Convertibles rise on light volume; Radian up; hedged players lose on RightNow's Oracle offer

By Rebecca Melvin

New York, Oct. 24 - Convertible bonds were generally moving up in light volume on Monday, with paper quoted higher as equity markets were stronger, market sources said.

Mortgage insurer Radian Group Inc. was active and moved higher late in the session, spurred into trade by news that the main unit of rival PMI Group Inc. was seized by regulatory authorities over the weekend in Arizona.

PMI was said to be at 25 bid, 26.5 offered, but quiet amid a lack of clarity about the situation, a trading source said.

The convertibles of a third mortgage insurance company, MGIC Investment Corp., were seen at about 57, but were also said to be quiet.

Amgen Inc.'s convertibles were steady ahead of the Thousand Oaks, Calif.-based biotech giant's quarterly earnings report, which was released after the market close and revealed better-than-expected third-quarter earnings, revenue that was in line, and slightly higher guidance, a New York-based sellside trader commented.

RightNow Technologies Inc. convertibles moved higher on an outright basis on Monday along with a sharp run up in the company's shares, but the RightNow convertibles were sharply lower on a hedged basis in response to news of Oracle Corp.'s cash takeover offer for the Bozeman, Mont.-base cloud computing software company.

Hedge players would have lost 6 or 7 points on RightNow if they were on a 75% to 80% hedge, a sellsider said.

That compared to a 7.4% gain for outright players and a 19% gain for stock holders, the sellsider pointed out.

MF Global Holdings Ltd. traded off a few points in line with its underlying shares, which dropped down from positive territory following a downgrade on its long-term debt ratings by Moody's Investor's Service.

Moody's lowered the rating on MF to Baa3 from Baa2, citing the current low-interest environment and volatile capital markets conditions, which made it unlikely that MF Global will be able to achieve the financial targets that Moody's had previously said were required for the Baa2 rating. The rating is under review for possible further downgrade.

Earnings reports expected on Tuesday include such convertibles issuers as Omnicare Inc., Human Genome Sciences Inc. and Peabody Energy Corp.

Radian drops back

Radian's 3% convertibles due 2017 were trading at about 48 bid, 50 offered during the session, and were seen at 51 bid, 53 offered right around the market close, a trader said.

Shares of the Philadelphia-based mortgage insurer dropped at the open, but also crept up during the session to end lower by 6 cents, or 2.5%, at $2.39.

The main PMI subsidiary was seized by Arizona insurance regulators on Saturday and will begin paying only 50% of claims. The remaining amount of each claim will be deferred.

The New York Stock Exchange halted trading in PMI Group's stock on Oct. 21. According to an 8-K filing with the Securities and Exchange Commission, the company expects that trading may be suspended following the 8-K. This would count as a fundamental change, triggering the requirement that PMI Group offer to buy back the convertibles at par.

The company said it does not have the financial resources to buy back the convertibles. The failure to buy any convertibles put back to it would be an event of default, which would allow the acceleration of the convertibles.

If the convertibles were accelerated and the debt was not discharged within 30 days, the holders of the company's 6% senior notes due 2016 and 6 5/8% senior notes due 2036 would have the option to accelerate their notes.

PMI Group said it is exploring strategic and restructuring alternatives

In August, two of PMI's units had been ordered to stop writing new business due to their failure to meet regulatory capital requirements.

MGIC has been writing insurance only after obtaining waivers on its capital requirements from Fannie Mae and Freddie Mac and a number of state regulators.

RightNow stings hedged players

RightNow Technologies' 2.5% convertibles due 2030, which priced last November, a little less than a year ago, traded at 145 versus an underlying share price of $43.85 on Monday.

Shares of the cloud computing software company had surged to that level from $35.58, representing nearly a 20% spike in price on the offer from Oracle Corp. The shares closed at $42.94, up $6.98, or 19.4%.

"Hedge guys lost 6 or 7 points on a 75% to 80% hedge. Ouch! You had to be about 45% to breakeven, and none of the hedgies were that low. Cash takeouts can hurt," a sellside trader said.

The RightNow convertibles were trading at a 22 point premium to parity on Friday and the make-whole table only gives about 2.5 shares, or 10.8 points, a second sellsider commented.

Oracle has agreed to buy RightNow for $43 a share, or 1.43 billion, with a view to bolstering its business-software line and to be more involved in cloud computing.

Amgen steady pre earnings

Amgen's 0.375% convertibles due 2013 traded between 98 and 99 on Monday, and were little changed from previous levels.

Shares of the Thousand Oaks, Calif.-based company settled a little higher at $58.95, which was up 36 cents, or 0.6%, on the day.

Amgen's stock moved upwards a little further in after-hours trade to $59.32 by 5 p.m. ET on the company's strong earnings.

A trader predicted that an accelerated buyback program described in the release would give shares "a little boost."

Amgen reported that its net income came down about 3% to $1.28 billion, but adjusted earnings were about 3% higher and brought earnings per share to $1.40 billion, which was better than analysts had expected.

One news outlet said the expected earnings per share was $1.29.

Revenue rose to $3.9 billion which was also about 3% better from the year-earlier quarter.

Revenue is now forecasted to fall in the $15.4 billion to $15.6 billion range while adjusted EPS is expected to fall between $5.15 and $5.30.

Also trading in the biotech space on Monday was Gilead Sciences Inc.'s 1% convertibles due 2014, or the C tranche, which was around 111 and up slightly. This issue is typically the least actively traded of three Gilead convertibles. There is also a Gilead 1.625% convertible due 2016, which is favored by outrights due to its bigger coupon, and a 0.625% convertible due 2013, which is the shortest-dated and favored by hedged players, a New York-based sellside trader said.

Mentioned in this article:

Amgen Inc. Nasdaq: AMGN

Gilead Sciences Inc. Nasdaq: GILD

Human Genome Sciences Inc. Nasdaq: HGSI

MF Global Holdings Ltd. NYSE: MF

MGIC Investment Corp. NYSE: MTG

Omnicare Inc. NYSE: OCR

Peabody Energy Corp. NYSE: BTU

PMI Group Inc. NYSE: PMI

Radian Group Inc. NYSE: RDN

RightNowTechnologies Inc. Nasdaq: RNOW

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.