Patriot Coal extends sharp fall; U.S. Steel lower on economic worries, Einhorn comments

By Rebecca Melvin

New York, May 16 - The convertible bond market was weaker on Wednesday as many market players turned sellers while watching developments in Greece, where banks faced emergency funding needs due to the high level of deposits that were withdrawn amid fears the country may soon pull out of the euro zone.

"I think there is genuine fear out there," a New York-based trader said of the day's trading action in convertibles.

Weakness was hitting more speculative paper in particular, a second trading source said.

Distressed James River Coal Co.'s 4.5% convertibles due 2015, for example, took another leg lower on Wednesday, ending the session at 39.25 bid, 39.75 offered, which was down 3 or 4 points compared to Tuesday's down move to 42ish from 44.

"It's definitely coming in weaker today," a trader said of the market in general, citing concerns about Greece and what looked like a run in the Greek banks, which saw about $700 million in deposits vanish in one day, he said.

Patriot Coal Corp.'s convertibles extended sharp losses, dropping to 86 bid, 88 offered during the session after falling about 5 points on Tuesday to 94 from 99.5 on worries about the St. Louis-based coal producer's ability to redeem the paper that comes due May 31, 2013.

Elsewhere, United States Steel Corp.'s convertibles traded actively and were down about 0.5 point on a dollar-neutral, or hedged, basis as the underlying shares tumbled 5% partly driven by a sector move on economic worries and partly by negative comments on the company by Greenlight Capital's David Einhorn, who was speaking at the Ira Sohn Investment Conference in New York.

Downgrades this week have hit several convertible names. Symantec Corp. remained down after Goldman Sachs & Co. cut the underlying shares of that company to "sell" on Monday, and Lam Research Corp.'s convertibles were active on Wednesday after JPMorgan downgraded it and other makers of semiconductor manufacturing tools to "underweight," predicting a downtick in capital expenditures by chip foundries in the second half of the year.

Meanwhile, Ares Capital Corp., the New York-based private equity firm, had a bit of positive news in that the shares were upgraded to "equal weight" from "underweight" by Barclays Capital.

The Ares 5.75% convertibles due 2016 traded at 101.671 versus shares that were at $15.14 during the session, and were left at a pretty wide 101 bid, 102 offered versus the $15.14 underlying share price, a New York-based trader said.

Patriot Coal extends slide

Patriot Coal's 3.25% convertibles due May 31, 2013 traded down sharply to 86 bid, 88 offered on Wednesday from Tuesday's 94ish level, as shares of the coal miner dropped another 20 cents, or 5%, to $3.74. That stock move was on top of an 18% slide on Tuesday.

Traders said that they were surprised that the convertible paper moved "this low."

"It's crazy for paper this short," a sellsider said.

Nevertheless, few were willing to step in on speculation that now was a good buying opportunity.

"There's a lot of speculation right now," a West Coast-based trader said, adding that the situation is something of "an information vortex" and "no one is sure which way is up."

The downdraft in the notes was related to a credit facility that was supposed to fund redemption of the bonds next year being pulled Tuesday.

A source from the straight bond market said, "Converts are getting hit harder" than the regular bonds.

Also on Wednesday, Standard & Poor's lowered its credit ratings on the company, citing weaker market conditions. It lowered Patriot's corporate credit rating to B- from B and the issue-level rating on the company's senior unsecured debt to B- from B.

U.S. Steel down

U.S. Steel's 4% convertibles due 2014 traded last at 105.5 versus the underlying share price of $22.76 on Wednesday, which was down more than 3 points outright, and down about 0.5 point on a dollar-neutral basis.

Shares of the Pittsburgh-based integrated steelmaker lost $1.18, or nearly 5%, to $22.76.

The move lower was "in line with the credit," a trader said.

The steel sector was lower even as iron ore prices dropped to their lowest since April, and as investors weighed the possibility that a decision by Greece to leave the euro zone could throw a monkey wrench into the global economy.

In addition, Einhorn's statement that he doesn't like U.S. Steel seemed to cast a pall on shares, traders said.

Mentioned in this article:

Ares Capital Corp. Nasdaq: ARCC

James River Coal Co. Nasdaq: JRCC

Lam Research Corp. Nasdaq: LRCX

Patriot Coal Corp. NYSE: PCX

Symantec Corp. Nasdaq: SYMC

United States Steel Corp. NYSE: X

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