Convertibles plummet; PMI flickering out; Central European Distribution paper moves lower

By Rebecca Melvin

New York, Aug. 4 - Convertible bonds fell sharply on Thursday as the equity markets experienced a free-fall spurred by fears about the U.S. and global economies, potential recession and the crisis surrounding European sovereign debt.

Around mid-session, the convertibles market was seen down about 0.5 point or more per average bond on a hedged basis, market participants said.

As for how convertibles performed relative to other asset classes, some said better, while others said it depended on miscellaneous things like deltas, or the amount of sensitivity of a hedge to stock price moves, and "other disparate things" that are specific to convertibles, one analyst said.

PMI Group Inc.'s convertibles were sickeningly lower after the third largest U.S. mortgage insurer warned that it couldn't write new mortgage insurance in a number of states due to its failure to meet regulators' capital requirements. Traders speculated that the company was headed toward bankruptcy, and PMI's 4.5% convertibles dropped to 35 from a recently traded 55.5 on July 21, according to one source.

Radian Group Inc., another mortgage insurance name, also fell, but not as sharply. Those bonds were down to 64 from 67, according to a source.

MGIC Investment Corp., another name in the mortgage insurance space, wasn't punished as harshly and wasn't a big trader, probably due to the fact that it's a bigger player and deemed to be a stronger credit, a New York-based trader said.

"The problem with all this stuff is there are no bids," the trader said of PMI, "so it doesn't trade well on the way down."

Central European Distribution Corp. was another big loser in the convert universe, melting lower by another 6.25 points outright to 69 after a 7-point slide on Tuesday. The vodka maker and beverage distributor cut its 2011 earnings outlook.

Eastman Kodak Co. hit new lows at 57.75 to 58 for the Kodak 7% convertibles due 2017. That paper was well over par a year ago.

"I haven't seen them trading at this level," a trader said of Kodak.

Outright investors got killed on Dendreon Corp. on Thursday, but hedged investors actually gained if they were on a 65% delta or heavier, one analyst said. Dendreon was torpedoed because the Seattle-based biotech downwardly revised its 2011 revenue forecast and said sales of its Provenge prostate-cancer drug weren't meeting projections.

Broad market sell-off

In the broader equity markets, the equity markets sold off massively on heavy volume. The Dow Jones Industrial Average, which was down 400 points at its lows during the session, continued to drop into the closing bell, shedding more than 500 points, or 4.3%, to 11,383.13 by day's end.

The S&P 500 stock index fell 60 points, or 4.8%, to just 12,000, and the Nasdaq Stock Market lost a full 5% on Wednesday, ending the session at 2,556. The indices' one-day point drop was of the magnitude not seen since the financial crisis in 2008.

Headlines from the European Central Bank on Thursday were a trigger for the renewed selling frenzy.

The ECB will offer a six-month tender of unlimited size next week, and it also reopened is program of government bond buying for the first time since March. ECB was buying the government bonds of Ireland and Portugal, according to reports.

One analyst pointed out 30-year Treasury bonds surged 3 points with the yield at 3.7%. Investors were said to be looking to longer maturities to capture some return.

In the convert market, names that were hit hardest were those with news out like disappointing earnings.

"It feels worse than a 0.5 point drop dollar neutral," a New York-based convertibles analyst said midafternoon Thursday, and he predicted that if the S&P closed with a 4% loss, then things would take another leg lower.

"Just because 4% is an amount that catches your eye," he said in regard to why things would get worse. "People are worried."

The analyst pointed out that General Motors Co., which put out very strong earnings on Thursday, was not being rewarded. And if earnings were not that strong it was just a good excuse to dump the name.

"The reality is second-quarter earnings is past history," the analyst said.

PMI whimpers

PMI Group's 4.5% convertible senior notes due 2020 traded down to 35 on Thursday, according to sources, down from the last round-lot sales in the name July 21 at 55.5.

PMI's 6% straight bonds of 2016 traded at 36.

Shares of the Walnut Creek, Calif.-based mortgage insurer slid 47 cents, or 53.4%, to $0.41.

"The story is horrible; this is probably all she wrote," a trader said regarding the future prospects for PMI.

The convertibles first priced a little more than a year ago in April 2010, and now parity is under 5, the trader noted.

Parity is the value of the shares into which the bond converts.

"It's unbelievable how quickly we've got to this. And Radian and these guys [PMI] are in fairly close succession. The space needs issuance, but this is ridiculous," the trader said.

The company can't make new mortgage insurance in a number of states and the number of states where they will be prohibited is expected to rise.

PMI reported the net loss at its U.S. mortgage unit widened to $338.4 million, from $115.6 million in the year-earlier period.

Radian Group's 3% convertibles due 2017 traded at 64, down from 67 on Wednesday, a New York-based sellside desk analyst said.

MGIC's convertibles weren't heard in trade.

"MGIC has a $700 million market cap, Radian has a $386 million market cap, and PMI's is $60 million. The fact that they are larger and better means that the market is treating them a little better," a trader said of MGIC.

"People are expecting a chapter," he said referring to a bankruptcy filing. "If the company is just servicing the old business and can't get new business, it can't be good."

Dendreon adds dollar neutral

Dendreon's 2.875% convertibles due 2016, which priced early this year, traded at 79 versus an underlying share price of $11.70. On Wednesday, the Dendreon convertibles were around 95 versus an underlying share price of $35.00, according to a New York-based sellside desk analyst.

Dendreon shares fell $24.15, or 67%, to $11.69 in ultra-heavy volume on Thursday.

"If you were outright you were slaughtered. They pulled guidance and the stock is down 66%. But this morning you were making about 3 points if you were on a 65% delta," a New York-based analyst said. "If you were heavier you did better."

Depending on assumptions and views on the stock, others agreed on a 2.75-point gain for hedged players.

Whether market players would now sell or hold on was uncertain. "People can't replace anything; that's the problem that everyone has," a trader said.

The Seattle-based biotechnology company disclosed that sales of its prostate-cancer drug Provenge are growing slower than expected.

The company withdrew its 2011 revenue estimates of $350 million to $400 million and announced plans to cut jobs.

For the second quarter, the company reported a net loss of $114.6 million, or 79 cents per share, compared with a loss of $142.6 million, or $1.04 per share, a year ago. Analysts had expected a loss of 71 cents per share.

Revenue of $49.6 million was less than the $57.7 million analysts expected.

Dendreon said the problem is related to doctors not being comfortable with getting reimbursed for the expensive Provenge treatment in a timely manner.

The treatment received regulatory approval in April 2010. It uses a patient's own cells to stimulate the body's immune system to fight prostate cancer.

The company had been increasing manufacturing capacity to meet U.S. demand. In fact, proceeds of the $620 million 2.875% convertibles priced early this year were to fund investment in manufacturing facilities, including construction of a new immunotherapy manufacturing facility in Europe.

Mentioned in this article:

Central European Distribution Corp. Nasdaq: CEDC

Dendreon Corp. Nasdaq: DNDN

Eastman Kodak Co. NYSE: EK

MGIC Investment Corp. NYSE: MTG

PMI Group Inc. NYSE: PMI

Radian Group Inc. NYSE: RDN

© 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.