Convertibles mostly quiet; WellPoint puts in notably strong week; Home Inns drops on swap

By Rebecca Melvin

New York, Oct. 5 - The convertible bond market was quiet Friday, with traders digesting monthly jobs data showing a surprising downtick in the unemployment rate, and ending a week that was slower than usual, with the exception of activity in the new WellPoint Inc. convertible, market sources said.

WellPoint's $1.35 billion of 2.75% convertibles traded up about 1.5 points in addition to the first day move on Wednesday, leaving it at 103.5 outright on Friday.

The week's other new issue, Ares Capital Corp.'s 4.75% convertibles, which priced at a discount of 99.25, was not a notable trader, market sources said.

Home Inns & Hotels Management Inc. turned heads this past week. The Home Inns 2% convertibles of the Shanghai-based hotel chain are a risk play/swap name that has come in about 5 or 6 points in the past 10 days amid no specific news, a New York-based trader said.

Elsewhere, Amarin Corp. plc was mentioned as a possible name of interest, with the underlying shares of the Dublin-based drug developer recovering from a midweek downgrade.

Overall, the first week of the fourth quarter saw some of the convertible bond market's in-the-money names creeping down in terms of valuation on generally low volatility, and credit-oriented, investment- grade paper better to buy, a New York-based trader said.

A second trader, also based in New York, said that some of the yield names including Polish vodka maker Central European Distribution Corp. were a little bit better as investors reached for risk.

But in general, it was a slower-than-normal week, sources said.

It's a continuation of the recent theme: large cap, credit names were better to buy, while in-the-money were flat to modestly lower, or better for sale, on a valuation basis, largely due to the declining volatility, a trader said.

There isn't concerted selling; it's "more like a slow leak," with valuations slipping as trader account for mark to market risk.

"They are modeling lower with lower vol. assumptions; and people are marking their positions down, but there's not a lot of selling," he said.

Yield-y, or credit-oriented names, on the other hand, including short-dated, investment-grade names like SanDisk Inc., have been the market focus for several weeks and market breadth has suffered because of it. Some 40% of flows have been in the investment-grade names, the trader said.

Meanwhile, attention was beginning to turn toward earnings season, which gets underway next week. There will be vol. events related to earnings reports to be sure, and in theory that's good for some of these names. But earnings season for a good chunk of the convertibles universe doesn't get going for another few weeks, and in the meantime, there's the mark to market risk.

In economic news, the jobs data for September showed that nonfarm payrolls rose by 114,000 jobs, which was a modest gain, with August numbers revised higher to a 142,000 gain, the Labor Department reported Friday.

There was a gain of 873,000 people who said they either rejoined or sought to rejoin the labor force last month, a huge jump that was reported to be the biggest increase in 29 years.

The unemployment rate fell to 7.8% from 8.1%.

A convertibles trader said he "was not fooled" by the jobs data.

"I don't put a lot of faith in the household survey, and there are seasonal adjustments in there. There wasn't a material change to the workforce utilization rate, especially against the fact that we've had two months of back to back declines in critical indicators like durable goods, which suggests an economy treading water and heading into recession," the trader said.

WellPoint puts in solid gain

WellPoint's 2.75% convertibles have added about 1.5 points to 2 points on a hedged basis since issue, ending Friday at 103.5 against a share price of about $61.22.

"Not including the first-day move, the issue traded up 1.5 points," a trader said, referring to the dollar-neutral, or hedged, move.

The paper has a delta of about 70%.

The Indianapolis-based health benefits company priced $1.35 billion of the new debentures after the market close Tuesday to yield 2.75% with an initial conversion premium of 25%.

The Rule 144A debenture has a $150 million over-allotment option and was sold via joint bookrunners Credit Suisse Securities (USA) LLC, Bank of America Merrill Lynch and UBS Investment Bank.

Home Inns falls

Home Inns' 2% convertibles due 2015 were 83.5 bid, 84.5 offered versus an underlying share price of $26.30 Friday, which was down from 88 versus a share price of $24.82 previously.

Home Inns' shares closed Friday down 79 cents, or 2.9%, at $26.30.

The $184 million convertible issue priced December 2010 when the stock was $41.14.

The bonds have come in 5 to 6 points on a hedged basis in the last week and a half, a trader said.

There was no obvious reason behind the retrenchment, the trader said, suggesting perhaps that the stock borrow had gotten worse.

"It may have been just one seller and there's not a lot of liquidity," he said.

Amarin in focus

Amarin's 3.5% exchangeables due 2032 were seen at 168.4 versus an underlying share price of $12.52 late Friday, according to a New York-based sellside analyst.

The paper was also quoted at 166 bid, 166.75 offered versus an underlying share price of $12.15, which is where the shares closed Thursday, according to a trader.

Shares of the Dublin-based drug developer added 37 cents, or 3%, to $12.52.

"The common has recovered from a downgrade and people are chirping it might get bought this weekend," a West Coast-based trader said.

Other market sources said they hadn't heard the latest takeout chatter around Amarin. But the company has been the subject of such speculation previously.

On Wednesday, shares fell after a Wedbush analyst downgraded the stock to "neutral" from "outperform," and cut his share price target to $15 from $22, saying the likelihood of Amarin being acquired by a larger drugmaker is decreasing.

Mentioned in this article:

Amarin Corp. plc Nasdaq: AMRN

Ares Capital Corp. Nasdaq: ARCC

Central European Distribution Corp. Nasdaq: CEDC

Home Inns & Hotels Management Inc. Nasdaq: HMIN

WellPoint Inc. NYSE: WLP

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