AMR collapses after bankruptcy filing; Transocean Cs improve; Onyx seen lower on hedge

By Rebecca Melvin

New York, Nov. 29 - AMR Corp.'s convertibles collapsed more than 25 points into the upper teens Tuesday after the Fort Worth, Texas-based parent company of American Airlines filed for Chapter 11 bankruptcy protection from creditors and its chief executive Gerard Arpey was replaced by current president Thomas W. Horton.

The AMR 6.25% convertible notes due 2014 traded between 16 and 17, compared to a trade at 42 on Monday with the underlying shares at $1.65. Earlier this year, in April, the convertibles traded close to par with the underlying shares at about $5.90.

AMR is the latest in a string of bankruptcies that have hit names in the convertibles market. Last week, PMI Group Inc. filed for bankruptcy and before that it was MF Global Holdings Ltd.

"These things hit Wall Street pretty hard, and you're likely to see desks contracting as a direct result of it," a Connecticut-based trader said.

A market was made early Tuesday in the convertibles of Walnut Creek, Calif.-based PMI at 23.75 bid, 24.25 offered, but they weren't known to have traded, a New York-based source said.

Elsewhere, Transocean Ltd. saw its series C convertibles about 0.5 point to 0.75 point better after the Switzerland-based deepsea oil driller announced that it was going to be pricing an offering of 26 million shares of common stock, with proceeds going to fund the buyback of Transocean's $1.7 billion of 1.5% series B convertibles bonds, which are redeemable in a few days.

Onyx Pharmaceuticals Inc. came in on a hedged basis compared to last week amid rumors that the San Francisco-based biopharmaceutical company is a likely takeover candidate. Also on Tuesday, Onyx said the U.S. Food and Drug Administration accepted its New Drug Application for a potential blood cancer treatment.

The AMR bankruptcy created some "knock on" trading action, as many market players sold that paper to distressed circles, and in the process freed up some cash for new purchases in mainstream convertible names.

There was a lot of trading in Gilead Sciences Inc. and Amgen Inc., one trader said. There wasn't significant price movement in these safer plays, but there was a significant amount of paper changing hands.

In the broader markets, equities ended mixed after early strength. The Dow Jones industrial average ended up 32.6 points, or 0.3%, to 11,555.63, which extended a 291 point, or 2.6%, climb on Monday. The Nasdaq Stock Index slipped into the red however, ending down 11.83 points, or 0.5%, at 2.515.51.

AMR plunges on filing

AMR's 6.25% convertibles due 2014 were seen at 16.125 bid, 16.875 offered on Tuesday after the company filed for Chapter 11 bankruptcy. They were seen at 17 to 18 at the close by one source. Those bonds traded at 42 versus an underlying share price of $1.65 on Monday and at 43 versus the same $1.65 share price last week.

The $520 million 6.25% convertibles were originally priced in September 2009 by bookrunners Citigroup Global Markets Inc., Morgan Stanley & Co. LLC and UBS.

There is a nominal 200 bonds outstanding of AMR's 4.5% convertible notes due 2024, but they weren't seen in trade.

The AMR bankruptcy follows hard on the heels of the PMI bankruptcy last week. One difference in the two situations is that PMI waited until the situation was imminent, but AMR could have continued to operate with the cash on its books but apparently made a strategic decision to file while they still had plenty of cash on hand, a New York-based trader pointed out.

AMR had $4.1 billion in unrestricted cash on its books when it filed. This allows it to begin restructuring before it burned through all that cash.

AMR has been burning cash faster than it could generate it for years, but over the past year it has been losing ground at an increasing rate, Gimme Credit analyst Vicky Bryan wrote in a recent report about the company.

Also, the problem for AMR was that it was fast becoming an airline without dominance in any market niche and losing market share not only to larger peers but also to leading low-cost carriers.

In August, AMR announced it had decided to spin off its American Eagle regional carrier after failing to sell it in the open market. It also sought financing this fall in a weak market environment and got stuck with its highest interest rate since 2009.

Transocean Cs higher

Transocean's 1.5% series C convertibles due 2037 were last around 97.75 bid, 98 offered, which was higher by about 0.5 point to 0.75 point, market sources said.

There were buyers of the C paper by those that want to maintain exposure to Transocean in the face of the Transocean 1.5% series B convertibles due 2037 going away. The 1.5% series B convertibles trade close to par.

Transocean launched a public offering of 26 million shares of common stock via Barclays Capital Inc. and Credit Suisse Securities (USA) LLC as joint bookrunners on Tuesday.

Proceeds of the deal are planned to be used to partially refinance its acquisition of Aker Drilling ASA and to repurchase the $1.7 billion of its 1.5% series B convertible senior notes due 2037.

The offering represents up to 8.9% of Transocean's total issued and outstanding shares.

Transocean common stock fell $4.29, or more than 9%, to $41.68 on the news on Tuesday.

Onyx down on takeover chatter

Onyx's 4% convertibles due 2016, which priced originally in August 2009, were around 133.5 around the close Tuesday with the shares at $44.00. That was up on an outright basis from about 126.5 previously.

But the bonds were lower by 2 to 3 points on a hedged basis as takeover chatter left swap players looking at still not making up the loss on a takeover table.

"If you owned them on swap you got crushed, but if you owned them outright you made money," a Connecticut-based trader said.

There were a significant amount of hedged players in the name and the make whole doesn't make up for the loss in the bonds.

Mentioned in this article:

Amgen Inc. Nasdaq: AMGN

AMR Corp. NYSE: AMR

Gilead Sciences Inc. Nasdaq: GILD

MF Global Holdings Ltd. Pink seets: MFGLQ

Onyx Pharmaceuticals Inc. Nasdaq: ONXX

PMI Group Inc. Pink sheets: PPMIQ

Transocean Ltd. NYSE: RIG

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