PHH drops sharply on S&P ratings cut; Micron recoups early losses; SandRidge in focus

By Rebecca Melvin

New York, Dec. 22 - PHH Corp.'s longer-dated convertibles due 2014 traded sharply lower on both an outright and hedged basis on Thursday - and in tandem with sharply lower shares - after Standard & Poor's lowered some of its ratings on the Mt. Laurel, N.J.-based mortgage company and said it may not be able to repay $423 million of debt due in early 2013.

S&P thought PHH would be able to repay its shorter-dated convertibles due April 2012, however. Those convertibles weren't heard in trade.

Micron Technology Inc.'s various convertibles traded down a little in early trade but recovered to end the session essentially unchanged, a New York-based trader said.

Micron shares jumped unexpectedly after the company missed analysts' estimates with its latest quarterly loss and revenue result.

SandRidge Energy Inc.'s convertible perpetual preferreds were in focus after the underlying share price of the Oklahoma City-based oil and gas company popped on news of a joint venture with a subsidiary of Madrid-based Repsol YPF SA.

The SandRidge preferreds weren't heard in trade, however.

Under the SandRidge-Repsol agreement, SandRidge will sell a minority non-operated working interest in two Mississippi plays for about $1 billion. Repsol will pay $250 million in cash at closing and the remainder in the form of a drilling carry.

As a result of the drilling carry and its lower working interest, SandRidge's 2012 capital expenditure is expected to go down to $1.6 billion from $1.8 billion.

Overall, trading was quiet on the second to last trading day before Christmas. But the quiet period hasn't just been in the past few weeks before the holidays. There have been some convertible players that essentially stopped trading in the third quarter, when volatility in the broader markets and the risk on, risk off trade related to fears about the European debt crisis, made it difficult to trade effectively, a New York-based sellsider said.

Most convertible players, who are heading into the end of the year with losses or a flat return, were probably sporting positive returns up until the third quarter. But after August, returns were trimmed and in the fourth quarter it got worse due to the constant volatility, a sellsider said.

PHH drops

PHH's 4% convertibles due 2014 dropped sharply in early trade to about 79 and then climbed back up to about the 82 mark, which was down about 9 points from previous levels at 91.

The 2014 convertibles trade on a low delta, but even against a hedge, the loss was about 8 points, a New York-based analyst said.

"Depending on the hedge, there was cover of 1.5 points to 2 points, but you were still down 8 points on a hedged basis," the analyst said.

The short dated PHH 4% convertibles of 2012 weren't heard in trade.

Shares of the Mount Laurel, N.J.-based mortgage services company ended down $1.95, or 15%, at $11.07, after having sunk to as low as $8.75 during the session.

The 2014 PHH fell to the low 80s from the low 90s after S&P lowered some of the mortgage company's credit ratings saying it is concerned the company may not be able to repay $423 million of debt due March 2013.

The ratings agency thinks the company will be able to pay back the $249 million of convertible notes due in April.

Although the credit issue hit the PHH shares and bonds hard, the problem was more likely a liquidity issue rather than a solvency problem, the analyst said.

The hedge didn't hold up given that it's a low delta, out-of-the-money name, the analyst said.

The initial conversion price on the bonds is $26.00.

"It was a credit event," the analyst said, citing the credit spread widening to 1,150 basis points to 1,200 bps over Libor, compared to 750 bps over Libor previously.

S&P cut PHH's long-term issuer credit rating and its senior unsecured debt two notches further into junk status to BB- from BB+.

S&P also took the ratings off CreditWatch, where they had negative implications. The outlook is negative.

The ratings action "reflects our view that PHH's historically high unsecured funding costs have reduced its financial flexibility to repay upcoming debt maturities, including $423 million of unsecured debt maturing in March 2013," an analyst said in a statement.

Micron ends unchanged

Micron's 1.875% convertible due 2014, which is a larger issue of about $950 million, was quoted last at 96.5 bid, 97 offered versus the underlying share price of $6.41.

According to one sellsider, his firm started out the day with the 2014 bonds at 95.125 bid, 96.125 offered, versus a share price of $5.60.

"They came in a little, but moved up a little bit from there, to end unchanged," the sellsider said.

All five of the Micron convertible bond issues outstanding saw a little bit of trading activity, which was described as "sporadic."

"There was buying interest in the 'olds,'" he said referring to the 1.875% convertibles due 2014.

Shares of the Boise, Idaho-based memory chip maker jumped 87 cents, or 16%, to $6.41 in active trade on Thursday.

The gain in the face of disappointing quarterly results seemed to have "no rhyme or reason," a sellsider said.

Micron reported a loss after the market close on Wednesday of $187 million, or 19 cents a share, compared with net income of $155 million, or 15 cents, a year earlier. Some analysts had expected a loss of 8 cents a share.

Revenue in the first quarter ended Dec. 1 fell 7.2% to $2.09 billion. Some analysts had expected sales of $2.12 billion.

The price of dynamic random access memory, or DRAM, which provides the main memory in PCs, dropped as much as 30% in the recent quarter, and floods in Thailand have left PC makers short of hard-disk drives, leading them to trim orders of other components, chipmakers have said.

Mentioned in this article:

Micron Technology Inc. NYSE: MU

PHH Corp. NYSE: PHH

SandRidge Energy Inc. NYSE: SD

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