Convertibles mostly steady; deep in-the-money names better bid; Nortel remains active

By Rebecca Melvin

New York, May 15 – U.S. convertibles traded quietly Friday with valuations essentially unchanged.

But some deep-in-the-money names remain notably well bid as market players continue to weigh the potential for more buybacks and/or exchange deals.

“Many deep in-the-money names are 0.75 point to a point higher than they were a month ago,” a New York-based trader said. “That’s a pretty big move for bonds that don’t generally move.”

Merrimack Pharmaceuticals Inc. was one such name on Friday. The 4.5% convertibles due 2020 were up 6 or 7 points on an outright basis to 213 on a 2.8% rise in the underlying shares of the Cambridge, Mass.-based biopharmaceutical company.

Market players have been emboldened to add to positions or get into new names in hopes that the issuers of that debt are looking at lowering debt service costs and will do deals to buy back the bonds, the trader said.

HeartWare International Inc. priced recently $148 million of 1.75% convertibles, of which a little more than half was earmarked to exchange for older paper. A big chunk of Anthem Inc.’s $1.76 million of units was earmarked to take out about $575 million face value of its outstanding 2.75% convertibles. And earlier this year, Microchip Technology Inc. priced $1.5 billion 1.625% convertibles, of which about half was used to repurchase $575 million face value of an old issue.

Market players generally put together a portfolio of names that are likely or eligible to be exchanged in hopes that issuers will act on one or two of them, the trader said.

Market players are also hoping for more new issuance. There were rumblings that a flurry of new paper might be forthcoming as soon as next week as earnings season draws nigh.

Ahead of the summer slowdown, the end of May and June have typically been good months for convertibles issuance, sources said.

So far this year there has been a solid pace of issuance, so the potential is good. According to Prospect News data, there has been $18.76 billion in 40 deals, compared to $16.6 billion in 44 deals for the same period of 2014.

But a lot of the issuance has been in the form of mandatory or preferred shares, which are not as appealing for hedged players, and a good number of deals have been smaller deals considered illiquid and of limited use to hedged players.

“It’s interesting, so many of the deals have been small, health care issues or jumbo deals,” a New York-based syndicate source said.

A second source said, “The market really does need new paper. I’m just afraid that things are pretty desperate and that may encourage underwriters to push the envelope in terms of pricing.” The SunEdison Inc. tranches that priced this week, for example, came at the rich end and beyond the rich end of talked terms.

“We’re not particularly constructive on either of the bonds,” the trader said of the SunEdison paper, citing credit concerns and the atypically longer maturities of the notes, which are for eight and 10 years.

In the broader markets on Friday, equities were narrowly mixed following a rally Thursday. Economic data has been mixed. The Philadelphia Federal Reserve said Friday the outlook for growth in the U.S. economy over the next three years looks weaker now than it did in February, according to 44 forecasters surveyed by the bank.

The forecasters predict real GDP will grow at an annual rate of 2.5% in the second quarter, which is down from a 3% forecast in February. Its forecast for third-quarter growth is at 3.1%, which was up from 2.8%, and the forecast for full-year growth is at 2.4%, which is down from 3.2%.

Many of the names in trade Friday represented follow-on action from earlier in the week.

The convertibles of bankrupt Nortel Networks Corp. were active again on Friday on the patent library news, a New York-based trader said. Nortel’s 1.75% convertible notes, which came due in 2012, changed hands on Friday at 85, which was up 0.9 point on the day but still down from about par at the beginning of the week.

“The ruling changed the perception of what bondholders will recover,” a trader said. “It’s still open to interpretation and will be volatile in the coming weeks.”

Ctrip.com International Ltd.’s 1.25% convertibles, which were busy on Thursday, recouped a bit after slipping later Thursday from its highs, trading at 117.77 early Friday, according to Trace data. That paper settled Thursday at 115.6 compared to 111.2 previously as shares of the Shanghai-based internet travel site jumped on an earnings beat and positive guidance.

Mentioned in this article:

Anthem Inc. Nasdaq: ANTM

Ctrip.com International Ltd. Nasdaq: CTRP

HeartWare International Inc. Nasdaq: HTWR

Marrimack Pharmaceuticals Inc. Nasdaq: MACK

Microchip Technology Inc. Nasdaq: MCHP

Nortel Networks Corp. OTC: NRTLQ

SunEdison Inc. Nasdaq: SUNE

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