may not complete its review of the company's dot-com registry agreement before it expires at the end of November and that an extension may have to be offered.

It said it submitted its agreement to provide registry for .com names to the department in June and had expected approval by Nov. 30.

VeriSign also reported a 32% rise in third-quarter profit as operating margin at the internet-domain-name company widened and revenue improved. But it trimmed the top end of its full-year revenue guidance.

One convertibles trader said he doesn't like the name because "it's essentially a monopoly to register all the domain names." And he tends to believe that "with monopolies, at some point they get broken."

Coinstar slips on hedge

Coinstar's 4% convertibles due 2014 traded at 128 and as high as 132.38 on Friday, according to market sources and Trace data. That was up 6 to 10 points outright, but on a hedged basis, Coinstar was down about 0.5 point, a Connecticut-based analyst said.

Coinstar shares closed up $1.20, or 2.8%, to $44.43 in heavier-than-average volume.

The company reported net income of $36.8 million, or $1.14 per share, in the three months ended Sept. 30, which was down compared to net income of $37.1 million, or $1.18 per share, in the year-earlier period.

Excluding one-time items, Coinstar's earnings were $1.26 per share.

Revenue increased 16% to $537.6 million, from $465.6 million a year earlier.

Analysts had forecast earnings of $557.2 million, or $1.05 per share.

Looking ahead, the company said it expects adjusted earnings per share of $4.50 to $4.65, which is lower than the $4.91 per share that analysts had forecast.

The company said revenue would range from $2.19 billion to $2.24 billion, which was below the $2.26 billion that analysts expected for the year.

Hertz's antitrust review

Hertz's 5.25% convertibles due 2014 traded late in the session at 173.299 versus an underlying share price of $13.50, which was "in" just a touch from midweek, a New York-based trader said.

Shares of the Park Ridge, N.J.-based auto rental company closed down 30 cents, or 2%, at $13.37 in average volume.

Hertz announced its deal to acquire Dollar Thrifty for about $2.3 billion, or $87.50 per share, at the end of August, and the U.S. Federal Trade Commission was expected to conclude its review of the proposed deal by mid-October.

"The FTC might block their buyout....That will put pressure on stock, and the bonds are deep in the money, so a big stock move might impact the bonds," the trader said.

Quantum coupon eyed

Quantum, a San Jose, Calif., provider of storage, backup, recovery and archive services, priced $60 million of five-year convertible senior subordinated notes after the market close Thursday with a 4.5% coupon and a 35% initial conversion premium, according to a news release.

The Rule 144A deal came beyond the cheap end of coupon talk, which was 3% to 3.5%, and at the rich end of premium talk, which was 30% to 35%.

"They had trouble getting that done," a trader said, noting the underlying shares have been week since the private offering was launched.

Credit Suisse Securities (USA) LLC was the bookrunner of the deal, which has a $10 million greenshoe.

The bonds are non-callable for life, and there is no net share settlement.

There is standard change-of-control protection, and there is dividend protection in the form of an adjustment to the conversion rate for dividends paid.

Proceeds will be used primarily to repay amounts outstanding under the company's senior secured credit agreement with Wells Fargo and for general corporate purposes.

Mentioned in this article:

Coinstar Inc. Nasdaq: CSTR

EMC Corp. NYSE: EMC

Hertz Global Holdings Inc. NYSE: HTZ

Quantum Corp. NYSE: QTM

VeriSign Inc. Nasdaq: VRSN

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