Convertibles weaken with equity slump; MF Global 'gets smoked' on earnings disappointment

By Rebecca Melvin

New York, Oct. 25 - Earnings news was a main driver of convertible bond trading early Tuesday, with the pummeling of MF Global Holdings Ltd. a top story there. But overall selling set in later in the session as equities slumped.

"There was a decent amount of flow this afternoon," a New York-based sellside trader said. "It felt a little weaker going into the close."

Equities snapped a three-day winning streak with a sharp sell-off amid fading optimism that European leaders are close to hammering out a significant solution to the region's debt crisis.

Commodity and derivatives broker MF Global plummeted after the New York-based brokerage firm, hit by turbulent markets and saddled with an uncomfortable amount of European debt, reported a wider fiscal second-quarter loss that missed estimates.

MF's 3.375% convertibles due 2018, which priced three months ago, were quoted at 48 bid, 51 offered and settled around 50, sources said. That paper priced at par on July 28.

MF's two other convertible issues were also sharply lower in active trade.

The 1% convertibles of Anixter International Inc. were pulled into trade and several points higher outright after the Midwestern-based communications parts supplier reported better-than-expected third-quarter earnings.

Meanwhile, the convertibles of mortgage insurer Radian Group Inc. remained fairly active and held their ground above the 50 mark in the early going despite pressure on its sector following the seizure of mortgage rival PMI Group Inc.

The convertibles of a third mortgage insurer, MGIC Investment Corp., were also a few points higher at midsession at 60 from 57.

Amgen Inc.'s convertibles were unchanged for much of the session after the Thousand Oaks, Calif.-based biotech giant posted better-than-expected third-quarter earnings and slightly higher guidance.

Clearwire Inc.'s convertibles have been rising steadily for the last several days since rumors last week that MetroPCS was in talks to purchase a portion of the Kirkwood, Wash.-based company's spectrum. It was unclear whether those rumors continued to impact the distressed bonds on Tuesday, which traded around 37.5.

The 4.625% convertibles of Meritor Inc., a Troy, Mich.-based original equipment manufacturer, have also improved over the past couple of days. They traded at 83 versus an underlying share price of $9.05 on Tuesday, compared to 80.75 versus an underlying share price of $8.20 on Friday, according to a New York-based sellside analyst.

MF Global tanks

Without a doubt, the story of the day was MF Global.

MF's 3.375% convertible senior notes due 2018 traded at 48.5, which was down 17 points outright, and were quoted at 48 bid, 51 offered versus an underlying share price of $2.25 on Tuesday after a Moody's Investors Service downgrade and disappointing earnings report.

The MF 3.375% convertibles settled right around 50.

MF Global's 1.875% convertibles due 2016 traded at 47.5 and also at 49, which was down 18 points outright, and were quoted 47.5 bid, 50.5 offered versus the same $2.25 share price.

There was a lot of trading volume in the two issues.

The MF 3.375% was issued in July, and the MF 1.875% convertible came six months earlier in February 2011. Goldman, Citi and Deutsche Bank brought the first issue, and Goldman and Citigroup brought the second one.

MF Global has a third convertible issue: a 9% convertible note due 2038, and that paper ended the day at about 72 after having been up at 95.

During the session, the paper was called 65 bid, 80 offered by one sellsider.

Shares of the New York-based dealer-broker plunged $1.69, or 48%, to $1.86 on extremely heavy volume.

"They got smoked," a Connecticut-based sellsider said.

He said that in early trading the paper was quoted against the underlying stock, but later it looked as if it was primarily trading outright.

One trading source said that the MF 9% notes were offered at 90 and that they were quoted recently versus the stock.

"But generally when it's a credit event, conventional hedges don't work," the trader said referring to the downgrade and weak quarter.

Another source said that the action seemed like an overreaction, "but in that business, perception is important. Otherwise your customers stop trading with you."

MF's misery

MF reported a wider quarterly loss of $186.6 million in its second fiscal quarter, down from $38.8 million in the same period a year earlier because of low trading amid market turbulence and weak capital markets.

Revenue fell 14%. The company also took charges related to deferred tax assets.

On Monday, Moody's downgraded MF to Baa3 from Baa2, citing the current low-interest environment and volatile capital markets conditions, which made it unlikely that MF Global will be able to achieve the financial targets that Moody's had previously said were required for the Baa2 rating. The rating is under review for possible further downgrade.

Last week, the three MF convertibles declined after headlines that regulators were requiring the broker dealer to increase its net capital due to its European debt exposure. As of Sept. 30, MF Global maintained a net long position of $6.3 billion in a short-duration European sovereign portfolio financed to maturity (repo-to-maturity), including Belgium, Italy, Spain, Portugal and Ireland.

The MF 9% and MF 3.375% convertibles both came in 2.5 points dollar neutral by the end of last week, and the non-putable, lower coupon, 1.875% convertible came in 6 points, according to Citigroup's convertibles trading desk commentary.

The company is run by Jon S. Corzine, former head of Goldman Sachs, former senator and former governor of New Jersey. It has been expected that the high-profile chief executive would help shares rise as he restructured the outfit, but he has presided over a steep contraction.

Regarding the results, Corzine said, "Reflecting the stressed markets in the quarter, we deliberately chose to reduce overall market exposure in most principal trading activities and focused on preserving capital and liquidity.

He went on to say in the release, "We also used the dislocation in the markets to add quality people for strategic roles, as well as expand our client relationships across our businesses. We were particularly pleased with the repositioning of our mortgage, credit and foreign exchange businesses; the performance of our commodities group; and the common alignment of our brand to strategy. These efforts reflect positively on our ability to execute and deliver competitive returns to shareholders in the quarters ahead."

Regarding MF's exposure to European debt, Corzine said that the company's portfolio is "fully financed," and he is confident that it can continue to manage the exposures successfully until they mature in December 2012.

Clearwire strengthens

Clearwire's 8.25% convertibles were seen at about 37.5 at the close, according to one trader, and they were quoted as having traded at 39 versus an underlying share price of $1.65 by another pricing source.

The first trader said he hadn't seen them that high on Tuesday, but the move up was still significant. On Friday, there were outright trades of the Clearwire convertibles at 34.

"I'm not sure why they are moving up," the trader said, reluctant to tie the move to rumors that surfaced last Thursday that MetroPCS was talking with the beleaguered Clearwire about buying some of its spectrum.

Clearwire shares have moved up about 18% from $1.39 from the middle of last week.

Mentioned in this article:

Amgen Inc. Nasdaq: AMGN

Anixter International Inc. NYSE: AXE

Clearwire Inc. Nasdaq: CLWR

Meritor Inc. Nasdaq: MTOR

MF Global Holdings Ltd. NYSE: MF

MGIC Investment Corp. NYSE: MTG

PMI Group Inc. NYSE: PMI

Radian Group Inc. NYSE: RDN

© 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.