Convertibles trade sideways, better amid unchanged Fed policy; NuVasive down; Meritor up

By Rebecca Melvin

New York, July 31 - The convertible bond market was moving sideways to slightly better Wednesday and was marked by smaller, month-end trades to dress investment portfolios while many market players waited for the latest word from the Federal Reserve on accommodative easing policies.

In a statement Wednesday afternoon, the Fed said it will keep buying $85 billion a month in bonds and plans to hold its key short-term rate at near zero as long as the unemployment rates stays above 6.5% and inflation remains low.

The news was "as expected," and markets didn't react strongly.

"The Fed spoke and it was nothing new," a New York-based convertibles sellsider said. "The waiting game is going to continue until the Fed says or does something differently."

He predicted the current market malaise is likely to persist.

Cubist Pharmaceuticals Inc.'s convertible was the most active name of the day and followed shares sharply higher after news that the Lexington, Mass.-based biopharmaceutical company is buying two small companies.

Another convertible name in trade on a 10% stock move higher was Alere Inc., which saw its 3% convertibles due 2016 gain several points to 104.25 to 106.25 after the Waltham, Mass.-based diagnostics and services company reported second-quarter earnings and revenue that beat estimates.

But NuVasive Inc.'s convertible dropped about 3 points outright in light volume as shares skidded 12.6% after the San Diego-based medical device maker reported earnings that missed estimates and disclosed that it has received a government subpoena regarding potentially fraudulent Medicare and Medicaid claims.

Elsewhere, three Meritor Inc. convertibles were in trade and in line to better by about 0.5 point outright after the Troy, Mich.-based truck parts maker reported a fiscal third-quarter loss, but earnings excluding charges beat estimates.

International Game Technology was also unchanged to slightly higher on swap, changing hands at 110.625 bid, 111.125 offered versus an underlying share price of $18.50, a Connecticut-based trader said. On Tuesday, the bonds traded around 110.

The last trading day of the month turned out to be "in line with what people have been thinking," a New York-based trader said.

"Some people were saving up to make some trades until after the Fed news, so flow-wise it has been one of the slower weeks, but there was some month-end activity, and we were a little busier as people were doing some rebalancing," the trader said.

In economic news, the Commerce Department said the U.S. gross domestic product expanded at a rate of 1.7% in the second quarter, beating expectations. But it revised lower the first-quarter growth estimate to 1.1%.

Full-year 2012 GDP was also revised up by 0.6% to nearly 3%.

Nevertheless, the last several quarters have been below trend, averaging about 1.5%, and representing something of a soft patch pundits say.

But the ADP National Employment Report showed that U.S. private employers added 200,000 jobs in July, which was better than the 180,000 jobs that economists had expected. The ADP report also revised upward June's private payrolls to 198.000 from the previously reported 188,000.

When the Fed came out with its statement following a two-day policy meeting, it left policies unchanged but essentially downgraded its description of growth to "modest" from "moderate," signaling a further go-slow approach ahead..

The Fed statement flagged modest growth, higher mortgage rates and low inflation as factors that are being watched closely.

On Thursday the Department of Labor will report initial claims, while on Friday the Bureau of Labor Statistics will report on the employment situation, and there will be the June personal income and outlays data as well as June factory orders.

Cubist jumps

Cubist's 2.25% convertibles due 2017 jumped to about 220 to 222 with trades going up as high as 225, compared to a previous level of 198.5, according to Trace data.

Cubist shares jumped $5.35, or 9.4%, to $62.35 in active trade.

The Cubist convertibles were the most active name of the day in convertibles with volume more than double the next name, a sellsider pointed out.

The in-the-money convertible is equity sensitive.

"It looks like outrights taking profits in the name; that's what would make sense to me," a New York-based sellsider said of the Cubist convertibles trading action.

Cubist said that it will pay as much as $801 million to buy Optimer Pharmaceuticals and as much as $818 million to buy Trius Therapeutics.

The deal will give Cubist full control of Dificid, an antibacterial drug that is used to treat an infection that causes diarrhea and other symptoms and is potentially fatal. And with the acquisition of Trius, Cubist will get a number of experimental antibiotics, including a late-stage drug that could be used to treat several serious types of infections, including those caused by MRSA.

Credit Suisse upgraded Cubist shares to "outperform" from "neutral" and raised its price target for the shares to $69.00 from $56.00.

NuVasive sheds 3 points

NuVasive's 2.75% convertibles due 2017 traded at 97.5 and were seen at 97 bid, 98 offered versus an underlying share of $22.75. That was down compared to 100.5 bid, 101.5 offered versus a share price of $26.10 prior to Wednesday's developments.

"It traded down about 3 points," a sellsider said, adding that the premium on the bond is close to 80% and that it is not much of a hedged name.

Shares of the San Diego-based medical device maker plunged $3.28, or 12.6%, to $22.82 in heavy volume.

"Earnings per share were in line, but people are worried about the subpoena related to the Medicare and Medicaid claims," a New York-based trader said.

Meritor flat to better

Meritor's 7.875% convertibles due 2026 traded at 127.5 bid, 128.5 offered versus an underlying share price of $8.35. That was seen in line on a dollar-neutral basis, assuming a delta of 60%, a New York-based trader said.

"Delta neutral, they were trading in line," the trader said. But the majority of trade was on an outright basis.

Meritor's 4% convertibles due 2027 traded outright at 92.5 bid, 93.5 offered, which was up about 0.5 point, the trader said.

Meritor's 4.625% convertibles due 2026 traded outright at 102.5 bid, 103.875 offered, which was also seen up 0.5 point.

Meritor shares gained 43 cents, or 5.6%, to $8.13.

The company's credit default swaps were slightly tighter.

Meritor swung to a loss for its fiscal third-quarter of $37 million, or $0.38 per share, compared to net income of $49 million in the year-earlier period. But adjusted earnings beat expectations by a penny.

The loss from continuing operations was $37 million.

Fiscal third-quarter revenue was $993 million, which was down 11% from $120 million for the year-earlier period, and missed estimates.

The decrease, the company said, was primarily due to lower sales in North America and the company's military business and China.

Mentioned in this article:

Alere Inc. NYSE: ALR

Cubist Pharmaceuticals Inc. Nasdaq: CBST

International Game Technology NYSE: IGT

Meritor Inc. Nasdaq: MTOR

NuVasive Inc. Nasdaq: NUVA

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