Transocean slips with sector; Salix gains on debut; tough month for convertibles trading

By Kenneth Lim

Boston, May 28 - Transocean Ltd. followed its stock lower on Friday, leading the convertible market to a generally poorer session as equity markets took a hit ahead of the Memorial Day weekend.

Salix Pharmaceuticals Ltd.'s new five-year convertibles traded up slightly in the market, although trading volumes were thin.

The convertible market in general was relatively quiet, given that bond markets closed early and that Monday is the Memorial Day holiday.

"It's pretty quiet after yesterday's excitement," one buysider said. "I think it's pretty quiet. We're not doing a tremendous amount today. It's mostly everyone's thinking about the holiday."

Light trading was seen in some of the usually more active names.

Virgin Media, Inc.'s 6.5% convertible due 2016 was seen about a half-point lower at 115 versus a common stock price of $16.30. The New York-based entertainment and communication services company saw its stock close at $16.24, lower by 0.25% or 4 cents.

Dearborn, Mich.-based automaker Ford Motor Co.'s 4.25% convertibles due 2016 also closed 0.5 point higher at 143.25 against a $12.00 common stock. The shares ended the day lower by 2.17%, or 26 cents, at $11.73.

Owens-Illinois, Inc.'s newly minted 3% exchangeables due 2015 closed unchanged at 97.5 versus a stock price of $30.25. The common stock closed at $30.33, lower by 0.46% or 14 cents.

Owens-Illinois is a Perrysburg, Ohio-based maker of glass containers.

Nabors Industries Ltd.'s 0.94% convertibles due May 2011 tracked the underlying stock higher to trade at 98.75 outright. Shares of Hamilton, Bermuda-based Nabors, a land drilling contractor, gained 3.48%, or 64 cents, to close at $19.03.

The buysider said the Nabors paper, which will mature in under a year, is not as interesting at the moment because of the low yield to maturity.

"I'd rather take a shot of something that has equity upside," the buysider said.

Transocean takes hit

Transocean, an actively traded convertible that has gained even greater prominence ever since its Deepwater Horizon rig in the Gulf of Mexico sank and opened up a massive leak, saw some weakness on Friday as its stock took a beating.

The 1.625% series A convertibles due 2037 were seen at 98, while the 1.5% B convertibles due 2037 changed hands at 92.875. The 1.5% series C convertibles due 2037 traded at 89.5.

Transocean and other offshore exploration names came under pressure on Friday in the wake of the White House's decision to extend a moratorium on offshore drilling licenses.

"It's obviously a negative for the companies," a sellside trader said. "I guess what's making it worse is today the equity market across the board is getting hit pretty hard, so they're just riding the current. Unfortunately the current's going the other way."

Salix gains on debut

Salix's new 2.75% convertible due 2015 traded at about 100.25 bid, 100.5 offered on a shortened session on Friday, with the deal seen as drawing a reasonably strong response from investors.

The $300 million deal priced at par after the market closed on Thursday, with an initial conversion premium of 30%. Price talk was for a coupon of 2.25% to 2.75% and an initial conversion premium of 30% to 35%.

The deal was upsized from an original $200 million.

Bank of America Merrill Lynch and Jefferies & Co. Inc. were the bookrunners.

Proceeds will be used for business development, for general corporate purposes and to pay for capped call hedging transactions related to the offering.

Salix is a Raleigh, N.C.-based maker of drugs to treat gastrointestinal diseases.

The deal saw strong demand from investors, one sellside trader said.

"Very good deal, very well-placed, good quality book," the trader said.

Negative month

Friday's negative turn for the market ended what had already been a negative month for convertibles in general, one sellside trader said.

"Trading was heavy at the start [of the day], but I haven't traded much since," the trader said. "Overall it's been a very, very quiet month in convertibles. Once that 1,000-point day [in equities] happened, everybody just stopped."

The trader was eager to move on.

"This convertible market's just basically been getting hammered," the trader said. "Premiums are contracting...just not a good month for anyone."

Although a lot of investors are "underinvested" and there is money waiting to be put to work on the sidelines, it remains to be seen whether the markets will improve soon, the trader said.

"What would make it get better is confidence getting back into the market, obviously," the trader said.

The buysider noted that convertibles have rebounded slightly since the lows earlier in the month, "but things still look relatively cheap."

"There's been a lot of volatility in big names like Transocean this month that normally don't move that much," the buysider said. "Financials have been under a little pressure, but that seems to have stabilized today...We're sort of relatively comfortable with how we're positioned.

"We've been taking advantage of sort of irrational movements, but overall I think convertibles have done OK relative to equities, but they've probably cheapened a little bit."

Mentioned in this article

Ford Motor Co. NYSE: F

Nabors Industries Ltd. NYSE: NBR

Owens-Illinois, Inc. NYSE: OI

Salix Pharmaceuticals Ltd. Nasdaq: SLXP

Transocean Ltd. NYSE: RIG

Virgin Media, Inc. Nasdaq: VMED

© 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.