Convertibles better; EMC, MF Global gain; stabilizing markets point to better September

By Rebecca Melvin

New York, Aug. 31 - Convertibles were somewhat better on the last day of the month Wednesday, but trading was quiet and limited mostly to larger, liquid investment-grade names as a significant number of market players remained sidelined following turbulent markets in August.

"It was better to buy things," a New York-based sellside trader said, attributing the improvement to end-of- month window dressing.

"It was a mixture of investment-grade stuff," he said. "I'm not sure what conclusions you can draw."

EMC Corp. was one of those investment-grade names that got better. The EMC A paper, a name that matures in December and carries virtually no risk, was particularly active.

Boston Properties Inc., Amgen Inc. and Newmont Mining Corp. were other investment-grade credits in trade.

Both issues of New York-based commodities and derivatives brokerage MF Global Holdings Ltd. were active in trade, with the MF 3.375% convertibles due 2018 improved, and were quoted at 85.875 bid, 86.25 offered versus an underlying share price of $5.47 in the afternoon, compared to 85.5 bid, 85.875 offered versus the same share price in early trade.

A significant number of players were "looking sidelined," a source said, after what has been a very weak month. Sources referred to investors redemptions, although they didn't think market pricing would be dampened by redemptions because of the low level of leverage that players are carrying in general right now.

"I think people might be concerned with performance or redemptions. Leverage is pretty low; no one is close to fully invested or levered up, so there's plenty of dry powder out there," a New York-based trader said.

Issuance dries up in August

One factor in the weak performance and low trading levels in recent weeks was that there was no new convertible paper issued during the month of August. Year-to-date issuance stands at about $23 billion and fell behind last year's comparable year-to-date tally of about $25 billion in new issuance.

The last time the convertible market went a month without new issuance was February 2009.

The reasons cited for the lack of issuance were the turbulent markets at the beginning of the month and summer vacations at the end of the month.

Issuer's didn't want to do deals ahead of stock markets tanking, they said. And that period melted right into the end of August vacation period.

Looking ahead, sources were optimistic that September would bring a restart in issuance if the current stabilizing period continues.

There is a pipeline in the technology sector, one New York-based syndicate source said. Technology and health care have typically been the biggest sectors participating in the convertible bond market.

Technology has been a leading edge sector of issuance, accounting for 19% of new issuance this year, and 21% of the market last year.

"Tech has always been leading the space, and telecom has always been a small part of that industry, accounting for 1% this year and 2% last year of total issuance.

Financials has also been a pretty strong sector for convertible issuance, but with financial weakness lately it's difficult to know if this sector will be a strong one, a syndicate source said.

"But we just had a hurricane, and who knows? The insurance companies might have to come out and do a convert. This is not stuff that we can predict," the source said.

Turbulence aside, technology, telecom and internet issuers are looking to go to market, and there's a "robust pipeline." As far as other sectors, it will be "wait and see," he said.

High-yield spreads wider

One reason behind the optimism that convertibles will improve is that the high-yield market, which has been sopping up a large portion of the pool of extant issuers, has hit a bump in the road. Interest rates for high-yield paper have risen, and this might encourage issuers to come back to the convertible market.

"Going from the crazy market into summer vacations kept issuers away, but with the high yield in the state it's in, people might come back to the convert market," a trader said.

Outflows increased in high yield when the markets became concerned about credit, and not a lot has returned to the market, which is very illiquid, and that's not what they are used to in the high-yield market," the trader said.

Much of the convertible market is made up of high-yield players or those without ratings.

For a BB credit, the spread was 678 basis points at the end of August, compared to 577 bps at the end of July.

"They've blown out 75 bps or 100 bps in a month. And for single B, it's worse: they've blown out 150 bps," a syndicate source said.

"The benchmarks may stay low, but if high yield is at 9% or 10%, then [issuers] are going to come to the convertible market," he said.

"Actually, the convert market has not fared that badly," the source said. "On an implied vol. basis, a lot of the convert universe is trading well."

EMC trades up

EMC's 1.75% convertible due 2011 traded at 141.4 during the session, which was up nearly 4 points on the day, according to Trace data.

The EMC 1.75% convertibles due 2013 traded up about 3 points to 141 on Wednesday.

Shares of the Hopkinton, Mass.-based IT infrastructure provider added 60 cents, or 2.7%, to $22.59 in active trade on the day.

"EMC's common moved a little bit. This name is so liquid and the As go away in December. These trade at 0.5 point; the big guys put on a lot of these and it costs them nothing," a New York-based trader said.

Mentioned in this article:

Amgen Inc. Nasdaq: AMGN

Boston Properties Inc. NYSE: BXP

EMC Corp. NYSE: EMC

Newmont Mining Corp. NYSE: NEM

MF Global Holdings Ltd. NYSE: MF

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