Convertibles market players watching for next trend; Ares Capital, American Realty better

By Rebecca Melvin

New York, Oct. 20 – U.S. convertibles were firmer amid tentative volume on Monday as market players remained poised for trends to develop following last week’s whipsaw action and watched for whether new deals would emerge.

“People were starting to feel better,” a New York-based trader said. “They just want to see a trend. They got really hurt last week, and they made some of it back, and now they are waiting to see what happens next.”

A second New York-based trader said the market was stabilizing amid healthy buyers.

Corporate earnings reports were expected to be a driver of convertibles trading this week, but they weren’t a major feature on Monday.

Ares Capital Corp.’s convertibles were in trade and trending better, as were American Realty Capital Properties Inc.’s 3.75% convertibles due 2020, which looked better, a New York-based trader said.

A large chunk of Mylan Inc.’s 3.75% convertibles traded. They were seen at 376.6, according to Trace data.

“There was about $20 million of Mylan that traded north of parity,” a trader said, noting both a swap seller and buyer.

And the small issue of Anacor Pharmaceuticals Inc.’s 2% convertibles, which priced earlier this month, were indicated higher at about 111.875 from 106 amid a 7% rise in the underlying shares of Palo Alto, Calif.-based biopharmaceutical company to $27.42, according to a market source.

Real estate investment trusts, including mortgage REITs, were in focus.

“REIT vol. is for sale, and that’s not a good sign,” a trader aid.

The trader said that convertibles holders turned sellers after equity markets came in last week, but REIT stocks didn’t go down. The vol. players are selling REITs to move on to something that will work, the trader said.

But a second trader said mortgage REITs had found buyers, which marked a change from recent months when there was no interest in mortgage REIT paper.

“Maybe they were covering shorts,” he said.

Annaly Capital Management Inc., a real estate investment trust based in New York that owns and manages a portfolio of mortgage-backed securities, saw trades in its 5% convertibles lower by 0.25 point to 0.5 point at 100.75. The Annaly 4% convertibles weren’t seen to have traded. Annaly shares ended up 9 cents, or 0.8%, at $11.29.

Meanwhile, Peabody Energy Corp.’s 4.75% convertibles due 2066 were quiet even though Peabody shares fell 5% after the St. Louis-based coal mining company reported a wider third-quarter loss on lower revenue that beat estimates. The company also guided full-year earnings per share lower.

Excluding one-time items, Peabody lost $154 million, or 59 cents per share, on revenue that fell 4% to $1.72 billion from $1.80 billion in the year-earlier quarter.

Analysts were expecting a loss of 62 cents per share on revenue of $1.64 billion.

The Peabody convertibles were last seen at 66 on Friday after sinking to as low of 62 on Wednesday.

A Connecticut-based trader said that he didn’t see the Peabody convertibles quoted on Monday and that the distressed space was generally quiet.

Only bankrupt GT Advanced Technologies Inc.’s 3% convertible bonds due 2020 traded at 21 where they had been previously, the trader said. The Merrimack, N.H.-based solar and LED equipment company filed for Chapter 11 bankruptcy protection at the beginning of the month.

After the market close, Illumina Inc. reported quarterly earnings that beat estimates, and shares of the San Diego-based developer of genetic research tools traded up nearly 10% in after-hours trade.

The primary market was quiet on Monday. Last week there was only one new deal, namely Monster Worldwide Inc.’s 3.5% convertibles, that traded well on its debut on Friday.

Ares Capital better

Ares Capital’s 5.75% convertibles due 2016 were seen better, changing hands at 103.675, which was up 0.3 point, according to Trace data.

Ares Capital’s 5.125% convertibles due 2020 were also seen in trade at 103.25, which was up 0.5 point, according to Trace data. Shares of the New York-based business development company added a dime, or 0.6%, to $16.01.

A New York-based trader noted that the Ares 5.75% convertibles looked “very cheap,” given that investment-grade paper was trading at more than 2% compared to two-year Treasuries that were at 0.35%.

American Realty Capital’s 3.75% convertibles due 2020 traded late in the session at 99.25, and the American Realty Capital 3% due 2018 traded at 98.125, according to Trace data.

The New York-based real estate investment company is focused on owning and acquiring single-tenant freestanding commercial real estate. The company’s shares were up 16 cents at $12.08 on Monday.

The convertibles looked better, according to one trader, who said that the securities were helped by news that the company had made some asset sales, solidifying its credit and promoting a re-focus on its core business.

Mentioned in this article:

American Realty Capital Properties Inc. Nasdaq: ARCP

Anacor Pharmaceuticals Inc. Nasdaq: ANAC

Annaly Capital Management Inc. NYSE: NLY

Ares Capital Corp. Nasdaq: ARCC

GT Advanced Technologies Inc. Nasdaq: GTAT

Illumina Inc. Nasdaq: ILMN

Mylan Inc. NYSE: MYL

Peabody Energy Corp. NYSE: BTU

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