Convertibles take hit as shots fly between North, South Korea; market quiet before holiday

By Kenneth Lim

Boston, Nov. 23 - Convertibles had a lackluster session on Tuesday as outright prices fell and corporate spreads in general widened on the back of heightened tension between North and South Korea.

Amgen Inc. slipped slightly outright with its stock, but the paper improved on a dollar-neutral basis after some stockholders raised doubts about a potential acquisition.

Newmont Mining Corp. gained early in the day but ended a touch lower as gold prices initially rose on safe-haven trades.

General Motors Co.'s new 4.75% mandatorily convertible preferreds due 2013 fell in line with the broader market.

The convertible changed hands at 49.90 against a common stock price of $33.24, lower by half a point. GM common stock closed at $33.25, down by 2.44% or 83 cents on Tuesday.

"I think it was just down with the rest of the market," a sellsider said. "The preferreds are actually doing OK. They're below par now because the common stock hasn't done well, but again that's mostly because equities in general haven't done so well since they launched."

Quiet session

The convertibles market had another quiet session, with a negative session for stocks and credit taking the steam out of investors.

"Nothing's going on," one trader said. "I've been here all day and I've only done a handful of trades. It's going to be like that all week. Nobody's buying."

The trader said the lack of volume exaggerates the volatility in the market, and both buyers and sellers are reluctant to make big trades based on possibly skewed market information.

"When prices are down, you can't find sellers," the trader said. "When they're up, you can't find buyers."

The convertible market weakened in general with Tuesday's news that North and South Korea exchanged artillery fire. That weakness could continue into Wednesday.

"Short of some kind of unexpected, significant news, I don't see anything right now that's going to pull us back up tomorrow," the trader said. "Guys are going to want to take a cautious position going into Thanksgiving and the weekend."

Amgen shareholders oppose bid

Amgen's 0.375% convertibles due 2013 eased about a quarter-point outright on Tuesday, dragged lower by the common stock after some shareholders said a potential acquisition by the Thousand Oaks, Calif.-based drugmaker was not a good idea.

The notes traded at 99.875 versus a common stock price of $53.75. The common stock declined by 2.08%, or $1.14, to close at $53.60 on Tuesday.

"Amgen was down with the stock - pretty active name today," a sellsider said. "[There was] a bit of negative sentiment after some of their shareholders said they don't like this acquisition that's been rumored."

Shareholders Invesco Ltd. and RCM Capital Management were reported to doubt the wisdom of Amgen's rumored interest in buying Actelion Ltd., a Swiss drugmaker that specializes in cardiovascular treatments.

Amgen has not commented on the rumors.

"I'm not really surprised that investors didn't like the deal," the sellsider said. "When the headline came out last week, the stock took a hit, which tells you that people didn't really like it. But I think having major shareholders come out and oppose it publicly puts pressure on management."

The risk of a conflict between management and investors, as well as the overall market's poor outing Tuesday, contributed to the decrease in Amgen stock prices, the sellsider added. That in turn pulled down the prices of the Amgen convertibles.

But on a hedged basis, Amgen's convertibles may have come out better because the news was better for the credit, the sellsider said.

"This means it's going to be harder for them to make what could be a costly acquisition that would hurt the credit," the sellsider said. "So it's a piece of credit positive news on a stock negative day."

Newmont loses early gains

Newmont's 3% convertible due 2012 rose to 139.25 early Tuesday before succumbing to some late selling and went out at about 138.875 outright. The common stock ended at $60.59, down by 0.57% or 35 cents.

Newmont is a gold producer based in Greenwood Village, Colo.

"Newmont looks like it got a bit of interest in the morning when the stock was up, but it kind of fizzled out in the afternoon," the sellsider said.

The name tends to be more volatile than average because of its stock price is linked to volatile gold prices, the sellsider said. Tuesday's movements reflected that kind of volatility.

"I guess people were buying up gold in the morning because of the Korea thing and the Ireland credit problems," the sellsider said. "So naturally Newmont follows gold higher."

The convertibles are already far in the money, so they tend to track the stock quite closely, the sellsider added.

Mentioned in this article

Amgen Inc. Nasdaq: AMGN

General Motors Co. NYSE: GM

Newmont Mining Corp. NYSE: NEM

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