VeriFone drops outright, expands on hedge after warning; NetApp eyed; Patriot edges higher

By Rebecca Melvin

New York, May 25 - Convertibles remained under pressure along with the broader markets on Friday as focus was still glued to Europe's sovereign debt problems. But there were a few bright spots as market action quieted ahead of the long, holiday weekend for Memorial Day.

VeriFone Systems Inc. fell outright, but were better by as much as 6 points on a dollar-neutral, or hedged, basis after the San Jose, Calif.-based electronic payments company gave a disappointing third-quarter outlook that torpedoed the underlying shares.

NetApp Inc.'s convertibles remained in focus and traded Friday at 110 versus an underlying share price of $28.82 after the paper dropped Thursday, but the convertibles expanded on a hedged basis on the Sunnyvale, Calif.-based data storage company's disappointing outlook.

Patriot Coal Corp.'s convertibles were creeping higher after getting shot down about 20 points earlier in the week on concerns of possible restructuring, and as refinancing efforts for the St. Louis-based coal producer continue.

But Alpha Natural Resources Inc. was a little bit lower on Friday amid no particular news, a New York-based trader said.

Overall, trading was light as convertibles players began to clear out ahead of the market close for the long, holiday weekend. Looking ahead to next week, DryShips Inc. will report earnings on Wednesday. DryShips' 5% convertibles due 2014 has been a popular issue with convertibles players, but was most recently seen at 72 to 73, having backed off of higher pricing in the middle of the first quarter.

VeriFone gains on hedge

VeriFone's 1.375% convertibles, which mature June 15, 2012, traded down about 5 points outright to 100.25 bid, 100.375 offered versus an underlying share price of about $38. But that represented about a 6-point expansion on swap, using a delta of about 66%, a New York-based trader said.

Shares of the San Jose, Calif.-based provider of electronic payment systems were down $7.39, or 15%, at $37.63 by midsession.

The VeriFone convertibles turned out to be a "good little trade on swap," the trader said.

The bonds, which had been on a delta of about 66%, will now trade on a theoretical delta of about 5% to 10%, but given that the paper matures in a couple of weeks, it will probably continue to trade right around the current level until then.

"It will probably just tick right around here unless something crazy happens on the upside to the shares," a trader said. At the same time, it is more than likely that the earnings posted late Thursday will be the last volatility catalyst for the issue, he said.

In its quarterly results, which exceeded estimates for the reported quarter, VeriFone said that it expects its current quarter to be weaker than expected, with adjusted profit of 68 cents to 70 cents per share on revenue of between $495 million to $500 million.

That is below analysts' expectations for earnings of 70 cents per share on $501.9 million in revenue.

VeriFone reiterated its full-year profit and revenue forecasts, however.

Net income for the second quarter fell to $14.5 million, or 13 cents per share, from $25.2 million, or 27 cents per share in the year-earlier quarter.

Excluding one-time items, the company earned 64 cents per share on adjusted revenue of $479 million, which was up 64%.

Analysts had expected adjusted profit of 61 cents per share on revenue of $471.8 million.

VeriFone blamed currency fluctuations for its missed guidance, saying it would be hurt by strength of the dollar against the euro.

Deutsche Bank, asserting that VeriFone had previously indicated that its results weren't vulnerable to currency fluctuations, reiterated a "sell" rating on the stock. It also noted that VeriFone's free cash flow sank to $13 million in the second quarter from $25 million in the previous quarter.

Last year VeriFone bought Hypercom, a maker of credit card swipe machines, and that purchase boosted sales this past quarter.

NetApp in focus

NetApp's 1.75% convertibles due 2013 traded at 110 versus an underlying share price of $28.82, which compares to 109.245 versus an underlying share price of $28.20 Thursday.

Shares of the Sunnyvale, Calif.-based data storage company were down another 12 cents, or nearly half a percentage point, to $28.70 in late afternoon trading, after falling 12% on Thursday.

Traders are still going to be focused on this name, and will likely be played on a 45% to 50% delta, compared to a slightly lower delta before, a New York-based trader said Friday.

"It's a different play now. People that had them on before and made a few points... may want to monetize that. But it's changing hands and is going to different players," the trader said, referring to the fact that the paper was in the money before and now is edging closer to par ahead of maturity.

The NetApp bonds added 2 to 3 points on hedge as the underlying shares slumped on Thursday.

The bond was not that actively traded on Friday.

Patriot regains some ground

Patriot Coal's 3.25% convertibles due May 31, 2013 was trading in the 60 bid, 62 offered range on Friday, having crept back up during the week from 53 bid, 55 offered on Tuesday, when the bonds slid 20 points.

Patriot shares were better by 4 cents, or 1.7%, at $2.466 on Friday.

Although the overall move in the sector has been painful, "the coal sector has been pretty interesting," a New York-based trader said. "The Patriot bonds have been "sort of creeping up."

There haven't been any new developments in the story since earlier in the week when the shares slid more than 40% on concerns that the company has hired a restructuring adviser.

The week prior, the company announced that a tentative financing commitment had been withdrawn, throwing into doubt whether the company would be able to redeem these convertible bonds, which mature in exactly one year.

The tentative commitment letter for a new revolving credit facility and new term loan facility for $625 million was from Citigroup Global Markets Inc., Barclays Bank plc and Natixis, New York branch.

Also on Friday, Alpha Natural's convertibles were moving a little lower by about 0.5 point, having lost about 3.5 points for the week.

The Alpha Natural convertibles were trading in the 85.25 bid, 85.5 offered range, compared to 85.75 bid, 86 offered on Thursday.

The trader said there was no real news, but he suspected that there was a seller in the market, weighing on the Alpha Natural paper.

"It's kind of a tough situation right now. The political climate is not too positive for it," the trader said of the coal sector. Some recovery could hinge on the November elections, he said, and some could hinge on a rally back in natural gas prices, which would make coal pricing more attractive and stimulate demand.

Mentioned in this article:

Alpha Natural Resources Inc. NYSE: ANR

DryShips Inc. Nasdaq: DRYS

NetApp Inc. Nasdaq: NTAP

Patriot Coal Corp. NYSE: PCX

Peabody Energy Corp. NYSE: BTU

VeriFone Systems Inc. NYSE: PAY

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.