Jefferies adds after unwinding euro debt; Amgen unmoved on share buyback, debt deal

By Rebecca Melvin

New York, Nov. 7 - The convertible bond market was mostly quiet on Monday, with trading concentrated in a few names as has been the trend in recent sessions.

Jefferies Group Inc. regained a point or two on its 3.875% convertibles after the New York-based investment bank unwound about half of its European sovereign debt holdings in an effort to quell investor fears regarding the viability of those securities.

Amgen Inc. was also active, although virtually unchanged, amid a 6% gain in the underlying shares on word that the Thousand Oaks, Calif.-based biotechnology company is offering $6 billion of new straight debt tranches to finance a $5 billion buyback of shares.

Amgen was not the only convertible name to announce that it's raising capital with straight debt. Similar announcements were made on Monday by Peabody Energy Corp. and Teva Pharmaceutical Industries Ltd.

Peabody, a St. Louis-based coal producer, may sell $2.75 billion of high-yield debt, and Teva, a Petach Tikva, Israel-based maker of generic drugs, may offer $5 billion.

The news from the three companies, taking advantage of currently lower bond yields, could have been discouraging to convert market players, who have been watching their market shrink due to bonds being taken out by maturities or other redemptions and not being replaced by new paper for the better part of two years. But other than stating the facts, convertible players were nonplussed on Monday.

Straight debt is cheap compared to convertibles due to the low-rate environment, they said. And lower equity prices also discourage would-be issuers from going with convertible debt, because they want to issue at the top of the stock's price range.

Redemptions outpace new deals

Redemptions outpaced new issuance in the convertibles market in October by about $700 million. There was $1.3 billion of new issuance and $2 billion of redemptions, according to Citigroup's convertibles trading and sales desk in its monthly report published last week.

But October wasn't an anomaly. Outstanding convertibles issuance has been going down fairly steadily since December 2010. At that time, convertible issuance outstanding totaled more than $250 billion. At the end of October, it totaled less than $235 billion, according to Citigroup.

July and March 2011 are the only months this year in which new issuance outpaced redemptions, according to Citigroup's statistics.

Other names quiet

Another name that had news on Monday, but little if anything trading, was Best Buy Co. Inc. The Richfield, Minn.-based consumer electronics retailer, the largest in the world, announced that it agreed to buy Carphone Warhouse Group plc's stake in its U.S. mobile joint venture for about $1.3 billion.

Best Buy will also close its U.K. stores open less than two years ago. While onlookers thought the news was beneficial for Best Buy, which has its horns locked with Amazon.com Inc. for market share, it was not enough to leave the shares in positive territory.

Meanwhile, the Best Buy 2.25% convertibles due 2022 were seen at 99.25 bid early in the Street, a Connecticut-based sellsider said. But "I have not seen the BBT converts trade at all today," he said.

Convertibles traders were looking ahead to a number of earnings reports seen coming out after the market close on Monday. Those included Priceline.com Inc. and DryShips Inc.

Quicksilver Resources Inc., which has been a convertibles name, was one of the few convert names that reported ahead of the opening bell. But even though the disappointing report sent the shares of the Fort Worth, Texas-based natural gas and onshore oil company sharply lower, the convertibles weren't changing hands actively since the 1.875% convertibles due 2024 were mostly put back by investors last week on Nov. 1.

There are only $18 million of the Quicksilver 1.875% convertibles outstanding after the put date, compared to $150 million previously, a New York-based trader said.

Market players continue to be fixed on news headlines coming out of Europe about its sovereign debt woes, with particular focus on Monday on sharply higher Italian bond yields.

Jefferies reverses course

Jefferies' 3.875% convertibles due 2029 traded up to 81 to 82 on Monday, reversing some of its losses notched last week. The paper went out Friday at about 77.75. That represents about a 12-point drop for the week as a whole last week.

The paper continues to dominate volume charts in the convertible bond market.

The company said early Monday that it reduced its trading positions in European debt to about $1.1 billion long and $1.1 billion short. It sold out of holdings of the sovereign securities of Portugal, Italy, Ireland, Greece and Spain.

"This represents a 49.5% reduction in Jefferies' gross holdings of these securities since the close of business Friday and results in no meaningful profit or loss on today's trading activity or our remaining positions, which continue to be substantially matched by country and maturity," the company said in a news release.

Jefferies' current net exposure to these sovereign securities is $59 million, or 1.7% of shareholder equity, with negligible market or credit risk.

They reduced their holdings to demonstrate the liquid nature of that market-making trading book. "We will now resume our normal market-making activities," the release stated.

Jefferies unwound by half, a Connecticut-based trader said, and they said the positions didn't go against them materially.

He called the improvement in the midsized investment-bank's convertibles better by a modest 1 or 2 points. Jefferies shares ended up by 17 cents, or 1.4%, to $12.24.

Egan-Jones downgraded Jefferies on Thursday, citing its exposure to European sovereign debt.

Amgen steady

Amgen's 0.375% convertibles due 2013 traded little changed at about 99. Amgen shares gained $3.26, or 6%, to $58.43.

"They gained by about a dime. Yoopee," a New York-based sellside trader said of the Amgen convertibles.

The shares would have to move up by a lot more for the bonds to improve significantly, he said.

Right now the convertibles are trading on a yield-to-maturity basis. They will move slowly toward par as they get closer to maturity. However, that would change if the underlying shares got within striking distance to the convertibles' conversion price of $79.48.

Gimme Credit said of Amgen in a recent note that Amgen's "high drug concentration elevates business risk, but prodigious free cash flow and bountiful cash and marketable securities, often in excess of debt, offsets this somewhat."

Profitability remains strong, although depressed despite blows to its anemia franchise, and the drug pipeline offers some hope, Gimme Credit analyst Carol Levenson wrote in a note published Oct. 25.

Mentioned in this article:

Amgen Inc. Nasdaq: AMGN

Best Buy & Co. Ltd. NYSE: BBY

Jefferies Group Inc. NYSE: JEF

Peabody Energy Corp. NYSE: BTU

Priceline.com Inc. Nasdaq: PLCN

Teva Pharmaceutical Industries Ltd. Nasdaq: TEVA

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.