Convertibles quiet amid market uncertainty; Massey Energy steady to higher on lower shares

By Rebecca Melvin

New York, May 18 - The convertible bond market was extremely quiet Tuesday as market players forsook trading in the face of ongoing worries about the European debt crisis. In addition, there was news that Germany is stopping naked short selling, which rattled the markets, a sellsider pointed out.

"There were plenty of inquiries and markets, but not much trading," a New York-based sellside desk analyst said.

Even a week after Europe passed the $750 billion bailout package, there's still a great divergence of opinion about whether tax dollars should be used to bail out Greece, sources said.

"They are far from being out of the woods," a convertibles analyst said of Europe.

There's a "huge amount" of focus on the European situation, so much so that "people don't even care about the oil spill or about Massey's potential liability when the U.S. confirmed a criminal probe," a sellsider said.

Market players were also weighing the strength of the U.S. markets in the aftermath of the strong run up in equities, and credit spreads were widening.

Massey Energy Co. convertibles were mostly steady to higher on recent levels, with positive comments on the bond issue's attractiveness coming on the heels of confirmation from federal investigators that a criminal investigation is being pursued against the Richmond, Va.-based coal producer relating to its deadly April 5 mine blast.

Analyst David Epstein of Convertible & Credit Insight put out a note Monday recommending swapping into Massey convertibles and out of Patriot Coal Corp.'s 3.25% convertibles due 2013.

Meanwhile, St. Louis-based coal producer Peabody Energy Corp. saw its convertibles higher after news that its takeover bid for an Australian coal miner failed.

SunPower Corp.'s 4.75% convertibles were lower bid early Tuesday amid continuing weakness in the embattled solar sector.

The European crisis and the depreciating euro is putting pressure on solar names that depend on demand in Europe, where subsidies boost clean energy initiatives.

OSI Pharmaceuticals Inc.'s 3.25% convertibles were quoted at 111 versus a share price of $57.35, extending weakness after news Monday that Astellas Pharma Inc.'s takeout offer, though sweetened, was lower than expected.

The general inactivity in the convertible bond market was taking a toll on market players.

"It's been an ugly year for us," a Connecticut-based sellside analyst said.

Massey mostly steady

Massey's 3.25% senior unsecured convertible bonds due 2015 traded Tuesday at 82.5 versus a share price of $33.75, which compared to a week ago when the bonds traded at 83.25 versus a share price of $35.50, according to a sellsider.

At 80.5 versus a share price of $33.10, the Massey bonds trade with a 7.9% yield to maturity, 113% conversion premium, 29% outright delta and 825 basis points of implied option-adjusted spread to Treasuries, assuming 45% volatility, according to Kynex, analyst Epstein wrote in his note.

Epstein recommended swapping from Patriot Coal's 3.25% convertibles due 2013 into the Massey Energy 3.25% convertibles in his Convertible & Credit Insight newsletter, citing the Massey paper's wider implied spreads despite Massey having significantly lower credit risk than Patriot.

Epstein considers the Massey convertible bond attractive.

According to Kynex, Patriot's 3.25% convertibles due 2013, at 85.75 versus $16.34 for the common stock, trade with an 8.7% yield to maturity, 255% conversion premium, 15% outright delta and 772 bps implied OAS to Treasuries assuming 50% volatility.

As of March 31, Massey had $520 million of cash, adjusted for the $640 million of cash spend on the Cumberland acquisition in April, versus total debt of $1.30 billion. So net debt was $729 million, which looked modest in relation to EBITDA in the range of $426 million to $664 million in the past five years, Epstein said.

"While Massey has positive working capital of $213 million, excluding cash, Patriot has negative working capital of $274 million, excluding cash," Epstein wrote.

Massey has lower liabilities overall despite the fact that Massey expects to produce 41 million to 43 million tons of coal for 2010, versus only 33 million to 35 million tons expected by Patriot. Massey also has a higher priced mix of coals, including 50% to 100% more metallurgical coal.

"While federal prosecutors are investigating whether there was "willful criminal activity" by the company in regards to the recent mine blast, we are confident that criminal prosecution will not influence whether customers choose to purchase their coal from Massey," Epstein wrote.

"That is the positive aspect of the credits of companies that have natural resources in the ground - unlike an Anderson Consulting or a Goldman Sachs or a Lehman Brothers; neither a whiff of financial distress nor a reputational black mark will have a significant effect on the value of their assets," Epstein wrote.

"While we can understand the inclination to want to wait until the dust settles on the civil and potentially criminal cases involving Massey, we believe it is already largely factored into the price," he wrote.

Peabody higher after failed bid

Peabody Energy's 4.75% convertibles due 2066 got as high as 102 on Tuesday and were trading at 100.75 around midsession, up from 99.25 on Monday.

Like the rest of the coal sector, shares of the St. Louis-based coal producer were higher early in the session, but they succumbed to selling pressure and ended the session down 41 cents, or 1%, to $39.20.

Peabody's plan to acquire Macarthur coal for $3.3 billion fell through after the Australian miner said it could not recommend a revised takeover offer that was unlikely to win support from its two largest shareholders.

Macarthur said that based on the price and the conditions of the proposal it could not recommend the Peabody offer to shareholders.

Peabody, which cut its cash takeover offer for Macarthur, said in a release that it was unfortunate that one shareholder could block a proposal that would have created significant value for all Macarthur shareholders.

Peabody said it looks forward to advancing its internal growth projects and continuing to pursue other value-added investments to serve high-demand markets.

SunPower bid lower

Switching over to clean energy, SunPower's 4.75% convertibles were bid at 78.25 versus a share price of $12.07. That compared to a trade at 78.336 on Monday, when the stock was trading at $12.25.

The shares of the San Jose, Calif.-based solar power company closed down 47 cents, or 3.9%, at $11.60 on Monday, which marked a new 52-week low for shares of the company, which have slumped 24% in the last five sessions. The stock closed at $15.29 on May 11.

Mentioned in this article:

Massey Energy Co. NYSE: MEE

OSI Pharmaceuticals Inc. Nasdaq: OSIP

Patriot Coal Corp. NYSE: PCX

Peabody Energy Corp. NYSE: BTU

SunPower Corp. Nasdaq: SPWRA

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