Amgen, Micron convertibles higher dollar neutral; AMR slips; NovaMed gains on takeout

By Rebecca Melvin

New York, Jan. 21 - Some "old school" stalwarts like Amgen Inc. and Micron Technology Inc. traded in Friday's convertible bond market, but action overall was pretty quiet, market players said.

Amgen's 2013 paper was called higher on a hedged basis by about 0.25 point.

The Amgen 2011 paper, which matures in less than two weeks, trades mostly outright as a yield play, but it also was about a point higher Friday with shares of the Thousand Oaks, Calif.-based biotechnology giant under a little bit of pressure.

Micron's convertibles were seen about 0.5 point better, with the older Micron cited in trade at 101 versus a share price of $9.80. Late Thursday UBS raised its rating on Micron to "buy" from "neutral," citing the company's improving prospects for DRAM business.

Another formerly active issue, AMR Corp. was seen in trade about 0.5 point lower on a dollar-neutral basis Friday. AMR beat estimates when it reported earnings earlier this week, but its shares have been under pressure as rising fuel costs and higher labor costs continue to be a concern.

DryShips Inc.'s convertibles also remained under pressure, trading late in the session at about 98.75, which was mostly steady on Thursday but well below its recently solid 105 to 110 price.

DryShips' shares are recoiling following a sharp move higher in November and December; but, one sellsider said the DryShips convertibles look interesting to hedge players at this level slightly under par.

The sellsider said investors could set them up here in a smart way.

In addition, NovaMed Inc.'s $75 million convertible bond issue gained about 4 points outright and was also higher on a hedged basis after word that the Chicago-based ambulatory surgery center has agreed to be acquired by H.I.G. Capital, a private equity firm, for about $109 million.

Overall, valuations in the convertible bond market were steady to slightly weaker in the past holiday-shortened week amid lower stocks.

Markets were closed on Monday for Martin Luther King Jr. Day.

One sellsider called the session "nondescript."

Higher volatility eyed

Stocks came back a little on Friday, but not before moving lower and sending the CBOE Volatility index, or VIX, up a couple of points to over 18 from 15 to 16. On Friday, the VIX ended at 18.47, which was up another 0.48 point.

Better volatility is supposed to support convertible bond valuations, but typically the benefit lags as market players initially wait and see how things are going to go. And while the VIX is up, it's still fairly low versus the long-term average, a New York-based sellside analyst pointed out, citing the one-year average at about 22.5.

The VIX move this week "didn't really help convertibles," a New York-based sellside trader said.

A higher VIX improves option value, and it improves the option value in the convertible bond.

"Volatility up makes name more valuable and that means they should be trading at a higher price. But that's theoretically," the trader said.

"You expect prices to improve because the underlying option improves, but we don't see it until it's been up for a while. There's a delay and then it gets baked in," the trader said.

For this week, stocks moving lower pulled a lot of outright buyers out of the market, and that's why convertibles didn't do that great, he said.

Amgen trades higher

Amgen's 0.125% convertibles due 2011 last traded at 99.95, which was up 1.45 points on the day, according to Trace data, and a sellside desk analyst also reported a trade at 100.

Amgen's 0.375% convertibles due 2013 traded at 101.312, which was also up 1.3 points on the day.

The 2011 convertibles, or the A paper, are trading mostly outright, and the B paper is also traded outright but also on hedge.

Shares of the biotechnology company finished lower by 34 cent, or 0.6%, at $56.97 on Friday.

"The strike price on the Amgen A's is $79.84, and the stock is currently at $56.97, so the odds of this going in the money by Feb. 1, when they disappear, are slim to none; it's a yield play," a New York-based sellside analyst explained.

The yield to maturity on the Amgen A's is 2.4%, the analyst said.

For the Amgen 2013 paper, or the Bs, the strike price is the same level, $79.48, but there are two years left before it matures.

"We have it assuming 40 basis points of borrow. The implied vol. is 24 and the equity implied vol. is 23. There's nothing too crazy going on here. It's kind of bland, kind of blah," the analyst said.

NovaMed gains on hedge

NovaMed's 1% convertible notes due 2012 were last at 98.75 bid on Friday, which was up about 4 points outright and 1.25 points on a dollar-neutral basis, a sellsider said.

The company has agreed to be taken over by H.I.G., and that deal is likely to close some time in the second quarter.

"It's an outright play; you will be getting par. But it's still a little yield until the deal closes," a sellsider said.

The issue is about $75 million in size and considered small. But about $13 million of those bonds traded on Friday.

Mentioned in this article:

Amgen Inc. Nasdaq: AMGN

AMR Corp. NYSE: AMR

DryShips Inc. Nasdaq: DRYS

NovaMed Inc. Nasdaq: NOVA

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