Convertibles lower; General Cable mixed dollar neutral; MF Global slips with straight deal

By Rebecca Melvin

New York, Aug. 2 - After a challenging July for convertibles players, August hasn't gotten off on a very good foot either. Selling hit the convertible bond market on Tuesday as equities slumped for an eighth straight day.

Worries about the U.S. economy and European sovereign debt overshadowed anything and everything else, including a successful U.S. debt ceiling deal by the dreaded Aug. 2 deadline and a number of strong earnings reports.

"The world is for sale today," a New York-based trader said. "High yield is getting hit and converts are getting hit with them."

Not only was high yield getting beaten down, particularly the longer-dated segment, but there was selling in high-grade paper as well. Arcelor Mittal hit the top of the biggest volume names in convertibles trade on Tuesday.

Back in the high-yield space, General Cable Corp. was one of the biggest outright decliners but was mixed on a hedged basis after the Highland Heights, Ky.-based cable maker posted disappointing earnings.

MF Global Holdings Ltd.'s new 3.375% convertibles came in between 0.5 point to 1 point on a dollar-neutral basis with a hew high-yield deal coming "inside the new convert terms" from the New York-based commodities and derivatives dealer. That did not help the new convertible, a California-based convertibles player said.

Meritor Inc.'s 4.625% convertibles traded down to 94.25 versus a share price of $11.50 early Tuesday, which was down from about par.

RTI International Metals Inc. also fell about 5 points outright on a 7% decline in the common stock despite the he Pittsburgh-based titanium producer posting better-than-expected second-quarter profit on strong sales at its titanium mill products division, which it expects to strengthen further.

But Boston Properties Inc. was fairly stable after the Boston-based real estate investment trust posted better-than-expected funds from operations and raised its forecast for the year.

"The market is not looking so hot," a New York-based sellside trader said.

Weighing on markets were continuing weak data coming in on the U.S. economy and worries about the European debt situation. Spain and Italy on Tuesday saw their 10-year yields for both rise about 6% on no particular headlines triggering the selling.

Those fears negated the U.S. succeeding at a political solution for its inadequate debt ceiling.

"That was never an issue," a New York-based trader said about the debt ceiling debate. "They were barking up the wrong tree. It was never a factor; nobody ever thought that they were going to default. But Europe and our own economy" were the sources of worry that caused traders to sell.

Weak July returns

Citigroup's convertibles trading desk reported that "convertibles posted another slightly negative return in July, declining between 0% to 3%, depending on the index."

The convertibles asset class performed in line with equities, but lagged fixed income, as Citi's high-yield index, broad investment-grade index and Treasuries finished the month with gains of between 1% to 2%., Citi's convertibles trading desk analyst Stu Novick noted in commentary published Tuesday.

Compounded outright returns were more than 2% lower in the month, and convertible arbitrage players were off 0.4%, according to the CWB ETF and HFR, Citi's Novick said. For the year to date, outrights are in the red, down by about 2.5%, but arbs remain up however, with a year-to-date return of slightly more than 1%.

General Cable mixed

General Cable's 0.875% convertibles due 2013 moved down about 5 points to 98.9 from 104.7, according to a pricing source.

General Cable's 4.5% convertibles due 2029 traded at 117.5 and were seen lower by about 13 to 14 points outright.

The company's shares dropped $7.07, or 18%, to $32.93 on Tuesday.

"General Cable 0.875% [convertibles] were better, and the 4.5s got worse. The 4.5% convertibles are longer dated," a New York-based sellside trader said.

General Cable, a maker of copper, aluminum and fiber optic wire and cable products, posted quarterly results below expectations, hurt by lower-than-expected volume in some of its markets.

The company expects third-quarter adjusted earnings of 66 cents a share to 76 cents a share, compared with analysts' estimates of 76 cents a share.

Second-quarter net income rose to $37.5 million, or 68 cents a share, from $23.8 million, or 45 cents a share, a year ago. Excluding items, the company earned 77 cents a share.

Revenue rose 27% to $1.53 billion. That compared to what analysts were expecting - $1.6 billion in revenue on 84 cents a share in earnings.

MF Global down dollar neutral

MF Global's 3.375% convertibles traded at 98.5 versus a share price of $7.40 in early trade. Later they were seen at 97.125.

Shares of the New York-based broker ended down 23 cents, or 3%, to $7.15 on Tuesday.

"The new high-yield deal coming inside the new convert terms did not help the new convert," a sellsider said.

MF announced a $300 million offering of five-year notes (Baa2/BBB-) on Tuesday with a possibility of a coupon increase tied to the company's CEO.

There is a covenant that the coupon will increase by 1% if chief executive officer Jon Corzine is appointed to a federal position by the U.S. president and a Senate confirmation is done prior to July 1, 2013. The interest rate can also be adjusted if the company's debt rating is downgraded.

The notes feature a change-of-control put at 101%.

The notes are expected to be priced in the next couple of days.

Jefferies & Co. is the bookrunner.

Proceeds are being used to repay at least $100 million of outstanding debt under a liquidity facility and for general corporate purposes, including working capital for broker-dealer subsidiaries.

Mentioned in this article:

Arcelor Mittal NYSE: MT

Boston Properties Inc. NYSE: BXP

General Cable Corp. NYSE: BGC

Meritor Inc. Nasdaq: MTOR

MF Global Holdings Ltd. NYSE: MF

RTI International Metals Inc. NYSE: RTI

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