Medtronic, Amgen, EMC all active as investors run for cover; trading volume stays high

By Evan Weinberger

New York, July 27 - Volume was heavy in the convertibles market for a summer Friday, the day after the National Association of Securities Dealers Trace system tracked the highest dollar-volume of trades since the system began tracing convertibles in January 2005.

The $4.6 billion traded Thursday - MarketAxess had the number at $4.3 billion - was more than twice the daily average of $1.9 billion.

Speculation as to the reason for the increased activity centered on fund managers trying to get positioned in convertibles they thought were safer than the stock markets, which experienced another epic down day Friday.

"It is/was folks finally realizing that the names they held dear actually have substantial credit risk and they wanted out," one trader said in an e-mail message.

In Friday's busy session, several big names in health care and computers, including Medtronic Inc., Amgen Inc. and EMC Corp. were active Friday as investors searched for strong credit and short puts as a life vest in stormy markets.

Equities drilled lower Friday, including a nosedive in the last 20 to 30 minutes of trading on the Dow Jones Industrial Average. The Dow dropped 208.10 points, or 1.54%, to close at 13,265.47. The Nasdaq closed at 2,562.24 points, a drop of 37.10 points, or 1.43%. This followed Thursday's 311.50 point, or 2.26%, Dow plunge and the Nasdaq's 48.83 point, or 1.84% sag.

News that the gross domestic product had risen 3.4% in the second quarter - the strongest growth in a year - was no match to investor fears over widening credit spreads, trouble in the mortgage sector and an increased perception of a corporate credit crunch.

There were no new issues Friday.

What does high volume mean?

With word that anywhere from $4.3 billion to $4.6 billion changed hands in the convertibles market through over 1,500 trades Thursday, it is even more clear that convertible and mixed fund managers were looking for convertibles from companies with good credit and with short puts or maturities as a safe place to stash money while the stock markets founder.

"I imagine people were taking down their risk exposures. Credit spreads widened considerably," one buyside fund manager said.

Dollar volumes started building over the course of the week, with Wednesday trading hitting $3.7 billion with nearly 1,700 trades, according to MarketAxess.

That trend links convertibles trading to the stock market slump, because the new deals priced over the course of the week did not excite investors. "The new issue calendar has not featured many attractive new issues (ex. [Newmont Mining Corp.]) recently," the fund manager said.

A trader added that the convertibles jockeying also coincided with normal end-of-the-month bookkeeping.

If the stock markets continue to crumble, however, traders and analysts expect the high volume to continue as investors and fund managers look for safe bets.

"My sense is that this phenomenon is continuing, but because it's a Friday I'd expect the volume to be down from yesterday," a sellside analyst said.

That was mostly true. The high volume did continue Friday, but at a Friday pace. MarketAxess reported that trading dollar volume stood at $2.4 billion with 1,100 trades as of around 2 p.m. Friday. That was still significantly higher than Trace's $1.9 billion daily average.

The NASD's Trace system began tracking convertibles on Jan. 4, 2005.

So what traded Friday?

The high dollar volume for Friday saw investors heading to what they assume will be safe convertibles. The consensus seems to be building that the safe bet is convertibles that mature or have puts relatively soon and come from solid companies with good credit and good outlooks.

Perhaps the convertibles that best exemplified this on Friday were two convertibles linked to Minneapolis medical device maker Medtronic.

The company showed its strength Friday by announcing a $3.9 billion acquisition of Sunnyvale, Calif.-based spinal care company Kyphon while several other mergers were pulled or were rumored to be on the ropes.

The two issues that moved were its 1.5% convertible senior notes due 2011 and its 1.625% convertible senior notes due 2013. Neither of the convertibles have puts, but were considered to be short maturities. By contrast, the company's 1.25% convertible senior debenture due 2021 did not trade Friday, according to trace.

The Medtronic 1.5% convertibles finished the day at 105.10 versus a closing stock price of $50.81. They began the day at 106.029 versus $50.92. The 1.625% convertibles finished the day at 104.625 versus $50.81. The convertibles began the day at 106.625 versus $50.92.

Medtronic stock (NYSE: MDT) lost 11 cents, or 0.22%, on the day.

Amgen's 0.125% convertible senior notes due 2011 were active Friday, as were the 0.375% convertible senior notes due 2013. Neither of those have any puts.

By contrast, the Amgen zero-coupon LYONs due 2032 did not trade Friday. Those convertibles have their first put in 2010.

The Amgen 0.125% convertibles closed the day at 92.2218 versus a stock price of $55.62. They closed Thursday at 92.657 versus $56.16.

The 0.375% convertibles closed Friday at 90.0541 versus $55.62 after closing Thursday at 90.50 versus $56.16.

Shares in the Thousand Oaks, Calif.-based biotech firm (Nasdaq: AMGN) dropped 54 cents, or 0.96%.

Both EMC convertible senior notes carry a coupon of 1.75%. One issue is due 2011, the other 2013. Neither have puts.

The 2011 convertibles closed at 129.76034 versus $18.35. They finished Thursday at 128.954 versus $18.39.

The 2013 convertibles finished Friday at 130.4529 versus $18.35. They closed Thursday at 131.1123 versus $18.39.

Shares in the Hopkinton, Mass.-based hard drive maker lost 4 cents, or 0.22% Friday.

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