Convertibles quiet as equities react to European debt news; BorgWarner adds; AMR slips

By Rebecca Melvin

New York, Dec. 5 - The convertibles market was mostly quiet on Monday despite an early rise in equities, which ended up giving back some of the day's gains on word that Standard & Poor's is placing all 17 nations of the euro zone, including Germany, on credit watch negative.

Credit watch negative is a signal that there's a good chance of a downgrade within 90 days.

There was no "perceptible" reaction in convertibles to possible euro debt downgrades, a New York-based trader said.

A second trader said that anyone who was surprised by that news "hasn't been reading the newspapers in the last six months."

Given the current size of the convertibles market, it will take something intrinsic to the market such as another bankruptcy, or some corporate action in terms of merger, or buybacks, to make the convertibles markets move from now until the end of the year, he said.

"It's not going to move on macro news," the trader said.

Others concurred. "If you sell something, what are you going to replace it with," a third New York-based trader said.

Despite significant moves on Monday in financial names, there were no financial convertibles trading in unison with the broader markets, a trader focused on that sector said.

"It was really one of the quieter days for us. And with just over $400 million on the tape, I wasn't involved in too much," one trader said.

The trader was referring to $400 million of convertibles changing hands, according to Finra's Trace data. That figure is low to average at this point. In previous periods, there might be as much as $1 billion of convertibles volume on Trace data.

BorgWarner Inc.'s convertibles were interesting for the simple fact that the BorgWarner 3.5% issue, which normally is pretty quiet, was atop the list of the Trace top volume names.

The issue, trading above double par, added about a half dozen more points on Monday, but even a bank involved in initially placing the deal hadn't made a market in the name on Monday, one of the bank's traders said.

Teva Pharmaceutical Industries Ltd., which last month priced $5 billion in new straight notes, saw a little trading in its 0.25% convertibles due 2026, or the C convertibles, but there wasn't significant price movement.

Vornado, which is also pricing straight debt, also saw a little bit of its convertible debt trading on Monday, but again without much price movement, a trader said.

AMR Corp., the parent company of American Airlines, which filed for Chapter 11 bankruptcy protection from creditors last week, saw its convertibles a little weaker on Monday. That reverses the trend in place at the end of last week when the AMR convertibles had recovered about 6.5 points from an initial 25-point collapse.

Europe eyed

Equities reacted again on Monday to headlines related to Europe. The major indices were much higher early on on reports that Germany's chancellor Angela Merkel and French president Nicolas Sarkozy were chiseling out accords to transform and improve the European Union.

But S&P's decision to put all of the euro zone nations on negative credit watch was a bucket of cold water on that fire. The news pertains to six countries with AAA ratings currently including the Netherlands, Austria, Finland, Germany and Luxembourg.

The surprise - if there was one - is that Germany, which has been counted on so far as the "savior" of the European Union, is also on shaky ground.

"The only thing there is that Germany is included," a trader said.

E.U. leaders plan to meet later this week to forge agreements on enforcing stricter budget rules across the currency bloc, a move seen as possibly keeping the Continent's financial problems from worsening.

The developments come on the heels of coordinated action taken by the world's central banks last week to boost liquidity to banks at lower cost. That helped lower bond yields in Europe by calming fears that the governments might be unable to fund themselves.

BorgWarner rises

BorgWarner's 3.5% convertibles due 2012 traded at 214 on Monday, which was up 6.5 points on the day. The BorgWarner paper traded at 204.215 on Dec. 1, but for the year, it stands more or less unchanged, although it had run higher midyear and also lower during October.

Shares of the Auburn Hills, Mich.-based auto parts supplier gained $2.65, or 4%, on Monday to settle at $69.76.

The auto parts sector has been gaining in the last couple of sessions on optimism related to higher November auto sales data. Last week, Chrysler reported a 45% surge in November car sales.

The high priced BorgWarner convertible isn't a hedged player's cup of tea.

One trader said about the issue, "It's a good way to raise a lot of capital very quickly."

BorgWarner was originally priced by Morgan Stanley, Merrill Lynch, Citigroup and Deutsche.

Teva trades steady

Teva's 0.25% convertibles due 2026, or the C convertibles, traded steady at about 104.

The Teva Cs are the only Teva issue left in the convertibles market with any significant amount outstanding.

Shares of the Israel-based generic drug maker ended up 10 cents, or 0.25%, to $39.80 on Monday.

"The valuation on this is fair if you're an outright account and need the exposure," a New York-based trader said.

"It's close to par, and they are not going to call them," he said, by way of positives for the outright players. Otherwise he didn't think the valuation would be attractive to a hedged player.

Mentioned in this article:

AMR Corp. NYSE: AMR

BorgWarner Inc. NYSE: BWA

Teva Pharmaceutical Industries Ltd. Nasdaq: TEVA

Vornado Realty Trust NYSE: VNO

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