Convertibles under pressure as equities drop; Amerigroup, RadioShack lower; Dendreon flat

By Rebecca Melvin

New York, Sept. 9 - Convertibles were under pressure Friday, with some issues moving down multiple points outright as equity markets sold off sharply following president Barack Obama's jobs speech Thursday evening and amid jitters over debt problems in Europe.

Larger, investment-grade names continued to dominate trading, but assessing how the convertibles space held up in the down market was a challenge, a New York-based trader said.

"I can't say anything was better or worse. It was really name-specific: volatility names did OK; but, if it was a credit name, it was weaker," the trader said

Volatility names such as BioMarin Pharmaceutical Inc. and Cubist Pharmaceuticals Inc. were doing well in the current environment, he said. In addition, shorter-dated real estate investment trusts were also "hanging in there and a great hiding place."

Amerigroup Corp.'s convertibles fell multiple points outright as shares of the Virginia Beach, Va.-based managed health care company came down 3.3% on Friday. Amerigroup's shares are down 7% from Monday's market open.

RadioShack Corp. was weaker by about 0.125 point outright on Friday after losing on a dollar-neutral basis for the holiday-shortened week overall.

Markets were closed on Monday to observe Labor Day.

Dendreon Corp. was a surprise to the upside as far as its shares were concerned, and the convertibles traded in line, or flat, on a dollar-neutral basis.

Endeavour International Corp., which priced a 5.5% convertible in July, saw that paper slip another couple of points in the past week to 85.75 bid, 86.75 offered versus an underlying share price of $9.00 on Friday, down from 87 bid, 88 offered versus an underlying share price of $9.50 previously. Endeavour shares on Friday fell 5.9%.

Market participants, who waited on president Obama's speech to glean clues about the future direction of the economy, apparently weren't cheered by what they heard Thursday.

"I guess people were disappointed that what he put out there was more of the same," a New York-based sellside desk analyst said. "It gets back to the fact that the president threw the same out there."

A second sellsider said, "The speech last night didn't do anything; it didn't instill any confidence at all."

Markets were also rattled again on Friday by news out of Europe that a top economist resigned from the European Central Bank, signaling that there is still considerable scope for disagreement over how the debt crisis is handled there.

In addition, Wall Street was sobered not only by remembrances of the Sept. 11 terror attacks on the eve of the upcoming 10th anniversary - with moments of silence observed on the New York Stock Exchange - but also by heightened security in and around Manhattan following credible intelligence of another possible attack.

Overall, the week in convertibles was a quiet one. There has been no new issuance for six straight weeks, and that places a strain on the market in that there is no impetus to trade, market players said.

"It didn't seem like there was a whole lot going on," an analyst said. "There are people out there looking for ideas, but not a lot of people putting money to work."

A second trader said, "The question is what is going to happen. What is going to happen in Europe? What is going to happen here? The president is going out of his way to try to do things to help stimulate the economy, but the Republicans and the Democrats, none of them can agree."

Amerigroup falls outright

Amerigroup's 2% convertibles due 2012 stood at around 114 at the end of the session Friday, according to Trace data, which was down nearly 5 points on the day. They last traded at nearly 119.

Amerigroup shares ended the day down $1.51, or 3.3%, at $44.43.

The Amerigroup convertibles, which mature in 20 months, have been active in recent sessions, trading at around a 70% delta.

On Friday, the convertibles appeared to have dropped harder than the stocks.

"I have a hard time wrapping my hands around the valuation on this one," a New York-based sellside trader said about Amerigroup. The trader thought that the put option (or maturity) was overvalued.

"That's a lot of points of premium," the trader said. "Somebody thinks that the maturity is worth a lot of points; but if the stock ever decides to go back, you're going to lose a lot."

RadioShack weaker

RadioShack's 2.5% convertible senior notes due 2013 traded at 97.5 outright on Friday and were seen at 97 bid, 97.75 offered during the session, which was down about 0.125 point from Thursday, according to a New York-based sellsider.

On Thursday, the RadioShack convertibles were trading at 96.5 versus an underlying share price of $11.97. The stock closed at $12.00 on Thursday and on Friday it closed at $11.84, which was down 1%.

For the week, the RadioShack convertibles made the list of the top 20 dollar-neutral losers, according to Citigroup's convertibles sales and trading desk.

The week-to-date dollar-neutral decline for RadioShack was 0.5%, according to Citi, based on its data through Thursday.

The top dollar-neutral decliner was MetLife Inc.'s 5% convertibles due 2013, which were down 5.5% dollar neutral, followed by Stillwater Mining Co.'s 1.875% convertibles, which booked at 3.3% decline dollar neutral, according to Citi.

RadioShack is a lower-delta name, with the stock at about $12 and the conversion price at $24, and maturity in less than two years.

There didn't appear to be any fundamental news driving trade in the RadioShack convertibles.

Dendreon higher, in line

Dendreon's 2.875% convertibles due 2016 traded Friday at 75.75 versus an underlying share price of $11.25, according to a sellsider, who said that going into Friday the market was 77.25 versus an underlying share price of $10.25.

Shares of the Seattle-based biotechnology company rose 52 cents, or 4.8%, to $11.40 in active trade.

"The bonds are trading on a 47% delta, so there's going to be some movement, not a ton," an analyst said.

Given the share and convert moves, the premium on the paper moved by about 2 points. The premium is still in the mid-50s.

With the stock at $11.00 and the conversion price on the issue at $51.00, there a 260%-odd premium, the analyst said.

Late Thursday, Dendreon announced it is cutting its workforce by 25% in an effort to cut costs and offset slower-than-expected sales of its Provenge prostate cancer drug.

The pace of sales prompted the company last month to withdraw its 2011 revenue estimate of $350 million to $400 million revenue. The company said that it would fire 500 workers, a move that will save $120 million a year.

Provenge is the first U.S. approved therapy that trains the body's immune system to attack cancer cells as if they were a virus. Treatment is prohibitively expensive at $93,000 per treatment. But Dendreon says that it is ironing out payment issues that discouraged medical doctors from prescribing the drug.

On Thursday, Dendreon reported August revenue of $22 million, a 16% gain from July.

Dendreon reported about $22 million gross revenue in August. Dendreon's restructuring will cost $21 million and will allow the company to break even in terms of cash flow.

As of Aug. 31, Dendreon has cash, cash equivalents and short- and long-term investments of about $600 million.

Given the current cash balance and the reduced levels of spending following the restructuring, Dendreon expects to have sufficient cash to enable the company to achieve a cash flow break even position in the United States at an annual run rate of about $500 million in revenue.

Mentioned in this article:

Amerigroup Corp. NYSE: AGP

BioMarin Pharmaceutical Inc. Nasdaq: BMRN

Cubist Pharmaceuticals Inc. Nasdaq: CBST

Dendreon Corp. Nasdaq: DNDN

Endeavour International Corp. NYSE: END

MetLife Inc. NYSE: MET

RadioShack Corp. NYSE: RSH

Stillwater Mining Co. NYSE: SWC

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