Medtronic convertibles trade ahead of maturity; Alcoa flat to up a hair; Colony gains

By Rebecca Melvin

New York, April 8 - The convertible bond market continued to trade in quiet mode on Monday as a lack of volatility dampened enthusiasm for the product, especially at currently high pricing levels.

Medtronic Inc.'s 1.625% convertibles, an issue which matures April 15, was the day's most active issue, trading little changed at between 100 and 101, a New York-based trader said.

"These are going away in a week," the trader said, adding that his desk was focused on that name primarily.

Alcoa Inc. traded some ahead of the aluminum maker's quarterly earnings announcement, which unofficially kicked off earnings season after the market close. The in-the-money Alcoa convertibles were slightly higher outright and in line or higher by 1/16th of a point on a hedged basis during the session ahead of the earnings announcement.

The Pittsburgh-based company beat estimates on earnings, but missed on revenue and held its forecast firm. Shares slipped in after-hours action.

A pair of financial names including private equity firm Ares Capital Corp. and business development company Apollo Investment Corp. traded, according to Trace data.

Ares' 5.125% convertibles of 2016 were in trade at levels that were little changed on a hedged basis, and Apollo's 5.75% convertibles due 2016, which trade outright, were up slightly, market sources said.

Colony Financial Inc.'s 5% convertibles extended gains after a strong debut in the secondary market on Friday for the Santa Monica, Calif.-based real estate investment trust's new paper.

"The new deal traded up to about 107.625," a New York-based trader said. "Other than that and hedging some positions and looking at some new names, it was dead."

At the end of Friday, the new Colony convertible was quoted at 106.375 bid, 106.875 offered versus a share price of $21.74.

Central European Distribution Corp.'s 3% convertible was not heard in trade after the Mount Laurel, N.J.-based vodka maker and supplier formally filed for Chapter 11 bankruptcy protection from creditors on Sunday. The company has a prearranged restructuring plan that has already been approved by most of its bondholders, the company said.

Equity markets started the day lower but reversed losses late in the day. The Dow Jones industrial average ended up 48.23 points, or 0.3%, at 14,613.48, which was up from a 67-point decline earlier. The S&P 500 stock index also ended up after earlier losses, settling up 9.79 points, or 0.6%, at 1,563.07, and the Nasdaq stock market added 18.39 points, or 0.6%, to 3,222.25.

Medtronic trades actively

Medtronic's 1.625% convertibles due April 2013 traded at 100 to 101 on Monday, which was little changed on previous levels.

Medtronic shares added a dime to trade at $46.38 on Monday.

The paper was flat or in line but was the most active name of the day, sources said.

Shares have run up, but hitting the $56.144 conversion price on the bonds ahead of maturity remains something of a stretch.

Alcoa flat to up a bit

Alcoa's 5.25% convertibles due 2014 traded at 137.093 versus an underlying share price of $8.39 at the end of the day, a New York-based trader said.

Shares of the Pittsburgh-based aluminum company traded up by 15 cents or 1.8%, to the $8.39 level.

After the earnings release, the common stock was down 13 cents, or 1.6%, to $8.26 in after-hours action.

The in-the-money bonds trade on about an 80% delta. They were seen as in line with the underlying share move to just slightly edging higher.

For the first quarter, Alcoa reported net income of $121 million, or 11 cents per share, excluding items, which was better compared to $105 million, or 10 cents per share, excluding items for the first quarter of 2012 and better than estimates.

Special items included a net discrete income tax benefit, the positive impact of mark-to-market changes on certain energy contracts and a net insurance recovery related to the March 2012 fire at its Massena, N.Y., location.

First-quarter revenue was $5.8 billion, which was down 4% from the first quarter a year-earlier but in line to slightly below estimates. The company cited lower London Metal Exchange aluminum prices and the impact of curtailments in Alcoa's European primary metals production.

Looking ahead Alcoa continued to project 7% global aluminum demand growth for the year, but slightly tighter markets as supply contracts, which will lift the currently depressed aluminum price environment.

The Alcoa convertibles trade on a delta hedge of about 80%.

The conversion price is $6.43, so the paper is still in the money, but the pricing of the stock and the convertible has weakened significantly since its last earnings release, with shares down 9.5% since Jan. 8.

The consensus estimate is for earnings of 8 cents per share, down 18% from a year earlier. Sales are expected to amount to $5.88 billion.

Ares Capital, Apollo in trade

Ares Capital's 5.125% convertibles of 2016 traded at 106.525 during the session, according to Trace data, and were quoted at 105.86 bid, 106.36 offered at the end of the session versus the closing stock price of $17.59 by a New York-based convertibles analyst.

Trading was choppy in the Ares shares during the session, but the stock ended up 5 cents, or 0.3%.

Ares has three other convertible bond issues. The Ares 4.875% convertibles were quoted at 102.1 bid, 103.56 offered versus the closing $17.59 stock price.

The Ares 4.875% convertibles of 2017 were 104.55 bid, 105.55 offered versus the closing share price at the end of the day. And the Ares 5.75% convertibles due 2016 were quoted at 107.78 bid, 108.28 offered.

The analyst said all of the issues looked to be flat or unchanged on a hedged basis.

"Not much was trading," he said.

Apollo's 5.75% convertibles due 2016 traded at 107.25, according to Trace data.

A New York-based trader said the paper changed hands at the end of the day at 107.25. The paper trades outright and isn't referenced with the underlying shares.

But Apollo shares were up 8 cents, or nearly 1%, at $8.35.

"It got lifted at 107.25. That's a little higher. Guys have made a lot of money on this and are figuring they can't get into it at this level. But it was a little higher today," the trader said.

A year ago, the paper was trading around par or below.

"There's nothing interesting about the name except that it's a yield name, and it has an investment-grade rating, although no one knows what is behind the loans. Guys are banking on the fact that it's not that long dated, with only 2.5 years left," the trader said.

Mentioned in this article:

Alcoa Inc. NYSE: AA

Apollo Investment Corp. Nasdaq: AINV

Ares Capital Corp. Nasdaq: ARCC

Central European Distribution Corp. Nasdaq: CEDC

Colony Financial Inc. Nasdaq: CLNY

Medtronic Inc. NYSE: MDT

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