Convertibles hold up despite slide in shares; Onyx surges on drug panel backing; AMR retraces 60

By Rebecca Melvin

New York, June 21 - The convertible bond market was quiet overall on Thursday, but held up well given the slide in equities, market players said.

Against the general current, Onyx Pharmaceuticals Inc.'s convertibles surged on both an outright and dollar-neutral, or hedged, basis after the San Francisco-based biopharmaceutical company received backing by a regulatory panel for its Kyprolis carfilzomib drug for the treatment of multiple myeloma.

Onyx was definitely the" nom du jour' in the convertibles market, contributing about half the day's market volume by midsession, a New York-based trader said.

The Onyx 4% convertibles ended up about 40 points outright and up about 3 points on a dollar-neutral basis.

Other volume paled in comparison to the trading action in Onyx. But among other names in the headlines was Micron Technology Inc., the convertibles of which were mostly quiet and in line with lower shares or unchanged dollar neutral after the Boise, Idaho-based memory chip maker reported its fourth straight quarterly loss as prices fell for chips used to store data in phones and tablets.

Among distressed debt names, AMR Corp.'s convertibles moved up another 0.5 point to achieve 60 this week for the first time since the paper slid well below that level with the bankruptcy filing of the American Airlines parent last November.

The gains for AMR came amid headlines that the company's pilots are rejecting a final contract offer, which was viewed as possibly speeding the company's bankruptcy process, a Connecticut-based trader said.

In addition, DryShips Inc. traded some. The convertibles of the Athens-based shipping and oil services company have been better bid in recent days, and although it tracked down some with the underlying shares on Thursday, the paper's recent action was still looked upon as positive, a Connecticut-based trader said.

The DryShips convertibles traded at 73 at the market close. They had been 74 bid earlier.

All in all, convertibles "held up pretty well," a New York-based trader told Prospect News.

Equities slid lower in trade Thursday, ending at their lows for the day.

The Nasdaq stock market fell 71.36 points, or 2.4%, to 2,859.09; the S&P 500 stock index dropped 30.18 points, or 2.2%, to 1,325.51; and the Dow Jones industrial average lost 250.82 points, or nearly 2%, to 12,573.57. The price of crude oil for August delivery fell $3.05, or 3.7%, to $78.40 per barrel amid mounting evidence of slowing growth in China, Europe and the United States.

Onyx jumps

The Onyx 4% convertibles due 2016 surged 35 points to 36 points early Thursday to 172 on an outright basis from about 136. The convertibles closed even higher at 177 versus the closing share price of $63.78, which was up $19.20, or 43% in ultra-heavy volume for the stock of the San Francisco-based biopharmaceutical company.

Depending on the delta on which the bonds were held, the trade gained 1 point to 9 points on a hedged basis, sources said.

At the close, the bonds were seen better by 3 points, a New York-based trader said.

Sources said that going into the day, the bonds were held on a 75% delta, which would have garnered 3.5 points to 8 or 9 points.

One trader that held the Onyx convertibles on a heavier, 80% delta made less on a hedged basis, or about a point on hedge, in the face of the tsunami-like surge in the underlying shares.

Now the bonds are held on a heavier 90% delta, sources said, meaning that more shares will need to be shorted to stay neutral at this price level.

"The bonds at this new level have become more equity-substitutes and less sweet-spot converts," a Connecticut-based analyst said.

Kyprolis, the proposed brand name of Onyx's carfilzomib drug, was deemed favorable in terms of its benefit-risk profile as treatment for patients with relapsed and refractory multiple myeloma who have received at least two prior lines of therapy.

The Food and Drug Administration's Oncologic Drugs Advisory Committee voted 11-0, with one abstention, that Onyx's carfilzomib drug is favorable treatment.

The committee's favorable vote amounts to a recommendation that the FDA approve the product under the agency's accelerated approval mechanism.

The news was opposed to the FDA's negative review of carfilzomib on Monday, when it said it was "very concerned with the severe toxicities including deaths that are associated with the use of this agent."

Micron slips in line

Micron's two convertible bonds that priced earlier this year both slipped about 3 points outright, but were viewed unchanged on a hedged basis.

Micron's 2.375% convertibles due 2032, or the C notes, were closed at 87.75 versus an underlying share price of $5.645, compared to 91.25 versus an underlying share price of $6.12 on Wednesday, according to a market source.

Micron's 3.125% convertibles due 2032, or the D notes, were closed 88.25 versus the $5.645 share price, compared to 91.875 versus a $6.12 share price on Wednesday.

These were the notes that one trader is following, but he was quiet in the name.

Among the company's other convertible issues, the Micron 1.875% convertibles due 2031 ended down at 83.75 compared to 87.25 previously.

Shares of the Boise, Idaho-based company ended down 48 cents, or 7.8%, to $5.65 on Thursday.

Micron reported a net loss of $320 million, or 32 cents a share, for the third quarter ended May 31, compared with profit of $75 million, or 7 cents a share, a year earlier.

Sales rose 1.5% to $2.17 billion. Analysts had been expecting a loss of 20 cents on revenue of $1.99 billion.

There has been a glut of supply in the NAND flash memory product category. The company said in May that it was in talks to buy a Japanese competitor, Elpida Memory Inc., to gain more control of industry output because of slack periods.

AMR retraces 60

AMR's 6.25% convertibles due 2015 traded up about 0.5 point to 60 to 60.5 on Thursday.

There were expectations, a sellsider said, that the pilots rejecting the company's contract offer allows the carrier to come out of bankruptcy more quickly.

American Airlines pilot unions have rejected the carrier's final contract offer, leaving it to a judge to decide whether to grant the company's request to vacate the labor group's collective bargaining agreement in court.

The Allied Pilots Association said on Wednesday that its board of directors voted 11 to 5 against approving management's final offer for a tentative deal and sending it on to the membership for a vote.

American filed for bankruptcy in November 2011 and is seeking $1.25 billion in annual labor cost savings to compete more effectively with rivals with lower labor costs. Most of the savings will come from unionized workers.

Mentioned in this article:

AMR Corp. NYSE: AAMRQ

DryShips Inc. Nasdaq: DRYS

Micron Technology Inc. NYSE: MU

Onyx Pharmaceuticals Inc. Nasdaq: ONXX

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