Amgen B paper active, lower; Alcoa nears double par; B of A extends gains; EMC, NetApp eyed

By Rebecca Melvin

New York, June 11 - Amgen Inc.'s 0.375% convertibles were active again Thursday and lower for much of the session after both it and the Amgen 0.125% paper traded actively on Wednesday - narrowing a dollar spread between the two issues that had gotten quite wide.

Alcoa Inc. was also active and climbed to near double par, a move attributed to a rise in its underlying shares.

Parity on the Alcoa bonds is 191. "It has a high delta, so it's moving with the stock," a New York-based sellside trader said.

Transocean Inc. was also among the top volume names on Thursday - a spot where it has consistently been of late; although on Wednesday it was noticeably absent from among the top traders.

Bank of America Corp. convertible preferreds were in trade and higher, as its common stock climbed while chief executive Ken Lewis testified before a U.S. House panel on Bank of America's purchase of Merrill Lynch despite Merrill's large losses.

School Specialty Inc. was another name in trade after the Wisconsin-based school equipment and supply company posted a narrower-than-expected loss for its fourth quarter and said its outlook was better than previously expected.

Meanwhile, EMC Corp. and NetApp Inc. were in focus as the two technology-storage-services companies vie to acquire Data Domain, which also specializes in storage hardware, software and services.

EMC's two issues and NetApp's paper was little changed in quiet trade.

Overall "there was a lot of noise but not much trading" Thursday, a New York-based sellside trader said of the session.

Amgen Bs active

Amgen's 0.375% convertibles due 2013 were at 88 to 88.25, compared to 88.75 on Wednesday. But Trace reported a late sale of 89.375.

The B paper, which is generally quieter than the Amgen A convertibles, was the one trading actively on Thursday.

The Amgen 0.125% convertibles due February 2011, or the A paper, traded at a low of 92 on Thursday but ended closer to 94, which was little changed on the day.

The dollar spread between the issues was about 5 points compared to 4.75 points to 5 points on Wednesday and 5.5 points on Tuesday.

Shares of the Thousand Oaks, Calif.-based company slipped in early trading but had recovered before the close. The shares still ended down 23 cents, or 0.5%, at $49.88.

The Amgen trades are a play on rates, a sellsider said. "Right now the largest input into the valuation is the rate curve as opposed to equity. There's not a lot of balance in the name right now, so it's a rate play - one's going down, while the other's going up."

The B's have not been active for a while, but they were very active on Thursday, the sellsider said.

Alcoa at 194

Alcoa's 5.25% convertibles due 2014 traded at 194 versus a share price of $11.75. The Pittsburgh-based aluminum producer's shares gained 73 cents, or 6%, to $12.22 in better-than-average volume.

A month ago, the Alcoa bonds traded at 176 versus a share price of $10.40.

Alcoa and Transocean were among the top volume names in trade, which was not unusual for the convertibles market.

Of Transocean's three convertibles issues, the 1.5% convertibles due 2037, or the C series, was most active on Thursday, trading at 88.25 or 88.30, which was little changed on the day, although they did move around a bit.

Transocean's 1.625% convertibles due 2037, or the A series, were seen at 94.25, and the Transocean 1.5% convertibles due 2037, or the B paper, was at 90.679.

The paper is considered a good credit and it is liquid, but the trade was considered a rate play like Amgen.

Shares of the Switzerland-based offshore oil services company were lower for much of the session but pulled higher late in the day, ending up 70 cents, or 0.8%, at $84.65.

B of A adds as CEO testifies

B of A's 7.25% convertible preferred shares were seen at 870 intraday, a strong showing along with an 8.8% climb in its common stock as chief executive Lewis appeared before the House Committee on Oversight and Government Reform.

The lawmakers were concerned about why Bank of America went through with the Merrill deal, and how government officials including Federal Reserve chairman Ben Bernanke and Treasury secretary Henry Paulson may have strong armed Bank of America to make the purchase, which ultimately required $20 billion of government backing in January to shore up.

EMC, NetApp vie for Data Domain

EMC's 1.75% B paper due 2013 was at 100.375 on Thursday, little changed from Wednesday, and the EMC 1.75% A paper due 2011 was at 101.875, also little changed.

The EMC B paper is generally more active than the EMC A paper.

It has a high bond floor and parity of about 81. "If the stock goes lower, they would work out nicely," a sellside trader said.

The NetApp 1.75% convertibles due 2013 were down about half a point at 86.75.

Like the EMC paper, NetApp is a large issue, totaling $1.26 billion.

NetApp made its initial $25 cash and stock offer for Data Domain on May 20. EMC matched the offer with a $30 all-cash offer on June 1, and on June 3 NetApp matched EMC's offer with $30 in cash and stock, of which $16.45 is cash.

According to Barclays Capital, EMC is determined to outbid for Data Domain and could easily raise its offer to as high as $35 and maintain earnings per share accretion by 2010.

An outcome on the competitive bidding is expected next week, according to Barclays Capital convertibles analyst Peng Cheng.

"It is possible NTAP shares could come under some pressure in the near term due to concerns regarding how much it will need to pay in order to eventually acquire DDUP, and as investors contemplate NetApp's business momentum without the benefit of a deal," Barclays analysts said in a research note.

EMC analysis

For convertible arb players, Barclays recommended the EMC A paper as a suitable play given its 2.5-year put/call and the strong credit, highly convex upside/downside potential, positive carry, relatively short duration, high bond floor and high realized vol, plus the expectation of continued volatility driven by macro conditions and the potential acquisition.

For outright convertible investors, Barclays recommends EMC Bs for new investors and a swap out of the EMC As into the Bs for existing holders.

"Although it is longer dated relative to the As, we prefer the Bs from an outright perspective because of its longer call protection (4.5 years vs. 2.5 years) and higher delta. The Bs enable investors better participation in any potential broader recovery while only being slightly worse than the As when it comes to downside protection. Given EMC's strong credit profile we are comfortable with the 4.5-year put in the Bs and are willing to give up the 2.5-year put in the As in return for the higher upside potential in the Bs," the Barclays analysts wrote.

The analysts also recommend swapping out of NetApp into the EMC Bs given the relative attractiveness of EMC B, with its lower premium (25.8% versus 27.4%), better credit profile, higher delta and longer duration that affords better upside participation.

For outright equity investors, Barclays recommended swapping out of the common stock and into the convertibles to maintain exposure to the names but dampen downside.

Barclays equity analysts believe that the potential deal would be neutral to positive for EMC but could present challenges for NetApp due to the increased purchase price.

Mentioned in this article:

Alcoa Inc. NYSE: AA

Amgen Inc. Nasdaq: AMGN

EMC Corp. NYSE: EMC

NetApp Inc. Nasdaq: NTAP

School Specialty Inc. Nasdaq: SCHS

Transocean Inc. NYSE: RIG

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