High-grade paper mixed as strong equity rally cools convertibles; Bank of America in focus

By Rebecca Melvin

New York, Aug. 11 - Convertible investment-grade paper was in demand and traded mixed on Thursday, moving lower in the early going and getting better later in the day as equities rallied fiercely into the session's close.

Medtronic Inc.'s 1.625% convertibles due 2013 traded at 99.95, EMC Corp.'s 1.75% convertibles due 2013 changed hands at 147.25, which was higher, and Amgen Inc.'s 0.375% convertibles due 2013 stood at 98.85, according to Trace data. All three were active traders on Thursday.

"A lot of investment-grade paper looks cheaper now. Holders often sell the big, liquid issues first since they'll usually get a decent price for it," a New York-based sellside desk analyst said of convertibles.

But the hectic stock buying didn't translate to the convertibles market in general, with many traders left twiddling their thumbs in the afternoon after accounts "sold at the lows and weren't about to buy at the highs," a New York-based trader said.

After a punishing sell-off on Wednesday, a forceful turnaround for stocks seemed to be sparked by positive jobs data and a few strong earnings reports that signaled that maybe the U.S. economy is not dipping into another recession.

Real estate investment trust ProLogis was also an active trader and lower amid what appeared to be "a big seller out there," according to a New York-based trader.

The Denver-based industrial REIT, with a large pool of high quality, unencumbered assets, looked lower outright, but the ProLogis 3.25% convertibles, which have some equity sensitivity, were in line, meaning that they didn't slip on a dollar-neutral basis, the trader said.

Players seek bargains

Traders surveyed the tattered market in the aftermath of heavy selling in search of dislocations created by the wild market action of the past week. The Dow Jones Industrial Average has whipped around by 400 points or more for four straight days.

Bank of America Corp. was one name that a New York-based outright buysider pointed to as evidence that there may be some bargains out there.

Bank of America's 7.25% L series convertible preferred has been trading at a higher yield than the pari passu Bank of America 7.25% J series straight preferred.

The outright player said it was unlikely that Bank of America could be in trouble, given its demand deposits and strong cash flow, but the discrepancy in pricing of the securities was "reminiscent of how cheap convertibles were in late 2008."

A similarity to the 2008 financial crisis is that financials are central to the volatility, the buysider said. "But this time the concern is really about major banks, mostly foreign banks, that are very big," he said.

The current situation is also different in that "convertibles are not being dumped randomly as happened when Lehman in London went under, and left convertibles as collateral with all sorts of institutions that sold at seemingly any price," the buysider said.

Other market sources agreed.

"I think the difference is today dealers are making two-way markets, and we are not seeing indiscriminate selling," a New York-based sellsider said.

"Are converts coming in? Absolutely," the sellsider said. "But there are still buyers picking their spots, and [we're] seeing good two-way flow."

But a name mentioned that may still be considered rich compared to what's happened to convertibles in general is Leap Wireless International Inc.

Leap's 4.5% convertibles due 2014 were trading up at around 90 "when you can buy the straight debt, which is higher in the cap structure at 86," a Connecticut-based sellside analyst noted.

International echoes U.S.

Eyes have been on Europe and the sovereign debt situation there. And as for the convertible market in Europe, valuations are cheap and could cheapen further, a London-based sellside analyst said Thursday.

The market "has fallen; it's a tough time," the analyst said. In the past week, "[it] has felt cautious, but functional."

As in the United States, there was some good two-way flow, but as is typical in most times of heightened stress, there were ebbs and flows that can change quickly, and the market was more inclined toward risk-aversion than risk-addition, the analyst said.

A name highlighted in the Barclays Capital convertible weekly published on Monday was Inmarsat. The Inmarsat convertibles have seen a large fall in implied volatility and the name was identified as a potential opportunity in the midst of the sell-off.

"The current environment may present a rare opportunity to access some bonds not only at depressed parity levels, but also at relatively cheap valuations," according to the Barclays commentary.

BofA preferreds in focus

Bank of America's 7.25% series L perpetual convertible preferred at $795 carries a 9.1% yield, a New York-based buysider noted.

"That's probably reward enough in itself. Long term, equities probably don't return 9.1%. Meanwhile, the 7.25% J straight preferred at $21.13 yields only 8.6%," the buysider said.

The comparison between the J paper, which has a $25 par and retail holders, and the perpetual convertible preferred with its $1,000 par and institutional holders, might mean that the J paper is less susceptible to volatility. Nevertheless the two issues should have similar yields, a New York-based trader commented.

Meanwhile, financial paper in the convertible market has not been a favored space. It's "all beta in financial names," a New York-based sellsider said, referring to risk and volatility in those investments.

Meanwhile, the outright player noted that "if one bought the BAC convertible preferred at issuance in early 2008, one is ahead now, whereas the underlying stock is down maybe 80%."

Shares of the Charlotte, N.C.-based bank closed at $7.25 on Thursday, which was up 48 cents, or 7%.

ProLogis lower

ProLogis' 2.625% convertibles due 2038, which have no equity sensitivity, got pushed lower on Thursday, changing hands at 98 at one point, according to Trace data. The ProLogis 3.25% convertibles due 2015, which have equity sensitivity, changed hands at 104.05.

Shares of the Denver-based REIT gained $1.31, or 5%, in trade on Thursday to close at $27.71.

"Someone was hitting a lot of bids at the end of the day," a trader said of the ProLogis convertibles. The trader also said there seemed to be a big seller in the market but said he was not personally involved in the trades.

Mentioned in this article:

Amgen Inc. Nasdaq: AMGN

Bank of America Corp. NYSE: BAC

EMC Corp. NYSE: EMC

Leap Wireless International Inc. Nasdaq: LEAP

Medtronic Inc. NYSE: MDT

ProLogis NYSE: PLD

© 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.