AMR extends dive after merger opposed; MannKind up on trial data; American Equity slips

By Rebecca Melvin

New York, Aug. 14 - AMR Corp.'s 6.25% convertibles due 2014 nosedived again and remained the primary focus of trade for a second straight day Wednesday after the U.S. government and a handful of states filed a lawsuit to block the bankrupt carrier's proposed merger with US Airways Group Inc.

The AMR bonds lost more than 12 points early Wednesday to the 89 context but recovered some ground to end at about 94 bid, 95 offered. Still that was down 9 or 10 points following a 12-point drop on Tuesday. Last week, the AMR paper was at about 117 on a yield to takeout.

Elsewhere, MannKind Corp. was in focus and quoted higher as the underlying stock jumped on word that the biopharma company's phase 3 trial showed use of inhaled Afrezza diabetes drug with oral diabetes medicines helped control patients' blood sugar levels more effectively than when using oral drugs alone.

Tesla Motors Inc.'s 1.5% convertibles traded down more than 5 points on an outright basis and underperformed the shares, which were also lower by 4%.The pullback was in tandem with lower equities in general on Wednesday.

American Equity Investment Life Holding Co.'s 3.5% convertible due 2015 also underperformed the underlying shares slightly. The high delta, deep in-the-money bond changed hands in good two-way flow and was "in" about 0.125 point on a dollar-neutral basis.

Rambus Inc.'s new 1.125% convertibles due 2018, which debuted in the secondary market on Tuesday, were unchanged at 102 bid, 102.75 offered on an outright basis in action that was lighter compared to Tuesday's.

The Rambus bonds traded "where the bond closed Tuesday," a syndicate source said. The shares closed down a penny on Wednesday.

Equities sagged. The Dow Jones industrial average closed down 113.35 points, or 0.7%, at 15,337.66; the S&P 500 stock index shed 8.77 points, or 0.5%, to 1,685.39; and the Nasdaq stock market lost 15.17 points, or 0.4%, to 3,669.27.

AMR nose-dives again

AMR's 6.25% convertibles due 2014 slipped below 90 early Wednesday before regaining some ground to trade at 92 and then were seen last at 94 bid, 95 offered, according to market sources.

The finish was still down 9 or 10 points on the day on top of a 12-point drop the day before to 104 from 115 to 116.

AMR's over-the-counter traded shares slumped another 47 cents, or 15%, to $2.70, on top of a $2.64, or 45%, plunge on Tuesday. The company has been in bankruptcy court since November 2011.

Investors were surprised by the Justice Department's move to block the merger of AMR's American Airlines with US Airways. That deal has been on the table since the beginning of the year and is part of its reorganization plan to exit Chapter 11 bankruptcy.

A convertibles analyst said that the fact that there has been so much consolidation in the airline space hurt this merger plan.

In addition to the federal Justice Department, the attorneys general from Arizona, where US Airways has its Tempe headquarters, and Texas, the state where Fort Worth-based AMR is located, along with Florida, Pennsylvania, Tennessee and Virginia, as well as the District of Columbia filed suit against the merger.

US Airways' shares were downgraded Wednesday by Deutsche Bank and JPMorgan. Analysts at those firms cited uncertainty created by the legal situation for their actions. U.S. Airways shares closed down 19 cents or 1.2%, to $16.17 on Wednesday, on top of a 13% loss Tuesday.

Tesla comes in

Tesla's 1.5% convertibles due 2018 traded down more than 5 points outright to 134.125 and were seen having "come in" on a dollar-neutral, or hedged, basis by 2 points, according to a New York-based convertibles analyst.

Another trader had "no comment" on the Tesla convertibles' move.

Tesla shares fell $6.07, or 4.2%, to $139.36 in average volume.

"The stock is down 4% and so is the convert, and the convert is down about 2 points on a dollar-neutral basis on a 72% to 73% delta," the analyst said.

A possible reason for the underperformance of the convertibles was "already tight valuations," the analyst said.

On Monday, the convertibles of the Palo Alto, Calif.-based electric car maker dropped on an outright basis but were better by about 0.5 point on a dollar-neutral, or hedged, basis after a Lazard share downgrade and a bearish Barron's article pointed to a potential bubble for the shares.

Tesla shares have run up about 50% since June.

The $660 million of Tesla convertibles initially priced May 16.

MannKind edges higher

MannKind's 3.75% convertibles, which mature in December, were seen at 98 bid, 99.5 offered versus an underlying share price of $8.00 during the session, and they were seen having traded Wednesday at 97.75, according to Trace data.

That was up from prints at 96.75 and 97.75 on Tuesday.

Traders said there was not much trading in the bonds. "Holders are jockeying in that name but have not pulled the trigger on either the bond or the warrants today," a New York-based trader said.

MannKind's 5.75% convertibles due 2015 were seen at 133 bid, 137 offered versus a share price of $8.00. The convertibles traded last on Monday at about 120 and on Aug. 2 at 132.

The ability to borrow the stock is limited, and that curtails convertible arbitrage players from participating.in the MannKind 5.75% bond, a second New York-based trader said.

Shares of the Valencia, Calif.-based biopharma closed up 73 cents, or 10.6%, to $7.59. Earlier in the session, shares had been higher by 15%.

MannKind announced positive preliminary results from a phase 3 study of Afrezza that showed the drug helped diabetics control their disease.

Afrezza was more effective at controlling diabetics' blood sugar levels when combined with oral diabetes medicines compared to those drugs alone.

American Equity slips

American Equity Investment Life's 3.5% convertible due 2015 traded at 162.75 bid, 163.5 offered versus an underlying share price of $19.70., a New York-based convertibles analyst said.

Shares of the West Des Moines, Iowa-based insurance company added 4 cents, or 0.2%, to $19.55 in average volume.

The analyst said the deep in-the-money bond was down about 0.125 point on a dollar-neutral basis on about a 95% delta. He didn't see any news driving the trade.

"They changed hands in good two-way flow," the analyst said, noting that the bonds are pretty illiquid, so it was good to see them trade.

A New York-based trader said of the underperformance, "There are too many names like that, plus the time of year is awful."

Mentioned in this article:

American Equity Investment Life Holding Co. NYSE: AEL

AMR Corp. Pink Sheets: AAMRQ

MannKind Corp. Nasdaq: MNKD

Rambus Inc. Nasdaq: RMBS

Tesla Motors Inc. Nasdaq: TSLA

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