Convertibles weaken: U.S. Steel, MGM, Annaly Capital down; NetApp eyed after earnings

By Rebecca Melvin

New York, May 23 - Convertibles were weighed down early Wednesday along with the broader markets on fears over Europe's economic crisis, with many names weaker by 0.25 point to 0.5 point as buyers sat on the sidelines and many dealers sought to lighten up positions, market players said.

The equity markets staged a late rally, reversing sharp early losses on headlines that indicated there might be some headway being made by political leaders to keep Greece in the euro zone.

"Today was heavy on the sellside - not so much from clients as from dealers just trying to sell," a New York-based sellsider said.

The Wednesday session contrasted with Tuesday's market, when there was good, two-way flow. "It was one-sided today. Most of it had to do with the market being down a lot early," the sellsider said.

United States Steel Corp. weakened Wednesday even though shares of the Pittsburgh-based steelmaker reversed early losses to close higher by 25 cents, or 1.2%.

Like U.S. Steel, MGM Resorts International was called lower by 0.25 point on swap, and Annaly Capital Management Inc. was lower by 0.25 point to 0.5 point.

NetApp Inc.'s 1.75% convertibles due 2013 were lower by 4 points outright to 117 during the session. The Sunnyvale, Calif.-based data storage company posted a disappointing outlook at the market close, and shares sank in after-hours trade, but the bonds were expected to expand on Thursday on the weaker shares.

Meanwhile, Patriot Coal Corp.'s convertibles steadied on Wednesday and traded little changed following a 20-point slide on Tuesday on concerns of possible restructuring and as refinancing efforts for the St. Louis-based coal producer continued.

Fear tinged the market tone on Wednesday as investors weighed the possibility that Greece might exit the euro zone.

"The European mess is one to keep a close eye on. If Greece leaves euro, I think you could see 10-year Treasuries at 1.5% or lower," a New York-based trader said.

While market tone was negative, market action was muted: "We were watching it," a trader said of the early equity selloff.

That selloff reversed course late in the day as the Euro summit got underway and there were reports that the leadership of Italy and France met and both jointly backed euro bonds.

U.S. Steel slips

U.S. Steel's 4% convertibles due May 2014 were last seen 103.875 bid, 104.25 offered versus an underlying share price of $22.03.

That level looked to be down about 0.25 point on swap compared to Tuesday's close at about 104.5.

U.S. Steel shares ended higher by 25 cents, or 1.2%. But that was a lot better than earlier near 5% losses. Materials companies, like U.S. Steel, are vulnerable to the global economy and what impact a weaker Europe would have on demand.

Likewise, MGM's 4.25% convertibles due 2015 were seen in 0.25 point early in the day. Trace data had the paper last down 1.625 points at 98; and Annaly Capital Management's 4% convertibles due 2015 were seen down 0.25 point to 0.5 point based on earlier markets.

"Not a lot of stuff was active late," a trader said.

NetApp seen expanding

One trader said that his desk anticipated that NetApp's 1.75% convertibles due 2013 would expand early Thursday amid weaker shares. He said he hadn't seen any post close trade in the bonds after the company's earnings report.

Shares of the Sunnyvale, Calif.-based data storage company slumped by 19% however in after-hours trade.

The paper was seen holding up because the company has plenty of cash to support the bonds. But the company "blew their numbers."

In fact, the company actually beat estimates for its fiscal fourth-quarter profit by 2 cents. But its outlook for fiscal first quarter was abysmal. The company forecast earnings of 10 cents to 15 cents a share, on revenue of $1.4 billion and $1.5 billion. Excluding one-time items, NetApp forecast a profit between 34 cents and 39 cents a share. Analysts had forecast the company to earn 59 cents a share, on $1.61 billion for NetApp's first quarter.

For the just passed quarter, NetApp reported profit of $181 million, or 47 cents a share, on revenue of $1.7 billion, which compared to $161 million, or 40 cents a share, on $1.43 billion in revenue in the year-earlier period.

Excluding items, NetApp would have earned $252 million, or 66 cents a share, which compared to analysts' estimates of 63 cents a share on $1.68 billion in revenue.

"They have $5 billion in cash, plenty to support the bonds," a trader said.

Patriot steadies

Patriot Coal's 3.25% convertibles due May 31, 2013 was seen last at 54.5 bid, 57.5 offered, which compared to Tuesday's settle at 53 bid, 55 offered.

Early in the session the Patriot convertibles traded at 57 and later they traded at 56.

Sources said they looked to have settled down following Tuesday's slide.

Patriot shares recouped 48 cents, or 22%, in the late rally to $2.66, following a 35% drop on Tuesday.

At one point Tuesday, the shares slid more than 40% and were halted on concerns that the company has hired a restructuring adviser. A company news release Tuesday afternoon cited continuing efforts at refinancing. That seemed to stem the slide and pull the securities off their lows. The company also said it has enlisted the involvement of private equity firm Blackstone Group.

During the session, Standard & Poor's said it lowered Patriot Coal's corporate credit rating to CCC from B-, along with the rating on the company's senior unsecured debt to CCC from B-, and Moody's Investors Service said it placed the company's Caa1 corporate family and probability of default ratings under review for possible downgrade.

S&P's said the recovery rating remains 3, reflecting 50% to 70% expected recovery in a default, and the ratings remain on CreditWatch with negative implications, where they were placed in January.

The CreditWatch listing reflects expectations that Patriot's proposed refinancing of its existing convertible notes and additional liquidity to support operations is highly uncertain based on current market conditions, S&P said.

The ratings reflect the combination of what is considered to be the company's weak business risk profile and highly leveraged financial risk profile, S&P said.

The company has significant exposure to the high-cost Central Appalachia region and faces the inherent risks of coal mining, the agency said.

The company also faces risks inherent in finishing the build out of its mines on time and budget, its lack of operating diversity and the high fixed cost nature of longwall mining, S&P said.

Moody's said that the company's Caa2 senior unsecured note rating was placed under review for possible downgrade, and its speculative grade liquidity rating of SGL-4 was affirmed.

Moody's said the review is a result of the delay in finalizing Patriot's new $625 million credit facility and the potential implications on the company's liquidity position.

Mentioned in this article:

Annaly Capital Management Inc. NYSE: NLY

MGM Resorts International NYSE: MGM

NetApp Inc. Nasdaq: NTAP

Patriot Coal Corp. NYSE: PCX

United States Steel Corp. NYSE: X

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