Convertibles stronger post Euro debt deal, but in-the money names slip; MF Global lower

By Rebecca Melvin

New York, Oct. 28 - Despite strengthening in the convertible bond universe on the back of a European debt deal this past week, the week's most actively traded name, MF Global Holdings Ltd., fell sharply, and on Friday continued to trade actively and was lower again.

MF Global's bonds were the worst performers for the week on an outright basis, sliding 36%, 28% and 26% for the 9%, 1.875% and 3.375% convertibles, respectively, according to Citigroup's convertibles sales and trading desk in commentary Friday.

Interestingly, the MF 3.375% and 1.875% bonds appeared to be gainers on a dollar-neutral basis; but it was a moot point given that players were likely to move in and hedge at this point, and even if they wanted to, borrowing the stock would be too difficult, a New York-based trader said.

In addition, "in-the-money" names slipped on Friday, as players looked to sell their "safer," put-like names to make room for riskier plays.

"In general, people are going back to the credit names and away from the in-the-money names," a New York-based trader said.

Convertibles are in-the-money when the price at which the bonds can convert into shares is lower than the underlying shares' current trading price.

Alcoa Inc., a deep in-the-money name, traded actively again - as it did on Thursday - and was lower by a couple of points.

Given Thursday's equity rally, deep in-the-money names did fine to better on the upside because they are closer to upside break even, a trader said. But with their bigger coupons and heavy deltas, issues like Alcoa and others would need to have several more days of equity gains to make significant improvement, the trader said.

Elsewhere on Friday, NuVasive Inc.'s convertibles were lower outright after the San Diego-based medical device company reported a third-quarter loss caused by higher costs.

There is no doubt that convertibles strengthened over the last few days on the Euro debt deal, but the improvement didn't quite match the rally in equities. That impressive move left the S&P 500 stock index up 5.7% for the week, erasing a year-to-date loss and making October, with a gain of nearly 13%, the best month since 1976, Citigroup's convertibles group noted.

In general, traders were evaluating price changes in existing paper after an exhausting week, they said.

"It's impossible to know where things go from here," a trader said. Basically, it's "the end of the month and a lot of people are just looking at stuff."

MF Global drags lower

MF's 3.375% convertibles due 2018 traded down to about 45.5 on Friday, having gone out at about 50 on Thursday. And that compared to late prints at 58 on Wednesday, 48.5 on Tuesday and 65.5 on Monday.

MF's 1.875% convertibles due 2016 moved almost in lock step with the 2018 bonds.

MF's 9% convertible due 2038, which is a less liquid and smaller issue, was 50 bid 53 offered on Friday, compared to 55 bid, 70 offered at the end of Thursday. Those bonds traded in the 90s on Monday.

Shares of the New York-based broker-dealer were trading down another 12% on Friday at about $1.262. The drop was on top of a 16% loss on Thursday, a 9% slip on Wednesday and a 42% slump on Tuesday.

"There's been no name that performed like that. Even Powerwave came back from last week," a New York-based trader said.

Powerwave Technologies Inc. plunged last week after the wireless equipment maker warned of a large shortfall in third-quarter revenue.

What caused the MF bonds to lose a third of their value were two ratings agency downgrades and an unexpected quarterly loss this week; and the troubles for the New York-based broker-dealer, led by former New Jersey governor Jon Corzine, are far from over, given uncertainty surrounding client confidence and its exposure to European debt.

Moody's Investors Service downgraded MF's credit to junk status late Thursday. It was Moody's second move on the company in less than a week. And Fitch Ratings downgraded MF Global on Thursday and placed it on Rating Watch negative, citing an increased risk-taking that has left the company "vulnerable to potential credit deterioration and/or significant margin calls."

Standard & Poor's put MF Global on watch for a possible downgrade.

Alcoa slips in line

Alcoa's 5.25% convertibles due 2014 traded at 186 during the session, which was down 2.5 points from Thursday. Shares of the Pittsburgh-based aluminum maker were also down a couple of percentage points, to $11.56, which was off 36 cents.

Shares jumped Thursday after word that a euro zone debt crisis deal had been reached. But whether that deal signals the all clear ahead remains to be seen.

"Greece can't possibly make its commitments; it can't impose the tax hikes; they already cut back on people's pensions, they are not going to be able to make their GDP numbers, and people have already taken a 50% haircut," a trader said, referring to private investors losses regarding Greek debt.

"The only question is, did they leave enough room for them to fall on their face," the trader said.

He didn't predict immediate turbulence, but foresaw troubles six or nine months ahead. "They are shrinking faster than their debt load," he said.

NuVasive lower outright

NuVasive's 2.75% convertibles due 2017 traded down to 81, which was off about 4.5 points, with the shares down at about $15.00. In September, the NuVasive bonds traded around 86ish when the underlying shares were $18.55.

The medical device company of products and procedures for the spine reported a 10.5% rise in revenue to $132.9 million quarter over quarter.

Meanwhile profit was higher but gross margin was lower. Third-quarter profit was $106.9 million, compared to $89 million in the same period of 2010. Gross margin was 80.4%, compared to 82.1% in the same period of 2010.

Mentioned in this article:

Alcoa Inc. NYSE: AA

MF Global Holdings Ltd. NYSE: MF

NuVasive Inc. Nasdaq: NUVA

Powerwave Technologies Inc. Nasdaq: PWAV

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