Some convertibles bounce back, especially new issues; Transocean, ProLogis weaken further

By Rebecca Melvin

New York, May 10 - The convertibles market saw some bounce back Monday, particularly in newer issues that sold off late last week, as equities rallied in relief after E.U. and International Monetary Fund leaders agreed to support the Eurozone with up to $1 trillion in funds. But convertibles action wasn't as good as one might want, market players said.

"People aren't chasing this market. They don't like it; don't believe in it," a New York-based sellside trader said.

The Dow Jones Industrial Average surged 404.71 points, or 4.8%, at 10,785.14; the Nasdaq Stock Market gained 109.03, or 4.8% as well, at 2,374.67; and the S&P 500 stock index moved up by 48.85 points, or 4.4%, to 1,159.73.

But Transocean Ltd. convertibles were weaker again and accounted for a large chunk of the day's trading, as its shares tracked lower amid speculation about the offshore contract drilling service provider's future prospects after the devastating rig explosion in the Gulf of Mexico April 20 that has left oil spewing uncontrollably into the water.

ProLogis was also weaker, including the ProLogis 2.625% convertibles, which were trading outright, despite strength in the Denver-based real estate investment trust's common stock.

The newest ProLogis 3.25% convertibles, which priced in March, "have just too much premium at par," a New York-based sellside trader said.

Convertibles follow stocks up

Some names ran with the stocks, as the CBOE Volatility index, or VIX, fell to 28.84% from above 40% on Friday as investors cheered the European banking package.

Hartford Financial Services Group Inc.'s 7.25% mandatory convertible preferred due 2013, which also priced in March, traded at 25.25 versus a share price of $26.85, compared to 24.75 versus a share price of $26.00 on Friday.

MGM Mirage, which priced $1 billion of 4.25% convertibles on April 18, traded at 99 versus a share price of $14.25, compared to 93.75 versus a share price of $13.25 on Friday, and 94 versus the same $13.25 share price on Thursday.

The new Owens-Illinois Inc. 3% convertibles, which priced a week ago, traded at 98 versus a share price of $32.50, compared with 96 versus a share price of $31.25 on Friday and 96 versus a share price of $31.25 on Thursday, according to a New York-based sellside desk analyst.

Annaly Capital Management Inc. looked stronger on Monday after an upgrade on its shares by JMP Securities on Friday.

Oklahoma City-based Chesapeake Energy Corp., the single most frequent convertible issuer in the U.S. market, said it priced $600 million of convertible preferred stock with foreign investors in a private placement. There is an over-allotment option to place up to $500 million in additional preferred stock, which has a dividend of 5.75%, with investors in Asia.

Otherwise there was no action in the primary market.

"It's interesting," a Connecticut-based investment banker said. The company typically just rotates among its existing bankers the next convertible issue, he said, noting also that the company is focused now on getting an investment-grade rating, which was never a focus of the natural gas company before.

Transocean weaker again

Transocean's 1.625% series A convertibles due 2037 traded at 97.80 on Monday, which was down from 99.20 in the May 5 and May 6 period.

Transocean's 1.5% series B convertibles due 2037 were seen late at 94.5 on Trace, which was down 1.5 points on the day, with trades ranging from 94.25 to 96.25.

Transocean's 1.5% series C convertibles due 2037 were last seen at 91.5, which was down 0.875 point, with trades ranging between 89.25 and 94.395.

Shares of the Vernier, Switzerland-based company ended down $1.67, or 2.5%, to $66.34 on Monday in heavy volume of 20.58 million shares, compared to average three-month traded volume of 9.15 million shares.

It's "easy to speculate" on the name, and there were buyers of the credit default swaps that had to sell some debt to offset their risk, a sellsider said.

"It's cheap to bet against," the sellsider added.

The Transocean As are callable and putable in December.

ProLogis paper weakens

ProLogis' 3.25% convertibles due 2015, which priced in March, traded at 98.25, which was up a point outright but weaker on a hedged basis.

ProLogis' 2.625% convertibles due 2038 were noted to be trading outright and were weaker at 91.5, which was down 0.5 point.

ProLogis' 1.875% convertibles due 2037 traded up just 0.5 point to 91, which was weaker on swap, and the ProLogis 2.25% convertible unsecured notes due 2037 traded up just 0.5 point to 95, which was also weaker on swap.

"The credit was significantly wider last Thursday and Friday and was starting to come back on Monday," a sellside trader said.

In general, the convertibles market saw issues moving up with the stock, but not moving up on their own, another sellsider said. "There is some gamma trading, or trading with the equity."

Annaly improved

Annaly Capital Management's 4% convertibles due 2015 traded at 100 on Monday, which was up from a 97.5 bid early in the session and up 2.677 points from Friday.

Shares of the real estate investment trust based in New York gained 50 cents, or 3.2%, to $16.30 on Monday.

Shares of the financial company, which owns and manages a portfolio of mortgage-backed securities, were upgraded to "market outperform" from "market perform" by JMP Securities on Friday.

Mentioned in this article:

Annaly Capital Management Inc. NYSE: NLY

Chesapeake Energy Corp. NYSE: CHK

Hartford Financial Services Group Inc. NYSE: HIG

MGM Mirage NYSE: MGM

Owens-Illinois Inc. NYSE: OI

ProLogis NYSE: PLD

Transocean Ltd. NYSE: RIG

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