Convertibles improve; beaten down DryShips, AMR rebound; Bank of America paper in focus

By Rebecca Melvin

New York, Oct. 6 - The convertible market firmed across the board on Thursday with some of the most beaten down names notably higher as a rebound in stocks continued.

"Many yield, zero delta names are up from Tuesday's lows," a sellside trader said. "It appears that European accounts and big dealers are done with the panic selling for now."

A second sellside trader said that with stocks moving higher, convertibles were definitely firmer, with markets in many names moving through Wednesday's offer side.

The session saw inquiries from non-traditional convertible players like high-yield and distressed market participants looking for paper that may have been oversold.

This represented a significant market change, the trader said. "It's been months" since the convertibles market has seen that type of activity.

"With a bid returning to high yield, I think there is a push to identify what has been washed out the most," the trader said.

From a fundamental perspective not that much changed day over day. But the tone in Europe improved amid comments by European Central Bank president Jean-Claude Trichet early on, attempting to ease some of the pressures on European banks.

The ECB plans to resume buying covered bank bonds in November and to hold two separate tenders of yearlong refinancing to euro-zone banks.

"With stock markets up three days in a row and with a little clarity out of Europe, everyone will feel a lot better," the trader said.

The convertibles of transportation companies DryShips Inc. and AMR Corp. improved Thursday. Both names had been beaten down amid concerns that the companies are ill-equipped to weather slower global economic growth.

Mexican cement producer Cemex SAB de CV was another name in more or less the same category, as was Eastman Kodak Co., which has its own special situation aspects.

With Kodak, if the capital markets are strong, which is contrary to the situation currently, then Kodak has less to worry about, a New York-based buysider noted, indicating that Kodak would be able to access those markets for funds.

Cemex's newer 3.25% tranche A convertibles due 2016, which priced this past March, traded at 45 versus an underlying share price of $2.90.

The Cemex 4.875% convertibles due 2015, or B tranche, also traded at 45 versus the same underlying share price.

Cubist Pharmaceuticals Inc. was active and Tyson Foods Inc. saw action in a follow through from Wednesday action, a New York-based trader said.

Meanwhile, Bank of America Corp. was stronger as its underlying shares jumped 9%.

DryShips riding higher

DryShips' 5% convertible senior notes due 2014 traded at 55.5 versus an underlying share price of $2.20. That was up from 49 to 50 when the stock was $2.00 on Tuesday.

Shares of the Athens, Greece-based provider of marine transportation jumped 30 cents, or 14%, to $2.39.

The company's shares dropped Monday when it announced that it had adjusted the conversion price of the convertible notes in connection with its planned partial spin-off of Ocean Rig UDW Inc. The new conversion price is $6.90, down from $7.19.

DryShips and other transportation companies like AMR are "hugely affected by the economy," a New York-based buysider said. While cash flows - as in the case of Kodak - also matter for DryShips and AMR, "it's more apparent that a strong economy would help the fundamentals of these transportation companies - whereas Kodak is in the midst of restructuring," the buysider said.

Kodak color improves

Kodak's 7% convertible notes due 2017 traded up to 40 from 33.75 bid to 34 on Wednesday. Last Friday, the convertibles slumped to around 26 with the underlying shares at $0.75.

Kodak's stock jumped 23 cents, or 19%, to $1.45 on Thursday.

"Kodak is hugely affected by the capital markets because it can refinance indefinitely if strong capital markets make it possible for companies like EK to float new high-yield and/or convertible bonds - whereas a weak market (such as we've been suffering lately) causes traders/speculators/investors to focus on EK's questionable ability to generate cash flow from operations/royalties/patent sales," the New York-based buysider said.

Kodak is working on licensing out its patents in order to increase cash flows, but the longer it takes for a deal to materialize on those patents, the more doubts grow that a sale will occur.

Kodak, DryShips and AMR were all labeled "special, unique situations," by one sellsider, who said performances in those bonds aren't indicators of the overall convertibles market.

"All those bonds on the cap structure are speculatively insolvent, and there's not much to be drawn from the economy at large. They all have their own story and are in a bad spot," the sellsider said.

AMR lifts

AMR's 6.25% convertible notes due 2014 traded at 53 versus an underlying share price of $2.50. It had fallen to the low 40s on fears the airline parent company could have to file for Chapter 11 protection soon.

This week, independent credit research firm Gimme Credit downgraded AMR to deteriorating from stable.

"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.

"This has put even more pressure on the company's dwindling cash reserves ahead of massive near-term obligations, making it even tougher and more expensive for the company to refinance and extend debt maturities."

"AMR is fast becoming an airline without dominance in any market niche - it is losing market share to larger peers which are claiming an increasing share of more lucrative business and international travel, and to leading low cost carriers able maintain a dramatically lower cost structure," Bryan wrote.

AMR has been unable to sell Eagle to raise cash. 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.

BofA yielding 9.5%

Bank of America's 7.25% series L convertible preferred stands at $762, yielding 9.5%.

Shares of the Charlotte, N.C.-based financial institution gained 51 cents, or 9%, to $6.28 on Thursday.

The Bank of America 7.25% L convertible yields about 70 basis points more than the pari passu 7.25% J straight preferred, a New York-based buysider pointed out.

"The J lacks any call protection equivalent to the $65-a-share soft call protection for the L. I wonder how many retirees are scratching for yield when they could own some (or a lot) of the BAC convertible preferred. This market definitely is providing opportunities," the buysider said.

With Bank of America common at $6.19, the convertible preferred has a conversion premium of 515%, which suggests little equity upside. But with a high yield, appreciation is less of an issue. The convertible has 130% soft call protection, so it can't be cash called until the stock reaches $65.

Mentioned in this article:

AMR Corp. NYSE: AMR

Bank of America Corp. NYSE: BAC

Cemex SAB de CV NYSE: CX

Cubist Pharmaceuticals Inc. Nasdaq: CBST

DryShips Inc. Nasdaq: DRYS

Eastman Kodak Co. NYSE: EK

Tyson Foods Inc. NYSE: TSN

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