Convertibles quiet: Transocean, Omnicare flat; Trico extends weakness; ADM paper improves

By Rebecca Melvin

New York, Aug. 6 - The convertible bond market was quiet on Friday after a weak July U.S. employment report put a damper on the broader markets, sources said.

It's "very, very quiet here....I think most of the market started the weekend before the numbers came out," a New York-based sellside trader said.

Another sellsider said Friday was a "pretty slow today."

Transocean Ltd. was "about flat" Friday from Thursday's market close, after the oilfield services company put in a strong showing in the past week amid a seemingly improved Gulf of Mexico oil leak situation and the company's earnings report Wednesday.

Omnicare Inc.'s convertibles were also flat in trade after dropping 1 to 2 points Thursday on the geriatric pharmaceutical services company's disappointing earnings and lowered full-year outlook.

Trico Marine Services Inc.'s 8.125% convertibles also extended their previous session's move, trading steady to weaker after the bonds plunged in active trade on word the marine services company is renegotiating its debtor-in-possession financing.

Elsewhere, Archer-Daniels-Midland Co. bucked the trend and added 1 to 2 points despite static underlying shares. The ADM shares had rallied Thursday on news that Russia is going to ban grain exports due to potential shortages related to a drought there.

In the primary arena, the U.S. market was quiet for the week other than Teleflex Inc.'s $350 million of 3.875% convertibles, which priced late Tuesday.

Internationally, India's Essar Shipping Ports and Logistics Ltd. priced $280 million of 5% foreign currency convertible bonds in five-year and seven-year tranches, and Acer Inc. of Taiwan priced $500 million of 0% convertibles in five-year and seven-year tranches, with initial conversion premiums of 30% and 33.75%, respectively.

Weaker jobs data

The Department of Labor showed a larger-than-expected drop in July payrolls, or a loss of 131,000 jobs for the United States last month, significantly higher than the decline economists had forecast. Meanwhile, the closely watched private employment number rose by a less-than-expected 71,000 jobs.

The headline unemployment rate stayed at 9.5%, but that is because the labor force continues to shrink as discouraged job seekers suspend job hunting efforts.

The equity markets sold off for much of the session but managed to pare losses by the session's close. Oil was also lower. Treasuries and gold moved higher.

Possible weaker issuance eyed

A weak jobs report, which signals a weaker economy, may mean less new issuance, sources said.

"Historically convertibles have usually been issued to fund capex, acquisitions, and other cash outlays that anticipated growth. And if the economy is slowing down, corporations may become even less likely to invest in future growth," a New York-based buysider said.

A New York-based syndicate source said he was not hearing much of a pipeline, at least for the rest of August.

"The only thing the employment number has done is knock rates down further, which makes convert issuance look less attractive compared to what you can get done in the straight market," the syndicate source said. "I don't think convert issuance comes back with any significance until you see rates starting to rise."

"Buyside investors definitely are not driving convert issuance in here. Corporate market continues to be red-hot with spreads grinding lower almost on [a] daily basis," the syndicate source said.

If the Fed is less likely to raise interest rates in the near term due to paltry economic growth, then "all else equal there probably would be less convert issuance," a New York-based sellside analyst said.

Deeper malaise

There is a deeper malaise, according to one buysider. There are very few companies issuing convertibles in anticipation of growth opportunities, the buysider said.

"Historically, convertibles usually funded growth. Corporations don't seem to expect growth these days. They will be wrong. Opportunities for growth will come. And so will new issuance. But it's impossible to know when," the buysider said.

In fact, currently it's almost the reverse of the 'New Economy.' that ended just over a decade ago when companies raised capital to fund dreams of rapid growth. Nowadays, companies marshal cash and issue new convertibles and other instruments only for financial engineering, or in other words, to reduce interest expenses and extend maturities, the buysider said.

ADM adds

ADM's 0.75% convertibles due 2014 jumped to as high as 101.5 on Friday, which was up by about 1.5 points on the day. But trade was also reported lower at 101 versus a share price of $30.40, according to one sellsider, and at 100.625, according to Trace data.

The 0.75% notes have moved up steadily through July from about the 90 level.

ADM's 6.25% mandatory convertibles due 2011 were seen at 41.60 versus a share price of $30.25.

Shares of the Decatur, Ill.-based agribusiness company ended lower by 7 cents, or 0.23%, at $30.18 on Friday.

"I'm sure the Russian story had some affect. Volume had been picking up since the beginning of the month as commodities prices have surged due to a decline in the dollar. The Russian drought problem is just another catalyst for 'ag' companies like ADM," a New York-based sellside analyst said.

Russia said Thursday it would ban grain exports due to that country's severe drought after first promising to keep grain exports stable.

Wheat prices spiked Thursday, with the contract for December delivery seen up 6.5% early on and up 25% for the week.

Mentioned in this article:

Acer Inc. Taiwan: 2353

Archer-Daniels-Midland Co. NYSE: ADM

Essar Shipping Ports & Logistics Ltd. Bombay: 500630

Omnicare Inc. NYSE: OCR

Teleflex Inc. NYSE: TFX

Transocean Ltd. NYSE: RIG

Trico Marine Services Inc. Nasdaq: TRMA

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