Knight Capital converts gyrate wildly following trading glitch; Navistar declines on headlines

By Stephanie N. Rotondo

Phoenix, Aug. 2 - Knight Capital Group Inc. was the nom du jour Thursday, as the market maker's convertible debt experienced "wild swings" during the trading session, a trader said.

The volatility in the name came one day after a computer glitch at the company caused erroneous trades in as many as 150 New York Stock Exchange-listed securities. The company said that it had addressed the problem, but not before losing $440 million.

Navistar International Corp. was also topical following the company's withdrawal of its full-year earnings forecasts and news that the Securities and Exchange Commission was looking into accounting and disclosure practices.

After rising in the previous session ahead of its earnings release, Clear Channel Communications Inc.'s bonds gave back some gains. The company reported a narrower quarterly loss after Wednesday's market closed.

And, Eastman Kodak Co. got a bit of a boost after it was reported Wednesday that the bankrupt company had partially won a patent fight against Apple Inc.

Knight Capital gyrates wildly

Knight Capital's 3.5% convertible bonds due 2015 had a "wild ride," a trader said Thursday.

The trader said the bonds hit lows in the mid-50s, moving back up to 67 early on, only to close out in the mid-70s.

Another trader said the name was "pretty interesting," as the bonds gyrated between the low-40s and the mid-70s.

The closing levels were in the mid-70s, he said, which was still down considerably on the day.

"They traded into the 40s first thing, then rallied as distressed buyers came into the market," an East Coast-based convertible trader said of the debt. But he added, "Things are definitely fluid!"

At another shop, Knight Capital's converts - of which $375 million were priced in March 2010 - were seen trading down to as low as 40 early Thursday and then rallied back as distressed buyers came into the market, with the paper retraced losses up to 75 and 76.

The issue then closed at 74 bid, 75 offered; but negative headlines subsequent to the close shot that paper back down to trade at 67, a Connecticut-based trader said.

On Wednesday the bonds fell more than 10 points outright and were said to have contracted on a hedged basis by five or six points.

The underlying stock (NYSE: KCG) dropped $4.36, or 62.82%, to $2.58.

"This is not like an earnings miss," a New York-based convertibles analyst said. "No one really knows what is going on, and we've seen this story from 2007 onwards. It's a question of confidence."

The analyst went on to say that the paper retraced losses intraday because of talk of a potential acquirer and a change of control put in the convertible indenture kicking in.

"There was hope that someone takes them over," the analyst said.

He said that truthfully the name is not even really on his radar screen because it is such a "hairy story" and his firm is not taking a strong opinion on it.

A trading source said, "There is a chance of a control put like all converts. I guess people can hope."

But "scary headlines" after the close were dousing those hopes.

Not only was the company considering bankruptcy after some failed talks with potential financial backers, but at least 10 counterparties are not dealing with Knight at least for now, according to Fox Business's Gasparino, citing sources.

Prices in between 140 and 150 stocks fluctuated widely during the first 45 minutes of trading Wednesday, after a Knight Capital software system went haywire. The problem was related to Knight's installation of trading software and resulted in Knight sending numerous erroneous orders in NYSE-listed securities into the market, the company said in a release early Thursday.

Knight said that it had traded out of its entire erroneous trade position, which resulted in a pre-tax loss of about $440 million.

Navistar loses ground

Navistar International was also making headlines on Thursday, as the company withdrew its earnings forecast and said that it was being investigated by the SEC.

A trader called the 8¼% notes due 2021 down about 2 points at 911/4, on about $55 million in trades.

Another trader said the paper was "pretty active," falling to lows around 90 before rallying back to end around 92.

On Thursday, Lisle, Ill.-based Navistar said it was taking back its 2012 profit forecast as it attempts to deal with its engine technology troubles.

Because of its continued issues with its technology - which has failed to meet federal environmental regulations - Navistar said it would increase its dependency on engines developed by Cummins Inc. That agreement with its rival, as well as costs associated with its own engine troubles, have left investors wondering how far the company's money troubles will go.

The company's troubles did not stop there, however. The company also said it was being probed by the SEC over accounting and disclosure issues.

Clear Channel mixed

A trader saw Clear Channel Communications' debt giving back some of the gains it had incurred ahead of the release of the company's second quarter results after Wednesday's close.

Overall, however, the company's bond structure was mixed.

The trader called the 11% notes due 2016 down a point at 611/2, on $22 million traded. Another $21 million of the 10¾% notes due 2016 changed hands, but ended unchanged at 631/2.

The 5½% notes due 2016 meantime rose over 3 points to 501/2, only on a handful of trades.

Another trader said the 10¾% notes traded up to 64, but fell back to 63½ by day's end. The 11% notes inched up to 63, falling back to 621/2.

"So they were off the highs," the trader said.

For the second quarter of 2012, the San Antonio-based multimedia company posted revenues of $761 million, down from $789 million the year before. Excluding the effects of foreign exchange rates, revenues would have risen 1%.

Net loss was $8 million, or 4 cents per share, versus a profit of $27 million, or 7 cents per share, for the same quarter of 2011.

As of June 30, cash flow from operations was $65 million.

Kodak rallies on patent win

Eastman Kodak "did rally some more," a trader said, following news out late Thursday regarding the company's partial victory in its patent fight against Apple.

He quoted the 9¾% second-lien notes due 2018 at 84½ bid, 85 offered and the 7¼% notes due 2013 at 25 bid, 26 offered.

Another market source called the 7 ¼% notes up over 3 points at 26 bid.

Rochester, N.Y.-based Kodak was granted ownership of two out of 10 patents that Apple is claiming it has claims over. The judgment was granted as the bankruptcy judge overseeing Kodak's case said Apple took too long to assert its claims.

The patents in question are among a portfolio that Kodak has put up for auction.

The judge said he would review the other eight patents.

Meanwhile, Apple reportedly has filed counterclaims against Kodak, alleging that Kodak is calling Apple's patents its own.

Broad market mixed

In the rest of the distressed arena, a trader said ATP Oil & Gas Corp.'s 11 7/8% notes due 2015 fell "almost 3 points" to 341/4.

"I thought I saw bonds offered even lower than that," he said.

Meanwhile, Overseas Shipholdings Group's 8 1/8% notes due 2018 were up at least 2 points at 57, following the company's earnings release on Wednesday.

At another desk, a trader said RadioShack Corp.'s 6¾% notes due 2019 were closing at 62 bid, 62½ offered.

Rebecca Melvin contributed to this article

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