Convertibles quiet ahead of central bank news; Intel bond ‘flat to slightly up’; Ariad eyed

By Rebecca Melvin

New York, Sept. 20 – U.S. convertibles traded quietly on Tuesday with no new issuance in the primary market as investors appeared to be “waiting on the sidelines” ahead of potential policy moves by the central banks of the United States and Japan, a New York-based sellsider said.

“It’s quiet in general. There is still uncertainty and issuers are on the sidelines while guys are just trying to find cheap bonds,” the sellsider said.

Investors are watching for central bank news from both the United States and Japan on Wednesday. The U.S. Federal Reserve is widely expected to leave interest rates unchanged, but the policy statement and comments following the conclusion of the two-day policy meeting may provide clues about whether a hike is in the cards for December.

Meanwhile, the Bank of Japan is also on investors’ radars for a decision on Wednesday. The expectations regarding the Asian central bank are more mixed ahead of its comprehensive assessment of its expansive stimulus program. Investors question whether the bank will cut its rates further into negative territory, change is bond buying program or signal a shift in monetary policy.

Intel Corp.’s convertibles continued to see volume, particularly the Intel 2.95% convertibles due 2035. The bonds were trading flat to slightly up on a dollar-neutral, or hedged basis, and little changed on an outright basis as the underlying shares of the Santa Clara, Calif.-based semiconductor company barely moved on Tuesday.

Speculation regarding whether the company will soon call the $1.6 billion 2.95% convertible bonds was driving activity, sources said. Some market players think the paper will be called, but others think that the tax treatment is favorable and the company will leave them outstanding, a New York-based sellsider said.

One name getting a look in convertibles on Tuesday was Ariad Pharmaceuticals Inc. Its common shares were up in early trading, and the convertible, which doesn’t usually trade actively, was getting a look following news late Monday that Allergan plc has agreed to buy Tobira Therapeutics Inc. in a deal worth about $1.7 billion.

The price tag for Tobira, a biopharmaceutical company, was deemed expensive, and Allergan shares were lower in the aftermath.

The Ariad convertible was quoted at about 152. Ariad shares were up 84 cents, or 7%, at $12.95.

The M&A activity has people’s attention, a sellsider said. “Allergan paid a ridiculous amount for Tobira. I think it had about a $100 million market cap before the deal.”

In general, technology names have been a little weaker in the last few weeks and energy names have held in, a trader said, citing solid performance of Cobalt International Energy Inc. and Chesapeake Energy Corp.

The Cobalt 2.625% convertibles, which are the shorter-dated of the company’s two issues, has been holding right around 45 despite lower oil prices in recent sessions.

But Oasis Petroleum Inc.’s 2.625% convertibles due 2023, which priced last week, traded down to the 96 mark on Tuesday from about 98 previously amid little change in oil prices on Tuesday.

Oasis shares fell 27 cents, or 3%, to $8.88. But they recouped about 2% of that loss in after-hours trading.

Equities markets ended little changed to slightly higher. The Nasdaq stock market added 6.3 points, or 0.12% to 5,241.35; the S&P 500 stock index closed up 0.64 point to 2,139.76, and the Dow Jones industrial average tacked on 9.79 points, or 0.05%, to 18,129.96.

Intel trades actively

Intel’s 2.95% convertibles due 2035 traded little changed to slightly better on Tuesday at about 136.5 to 136.8. The common shares closed off 2 cents at $37.14.

The $1.6 billion issue, which priced initially in December 2005, has a provisional call at 130% of the initial conversion price, which is $31.53.

These are soon to be callable. But some think that the tax treatment is so favorable that the company deducts more for them than they pay out, and therefore there is money to be made in leaving them outstanding, a trader said.

The Intel 3.25% convertibles were not trading as actively, a trader said.

On Friday, Intel’s stock and bonds rallied after the company upwardly revised third-quarter revenue guidance. The chipmaker now expects third-quarter revenue of $15.6 billion, plus or minus $300 million, which is up from a previous range of $14.9 billion, plus or minus $500 million, and well above the company’s 2015 third-quarter revenue.

Intel also boosted its gross margin forecast by two percentage points, attributing both improvements in its forecast to moves by hardware makers to replenish finished PC and component inventories and seeing signs of improving PC demand.

Mentioned in this article:

Ariad Pharmaceuticals Inc. Nasdaq: ARIA

Chesapeake Energy Corp. NYSE: CHK

Cobalt International Energy Ltd. NYSE: CIE

Intel Corp. Nasdaq: INTC

Oasis Petroleum Inc. NYSE: OAS

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