EMC trades mixed, Teva up outright; Lehman mostly higher; Transocean adds despite lower oil prices

By Rebecca Melvin

New York, July 8 - EMC Corp. convertibles traded mixed Tuesday even as its underlying shares dropped 12% in sympathy with a slide in VMware Inc., which warned revenue for the current year will fall short of expectations and that its CEO is being replaced.

VMware president and CEO Diane Green is leaving the storage virtualization software maker and being replaced by Paul Maritz, who comes from EMC, majority owner of VMware.

Separately, Teva Pharmaceutical Industries Ltd. convertibles and stock gained after Goldman Sachs added the generic drug maker to its conviction buy list Tuesday, a day after disappointing Copaxone results caused a 9% pullback in the shares.

Lehman Brothers Holdings Inc. rose in tandem with its underlying shares amid a surprise rally in financial shares, but convertibles players disavowed much participation.

"I avoid financials religiously at this point in time," a New York-based sellside trader said via e-mail. Instead his bailiwick includes industrials and biotechs, he wrote.

A second consecutive day of lower oil prices put pressure on energy names on Tuesday, but Transocean Inc. was a notable exception to the rule, with both its shares and convertibles ending the day sharply higher.

The primary arena was quiet on Tuesday.

EMC tranches mixed on VMware move

The two convertible bond issues of EMC - big, liquid names in the market - moved in opposing directions on Tuesday after VMware, a storage software company, of which EMC owns 326 million shares of both A and B stock, took down guidance slightly for the year and said it was installing a new CEO, a New York-based sellside analyst said.

The EMC B tranche of 1.75% convertibles due 2013 that were more actively traded edged down 0.25 point on a hedged basis, compared with the 1.75% A tranche due 2011, which got better by about 0.125% on a hedged basis.

The news Tuesday was a surprise, especially since the exiting CEO was a co-founder, the analyst said.

The company has been asked many times if it plans to reduce its VMware stake, but it has always indicated that it wants to keep it.

"Every time they are asked, they say, 'No, we are happy with the stake,'" the analyst said.

Also on Tuesday, Thomas Weisel reduced its EMC estimate, which had been over consensus.

The 1.75% B tranche was quoted around 110.5 versus a share price of $13.60, compared to 116 offered versus a share price of $15.08 on Monday.

The Bs move on a delta of 67% and nuked down slightly, he said.

The shorter-dated 1.75% A tranche of convertibles due 2011 actually strengthened, trading at 110.5 bid, 111 offered versus a share price of $13.60. That compared to 115 bid, 116 offered on Monday.

The As move on a 61% delta and got a little better on a hedged basis by about 0.125 point, he said.

With the two-year difference, the As will tend to do a little better as the stock collapses, he said.

Shares of the Hopkinton, Mass.-based data-storage company dropped $1.75, or 12%, to $13.39.

Teva adds outright

Teva's four main convertible bonds were active and higher in trade Tuesday as its underlying shares regained about half of the preceding day's loss.

Tuesday's move was motivated by Goldman Sach's adding them to its conviction buy list, but there was also an overall gain in the generic drug sector, a Connecticut-based sellside trader pointed out. Plus there was a Teva downgrade, he said, referring to Deutsche Bank Securities' downgrade of Teva to "hold" from "buy."

Monday's 8.5% pullback was attributed to disappointing Copaxone results. The Israel-based company said that tests showed a 40-mg dose of Copaxone was no more effective than the original 20-mg version.

But early Tuesday, the stock was added to Goldman's Americas conviction list because the stock is trading near a five-year low relative to profits, according to the Goldman analyst. The analyst kept his price target at $56 per share, however.

The analyst also said he thinks that the Parkinson's disease treatment Azilect is more important to Teva stock than is Copaxone.

In June, Teva reported trial data showing Azilect can slow the progression of Parkinson's. The drug is approved only to treat the symptoms of the illness, but a wider approval could increase sales.

The Teva 1.75% convertibles due 2026, known as the D tranche, were seen at about 110 compared to a recent bid of 108.75.

The Teva 0.25% convertibles due 2026, known as the C tranche, added about a point to trade at more than 102, compared to 100.875 on Monday.

Meanwhile, the Teva 0.5% convertibles due in 2024, known as the A tranche, and the Teva 0.25% convertibles of 2024, known as the B tranche, were seen at about 118.75 and 125, respectively, versus the stock close of $45.01.

Teva shares (Nasdaq: TEVA) closed up $1.83, or 4.2%, at $45.01.

Other moves in the generic drug sector included 5% to 6% gains each for Par Pharmaceutical Cos. Inc. (NYSE: PRX), KV Pharmaceutical Co. and Mylan Inc. (NYSE: MYL); and Watson Pharmaceuticals' (NYSE: WPI) 1.95% gain, the Connecticut based sellside analyst pointed out.

Financials move up

"You can't trade in this kind of market from a position perspective. It's just delta trading or gamma trading," a West Coast-based buyside trader said. "A couple of positions richened between today and yesterday, but it's hard to mark something on a wacky stock reference price."

It's a fun stock trading environment, rather than one in which you can take a position," he said, adding that Tuesday's financials rally definitely took him by surprise.

"And in homebuilders," he said, referring to moves on the upside. "But how can you really extract anything from it or build anything into a fundamental position, it's more of a technical move or a rebound."

So if anything, Tuesday's financials climb was an opportunity to trim, the buyside trader said.

Lehman's convertible preferred stock was mostly higher, with the Lehman 8.75% series Q mandatory convertible preferreds trading Tuesday at 834.119 versus a stock price of $22.27. That compared with Monday's close at 819.345 versus a share price of $20.84.

But Lehman's older 7.25% series P convertible preferreds were essentially unchanged at 819.625.

Shares of Lehman (NYSE: LEH) closed up $1.43, or 6.9%, at $22.27.

Transocean gains despite oil drop

Crude prices fell $5.33 to settle at $136.04 a barrel on the New York Mercantile Exchange, bringing oil's two-day drop to more than $9.

Some people were disturbed that the move didn't seem to affect things more. The market's not really reacting to it, one source said, but in one instance at least, non reaction wasn't negative: the convertibles and stock of Transocean, which typically moves in tandem with oil prices, was moving up on oil's move lower.

The Transocean A tranche was viewed as particularly interesting, with a "lowerish premium of 20% relative to the rest of the market," a buyside trader said.

Transocean's series A 1.625% convertible due 2037 was more than a point higher outright at 110.257 versus a stock price of $145.94 on Tuesday, compared with 108.807 versus a share price of $140.60 on Monday.

The Transocean series B 1.5% convertible due 2037 was similarly priced at 110.491 compared with 108.863 on Monday; while the Transocean series C 1.5% convertible due 2037 was at 111.13, compared to 109.348 on Monday.

Transocean common stock (NYSE: RIG) closed up by $5.34, or 3.8%.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.