Convertibles market remains weak, subdued; Kodak paper rallies; AMR convertibles nosedive

By Stephanie N. Rotondo

Portland, Ore., Oct. 3 - Convertible bonds were trading heavy as the fourth quarter began Monday.

"Converts are very weak right now," a trader said. Another trader dubbed the day "Meltdown Monday."

"There doesn't seem to be a lot of trading," said another market source. "Everybody is a seller for the most part. Customers are reluctant to buy because they believe prices with go lower."

"Last week continues," he added.

But while most of the convertibles arena was down, Eastman Kodak Co. got a boost as the company refuted a looming bankruptcy filing.

"They bounced back a bit today," a trader said, seeing at least a 6-point gain in the paper.

On the other hand, AMR Corp., the parent of American Airlines, saw its convertibles lose about 10 points on the day on fears the money-losing company could be forced to file for Chapter 11 protection.

Kodak rallies

Eastman Kodak's 7% convertible notes due 2017 "bounced back a little today," a trader said.

"The stock has almost doubled," he added, as the company attempted to assure investors that a bankruptcy filing was not imminent.

He quoted the convertibles at 31.5 bid, 32.5 offered, a gain of about 6 points on the day.

He also saw the stock up 66 cents at $1.44 shortly after midday.

Another trader saw the convertibles trading around 30 versus a stock price of $1.30 shortly before the close.

The stock closed up 56 cents, or 71.77%, to $1.34.

On Friday, the Rochester, N.Y.-based company said it had hired Jones Day to help it develop a restructuring plan. Given that the stock and the bonds have declined significantly recently, investors reacted quickly, assuming that a bankruptcy was near.

The company, for its part, has said that a bankruptcy is not currently in the cards.

Also, on Monday, the company made a $14 million payment to convertibles holders.

AMR in tailspin

AMR's convertibles lost ground as investors, expecting a fourth consecutive year of losses, worried that a bankruptcy filing could be in the company's future.

One market source saw the 6.25% convertible notes due 2014 opening at around 55, then quickly falling to close at around 44.

Another trader placed the issue at 44.5 versus a stock price of $2.00.

The stock closed down 98 cents, or 33.11%, to $1.98.

There has been no credit-specific news out to cause the decline, but among the airlines, AMR is considered to be a weak link.

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

And, for all of its efforts to shore up its cash position, its efforts could be in vain.

"The boost to liquidity may be only temporary and fleeting - cash flow remains significantly negative and the company is burning cash at an accelerating rate," wrote Gimme Credit LLC analyst Vicki Bryan. "AMR continues to lost market share, as we expected, and now that the economic recovery seems to have stalled it will likely feel the pain faster and more deeply than most of its larger peers."

Mentioned in this article:

AMR Corp. NYSE: AMR

Eastman Kodak Co. NYSE: EK

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