Amgen steady in active trade; Equinix continues to expand after warning; Alcoa quiet

By Rebecca Melvin

New York, Oct. 7 - Action in the convertible bond market was muted on Thursday ahead of Friday's U.S. payrolls data, which market players said will be watched to get a read on potential government moves to support the economy through asset purchases and the future direction of interest rates.

How the payrolls figure will ultimately affect the convertibles market was difficult to predict given that the niche market doesn't always respond as expected, a New York-based sellside analyst said.

The analyst predicted risk to the upside if the number is positive.

Convertibles were relatively quiet for the past several sessions, which may have been what drove surprisingly heavy volume Thursday in Amgen Inc.'s B series convertibles, or the 0.375% convertibles due 2013, amid a dearth of news or stock price action in that name.

Most of the Amgen sales were dealer-to-dealer trades with very small spreads. Sources said that the action may have been an attempt to create a pocket of liquidity to spur further interest in the market.

While the Amgen trades weren't viewed as terribly interesting, continued strengthening in Equinix Inc. on Thursday was.

The Equinix 2.5% convertibles and 3% convertibles were up another 0.5 point to 0.75 point on a dollar-neutral basis on Thursday. The convertibles expanded on Wednesday amid a stock plunge related to the Foster City, Calif.-based data center service provider's revenue warning.

Alcoa Inc. was quiet ahead of its third-quarter earnings report released after the close of markets. Those earnings came in lower from the year-earlier period but were better than expected, and the report was likely to be viewed as a harbinger of good things to come for earnings season, a sellside analyst said.

In the primary market, Allied Irish Banks plc priced $2 billion of contingent mandatorily exchangeable notes due Nov. 15, 2010 exchangeable for M&T Bank Corp. common stock at $77.50 per note.

But the Allied Irish paper, while actively traded, wasn't seen by traders in the convertibles market.

"It's been very active, but it's not a traditional convert...it goes away in one month," a New York-based sellside trader said.

Another sources said "it seems to have gone to just a handful of big guys."

Overall, the market was "kinda quiet. We had the Equinix trade yesterday, but not much was going on today," a New York-based sellside trader said of the session.

Earnings season kicked off unofficially, and on Friday market participants will be eyeing the long weekend coming up for the Columbus Day holiday.

Amgen steady in active trade

Amgen's 0.375% convertibles were little changed at about 99.5 on outsized volume of about $112 million of bonds that changed hands, according to Trace data, a New York-based trader said.

The Amgen 0.125% convertibles due 2011 were less active and were seen closing slightly higher at 99.86.

"Sometimes they just trade: you've got guys freeing up cash or putting cash to work," the trader said.

Shares of the Thousand Oaks, Calif.-based biotechnology company settled little changed at $55.96, which was up 13 cents.

The Amgen 2013 convertibles have a little bit more equity sensitivity than the closer dated 2011 bonds. But the stock wasn't seen as a driver of convertibles trade Thursday.

"The stock didn't move that much, so the bonds shouldn't be moving either, unless guys are setting up in anticipation of something," the trader said.

Equinix strengthens further

Equinix's 2.5% convertibles due 2012 traded at 102.128 versus a share price of $74.00 on Thursday, which compared to 101.375 versus a share price of $71.00 on Wednesday.

The Equinix 3% convertibles due 2014 traded at 97.75 versus a share price of $75.00, compared to 96 versus a share price of $71.00 on Wednesday.

Equinix's 4.75% convertibles due 2016 were seen up at 118.5 on Thursday compared to 114 on Wednesday.

Shares of the Foster City, Calif.-based data center service provider recovered $4.66, or 6.6%, to $75.00 on Thursday, compared to a 33% slump on Wednesday.

"These did better with the stock having collapsed," the trader said.

A second sellsider said Equinix is a vol. name as opposed to a credit or equity sensitive name, so it did perform under extreme volatility.

The Equinix bonds have a hyper structure, meaning that there is a variable conversion ratio that increases as the stock moves through the conversion price.

"Vcrs are more sensitive to vol. than others," the sellsider said, referring to variable conversion ratio.

The Equinix 2012 expanded nicely since the bonds tend to spread out a lot when they get near par.

"The closer they get to par, the more the bond kicks in. If it's a good company, the credit is going to hold," the sellsider said.

The data center service provider's shares plunged after it cut its revenue outlook because of lost North American customers.

It now expects third-quarter and full-year revenues to fall below the company's previous outlook, with third-quarter revenue seen to be in the range of $328 million to $333 million, the midpoint of which is 2.2% lower than the midpoint of its previous outlook.

Total revenue for the full year is now expected to be about $1.215 billion, which is 1.2% lower than the previous outlook, which had been provided July 28.

Alcoa quiet ahead of earnings

Alcoa's 5.25% convertibles due 2014 were seen settling at 203 on Thursday versus a closing share price of $12.20, which was down 17 cents, or 1.4%, on the day.

But shares gained in after-hours after the Pittsburgh-based aluminum company reported that third-quarter net income fell but beat expectations.

"I think people will generally be positive on the news," a New York-based sellside analyst said of Alcoa and its deep-in-the-money convertible.

Net income fell to $61 million, or 6 cents a share, compared with $77 million, or 8 cents a share, in the same quarter last year.

The result included a charge of 3 cents per share, while the year-earlier period included a 3-cents-a-share acquisition-related gain. Excluding items, Alcoa's adjusted 9 cents per share earnings beat the consensus forecast of 6 cents a share.

Revenue rose 15% to $5.3 billion, mainly due to higher volumes in the aerospace market and increased market share in construction.

Mentioned in this article:

Alcoa Inc. NYSE: AA

Allied Irish Banks plc NYSE: AIG

Amgen Inc. Nasdaq: AMGN

Equinix Inc. Nasdaq: EQIX

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