Convertibles turn quiet: Kinross Gold steady; Cogent quiet despite share slump; Kodak adds

By Rebecca Melvin

New York, Jan. 20 - Convertibles quieted down considerably Friday after a flurry of activity Wednesday and Thursday, which evidenced investors' interest in putting money to work in the space and reaching for new and old names, traders said.

Friday's inactivity heading into the weekend was ahead of what is anticipated to be a big earnings week in convertible names next week, they said.

It was a "typical, quiet Friday," a New York-based trader said, adding that volume tends to get "all bunched up in the middle of the week."

A second New York-based trader said of Thursday's session, "There were plenty of bids in the street of names that rarely trade, demonstrating the willingness to reach for paper."

Aside from the typical, large, liquid names that trade back and forth every day, there was very little notable action in Friday's session, the traders said.

Kinross Gold Corp. was a big trader with one firm, but the paper barely moved, holding steady even as the underlying shares remain weak following a slump Monday. The moves followed word that the Toronto-based gold mining company is delaying development of one of its mines and expecting to have a sizable write-down because of it and amid buzz on Friday of it becoming a takeover target, a New York-based analyst said.

There was some interest in Cogent Communications Group Inc., which saw its shares slump after U.S. authorities said they shut down customer Megaupload.com in the latest offensive against movie and music piracy.

The Cogent 1% convertibles due 2027 traded Thursday for the first time in a while, and were inquired about on Friday but didn't trade, sources said.

Neither was Cubist Pharmaceuticals Inc. seen in trade, despite that popular convert name having reported earnings that missed estimates on earnings but beat revenue estimates.

Cubist shares were down 2%, but "nobody seemed to care [on the convertibles]," a trader said. The convert paper was seen marked at the end of the day at 139 76 versus an underlying share price of $39.63.

Eastman Kodak Co.'s convertibles continued to trade however and extended gains on Friday after the Rochester N.Y.-based digital photography company announced it filed for Chapter 11 bankruptcy protection on Thursday.

Busted names doing well

The notable upward moves of late have been prevalent among busted convertibles, or issues that are disassociated from the underlying equity, and more of a credit, or straight bond, play. In contrast, equity-sensitive, low premium convertibles have been lagging the market in step with retreating volatility, one trader observed.

The equity sensitive sphere of the convertible space has lagged the credit sphere for the last three weeks since the start of the new year. For example, tech stalwart NetApp Inc. has sat out the recent surge, with the NetApp 1.75% convertibles due 2013 slipping to about 128 to 129, down from the low to mid 130s.

"It sucks the premium out of them when volatility comes in," a trader said.

A second sellsider said the NetApp paper, with a year and half left to go, is a pure equity play with 12 points of premium.

On the other hand, credit markets have been improving almost daily. Credit default swaps and investment-grade and high-yield indices have all strengthened and are more or less proxies for the convertible market, one trader said.

"It's definitely different from December and even November. The mindset of a lot of funds now is that they are no longer in a position where they have to protect their performance from the prior year. So the bias has been better every day with a few exceptions," the trader said.

Kinross holds steady

The Kinross 1.75% convertible notes due 2028, which mature in a little more than a year, traded Friday at 98 versus an underlying share price of $10.21, compared to 97.75 bid, 98 offered versus an underlying share price of $10.27 on Monday, which had dropped by $2.38, or 18.81%.

Kinross has a very low delta and the bonds aren't associated with the stock moves, an analyst said. It is very short-dated, and on Friday, the company was named as a takeover target in a Bloomberg news report that cited expensive acquisitions in western Africa for making the stock very cheap now.

Cogent in focus

Cogent's 1% convertibles due 2027 were getting a once over after damaging headlines sent its underlying shares down 19%, but the tightly held Cogent convertibles weren't seen in trade.

The bonds, which don't trade frequently, did change hands in a dealer sale Thursday at 90.875.

On Friday, one firm, which isn't active in the name and hadn't traded them Friday, had them marked at 90.5 versus an underlying share price of $15.30.

The shares were hammered on Friday, dropping more than 20%, but settling slightly better at down $3.51, or 19%, at $15.30 on news that the U.S. government shut down one of its customers, a file sharing site called Megaupload.com, and that the Federal Bureau of Investigation had searched its offices.

The government shut Megaupload.com content sharing website on copyright infringement charges.

A convertibles analyst said that despite the indictment, the impact on Cogent wasn't seen by another research shop as being very significant.

"This bond has done reasonably well," the analyst said. "In August, the bonds were at 82 and now they are 89 to 90."

The paper is "reasonably busted, with a delta of 16%," the analyst said.

The small, $92 million Cogent convertible is tightly held, with the top four holders accounting for about 70% of the issue.

Kodak gains again

Kodak's 7% convertibles due 2017 traded up a little again on Friday to 30 bid, 31 offered, from between 28.5 and 29.5 on Thursday after filing for bankruptcy protection.

The paper, which is mainly in the hands of distressed players at this point, was gaining in tandem with the view that Kodak's large portfolio of digital patents are more likely to be sold during bankruptcy than before.

The patent portfolio is seen as having a value of between $1 billion to $2 billion, with some putting the value as high as $2.5 billion.

CRT Capital Group LLC senior analyst Amer Tiwana said in a note published Thursday, "We believe that the level of recovery for the unsecured notes is a function of the eventual realized value of the patent portfolio."

Kodak's Chapter 11 filing is intended to allow it to reorganize around its printers and ink division, and to sell its photo patents, according to the company.

Mentioned in this article:

Cogent Communications Group Inc. Nasdaq: CCOI

Cubist Pharmaceuticals Inc. Nasdaq: CBST

Eastman Kodak Co. NYSE: EK

Kinross Gold Corp. NYSE: KGC

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