EMC moves 'in line' on strong earnings; Petroplus gyrates on default news; Peabody slips

By Rebecca Melvin

New York, Jan. 24 - EMC Corp. was a top trader in the convertible bond market on Tuesday after the Hopkinton, Mass.-based IT infrastructure provider reported stellar quarterly results that beat analysts' estimates on strong demand for its storage products. The bonds were seen having gained in line with the underlying shares.

Petroplus Holdings AG's 4% convertible sank to 29 as shares plunged on headlines that the Switzerland-based refiner received a notice of acceleration on its revolving credit facility, constituting an event of default. The company said it plans to file for insolvency but in exactly what jurisdiction wasn't immediately clear.

Also on earnings news, Peabody Energy Corp.'s convertibles traded down just slightly on a dollar-neutral, or hedged, basis after weak earnings that missed estimates and lowered guidance.

There wasn't much action in the convertibles of other coal sector companies, such as Alpha Natural Resources Inc., although most coal stocks were lower.

Weakness in the coal sector may have been related to uncertainty about possible energy policy plans laid out by president Barack Obama in his State of the Union speech Tuesday night, which may exclude the coal sector, a New York-based convertibles analyst suggested.

Also in the energy patch, Apache Corp.'s mandatory convertibles were quiet in the face of news that the Houston-based oil and natural gas exploration and development company plans to raise $2.25 billion in debt to fund a pending acquisition of Cordilla Energy Partners III LLC.

Overall, the convertibles market was mostly flat although there were pockets of profit-taking after strong gains for much of the month, sources said.

"It was really a mixed bag; you've got guys both lightening up and reaching for stuff," an analyst said.

A second sellsider said, "It's been a strong month for returns; it's been a good performing month for convert arb, and now there are certain types of names that are becoming marginal and people are looking to lighten up."

Marginal refers to the bonds starting to look like fair value theoretically based on credit and volatility.

EMC lifts with shares

EMC's 1.75% convertibles due 2013 traded up to 161 from 155 with a similar rise in the underlying shares after the IT infrastructure company reported strong fourth-quarter results and issued an upbeat outlook for 2012.

The EMC convertibles are deep in the money and "move like equity," a trader said. "Some hedge funds look at them as synthetic puts. They have a decent conversion ratio and move in step with the stock.

Seen as a bellwether for the technology sector, EMC said demand for its storage products remains high and IT spending should continue growing this year.

Chief executive Joe Tucci, who was originally going to step down at the end of 2012, said he would remain in charge into 2013.

EMC sells data-center products for storage and security purposes. Its results have been strengthened by customers seeking efficient ways to store and access very large amounts of documents and media.

EMC reported profit of $832 million, or 38 cents a share, up from $628.6 million, or 29 cents a share, a year earlier. Excluding items such as stock-based compensation, earnings per share were 49 cents, which was higher than the 46 cents per share that analysts estimated.

Revenue rose 14% to $5.57 billion, which was higher than the $5.49 billion analysts expected. Gross margin rose to 20.4% from 19.3%.

The company forecast full-year earnings of $1.70 per share on revenue of $22 billion, compared to $1.71 per share that analysts were expecting on $22 billion in revenue.

The company believes business spending on technology will rise between 3% and 4% this year, despite uncertainty in the global economy that has several data-center rivals worried about corporate demand for high-tech products.

NetApp Inc. for example said in November that some of its biggest customers were taking a break in IT spending in light of macroeconomic worries.

Petroplus sinks

Petroplus' 4% convertibles due 2015 traded down to 29 and then up to 35 and then back to 29 again, a Connecticut-based trader, active in the name, said.

Shares of the Switzerland-based petroleum refiner plunged $1.23, or 84%, to $0.24 on Tuesday.

One trader, for whom Petroplus was an active name, said questions about where the company would file for insolvency caused gyrations in the bond price.

The market didn't want to see the company file in Germany, he said, because administrators in that country were not known for ruling favorably for investors.

Petroplus said it decided to file for insolvency or composition proceedings in Switzerland as soon as possible, according to a company news release.

Similar insolvency preparations are being taken by Petroplus subsidiaries in various jurisdictions, the release said.

The company said acceleration of the revolver constitutes an event of default under Petroplus Finance Ltd.'s $1.75 billion total principal amount of outstanding senior notes and convertible bonds.

The company said the filing of insolvency proceedings by any guarantor of the senior notes, including Petroplus Holdings, Petroplus Refining and Marketing Ltd. and Petroplus Holdings France SAS, will result in acceleration of the senior notes.

Petroplus said negotiations with its revolver lenders to reopen credit lines needed to maintain operations and meet financial obligations have not been successful. The company has also been trying to arrange alternative financial and liquidity facilities.

The lenders served notices of acceleration, began enforcement actions and appointed a receiver for Petroplus Marketing AG's assets in the United Kingdom.

Zug, Switzerland-based Petroplus is the largest independent refiner and wholesaler of petroleum products in Europe.

Peabody slips slightly

Peabody's 4.75% convertible junior subordinated debentures due 2066 were marked at the end of the session at 104.25 bid, 105.25 offered by one large New York bank. That was down 11/16 on a dollar-neutral basis, a bank source said. The bond "traded some," he said.

Peabody shares were down 65 cents, or 1.7%, to $36.86 in heavy volume on Tuesday.

The St. Louis-based coal producer reported fourth-quarter adjusted income of 98 cents a share, up from 87 cents a share in the year-earlier period. Revenue rose to $2.25 billion from $1.79 billion.

Analysts, on average, had expected the coal producer to earn $1.33 a share on revenue of $2.37 billion.

Peabody also said it expects to post an adjusted first-quarter profit of 50 cents to 75 cents a share, short of analysts' expectations of $1.18 a share.

Other coal sector convertibles weren't heard in trade, including Alpha Natural's 3.25% convertibles due 2015, or the old Massey paper, and Alpha Natural's 2.375% convertibles due 2015.

Meanwhile, Apache Corp.'s 6% convertible mandatory preferred, with a $50 par, was marked at 56 bid, 56.5 offered versus an underlying share price of $98.38 on Tuesday.

Shares of the Houston-based oil and gas exploration and production company settled lower by 67 cents, or 0.7%, at $97.71 on Tuesday.

"We haven't traded them for a couple of weeks," a market source said.

The company has operations in the United States, Canada, Egypt, the U.K. North Sea, Australia and Argentina.

Mentioned in this article:

Alpha Natural Resources Inc. NYSE: ANR

Apache Corp. NYSE: APA

EMC Corp. NYSE: EMC

Peabody Holdings AG NYSE: BTU

Petroplus Holdings AG Nasdaq: PPHNSW

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