Jefferies drops amid funding concerns; Rambus steadies after sharp slide; NetApp lower

By Rebecca Melvin

New York, Nov. 17 - Jefferies Inc. convertibles traded down sharply on Thursday before retracing a good chuck of those losses before the market close, as investors worried about the mid-sized investment bank's funding sources that have been linked to debt markets.

"There are concerns that it's heavily depending on repo funding. There are concerns with counterparties and if you're a counterparty to Jefferies, you are wondering whether to continue to trade with them," a New York-based trader said.

Rambus Inc.'s convertibles bounced slightly after a slide of more than 20 points late Wednesday on word that the Sunnyvale, Calif.-based chip-technology company lost a long-running price-fixing case against Micron Technology Inc. and Hynix Semiconductor.

For outright investors, Rambus' pricing still represented a sharp loss, but on a hedged basis, investors made 4 to 6 points, depending on their delta, one trader said.

Fellow tech-sector name NetApp Inc. dropped another 5 points Thursday following a 10-point slide late Wednesday after the data-storage technology company provided weaker-than-expected guidance for the current quarter.

AMR Corp.'s convertibles were down another couple points amid more bankruptcy chatter as the Dallas-based parent to American Airlines wrestles with pilot union talks.

AMR's 6.25% convertible notes due 2014 traded at 43 versus an underlying share price of $1.65, a New York-based analyst said.

"Those bonds seem to be firmly planted in the land of distressed," a New York-based trader said of AMR.

Overall, the tone of the convertibles market was mixed, however, and dependent on name-specific news, a market source observed. The session seemed to be raining headlines, raising the tempo of trading in the convertibles market and pushing typical top-volume names aside in favor of those in the limelight.

Jefferies was the top volume name of the day, according to Trace data. NetApp and Micron were also among top names, as was Tech Data Corp., which announced that it is calling its $350 million outstanding of 2.75% convertibles due 2026.

Jefferies drops

Jefferies' 3.875% convertibles due 2029 traded down as low as 70 bid, 71 offered on Thursday, with the lowest round lot trade reported at 71, according to a New York-based trader. The paper regained ground to trade significantly at 74, and then closed a little higher than that at 75 bid, 76 offered.

At the 74 level, that put the bonds 3 points lower than Wednesday's closing 77 bid, 78 offered, according to the trader.

Shares of the New York-based investment bank also fell on Thursday but also recovered much of their lost ground by the market close. At their lows, shares were down 8% at $9.50, but they closed down just 2% at $10.11.

Jefferies credit spreads also blew out during the session.

"Many of its issues in the credit complex were printing at distressed levels today," a sellsider said of Jefferies.

A Financial Times online story linked the sell-off in Jefferies' shares to the bank's dependence for funding on debt markets. The article, highlighted by convertibles traders, also reiterated Jefferies' travails since Nov. 10, when analysts expressed concern about the firm's exposure to euro zone sovereign debt.

"All in, it's not down that much," the trader said. "But it was the single most active bond on Trace today and there are funding concerns."

Rambus lower on verdict

Rambus' 5% convertibles due 2014 traded at 97 versus an underlying share price of $8.30 on Thursday, according to a New York-based analyst. There were also trades as low at 95.16 and as high as 97.76, a trader said, referring to "prints" being all over.

Meanwhile, Micron's convertibles edged higher.

Both moves were related to the California court verdict that went against Rambus in its case involving the price of DRAM memory chips. The long-running case began more than five years ago.

Rambus outright holders lost more than 20 points, while hedged investors made 4 to 6 points depending on their hedge, one trader said.

Rambus shares fell more than 60% on Wednesday but recovered 23% on Thursday on what one trader called an "unexpected verdict."

The company sought as much as $4 billion in damages in the price-fixing case.

NetApp down on outlook

NetApp's 1.75% convertibles due 2013 traded down on Thursday, with one exchange reported at 126.5 versus an underlying share price of $36.30.

The 126 price was down 5 points from Wednesday's 131 level, which was, in turn, down 10 points from Tuesday's levels.

NetApp shares fell $5.01, or 12% on the day, to $35.73.

For its current fiscal third quarter, NetApp forecast earnings between 36 cents and 40 cents a share, or between 56 cents and 60 cents a share excluding items, on revenue of $1.52 billion to $1.61 billion.

Analysts were expecting adjusted earnings of 63 cents a share on $1.65 billion for this period, which ends in January.

The company cited weak demand for its data storage products for the declines. The Sunnyvale, Calif.-based company said that the Thailand floods shouldn't affect supplies of hard disk drives for the current quarter, but production problems in that nation may affect revenue and margins in 2012.

NetApp reported late Wednesday a fiscal second-quarter profit excluding one-time items of $235.5 million, or 63 cents a share, which actually beat analysts' expectations for adjusted earnings of 60 cents per share. Revenue at $1.51 billion fell short of analysts' consensus estimate of $1.55 billion, however.

Collins Stewart downgraded NetApp to "neutral" from "buy" ahead of the market open Thursday.

NetApp chief executive Tom Georgens said in a statement that the company generally saw strong revenue growth across most of its business areas, but there was some unexpected weakness in a few of its largest accounts.

Mentioned in this article:

AMR Corp. NYSE: AMR

Jefferies Inc. NYSE: JEF

Micron Technology Inc. NYSE: MU

NetApp Inc. Nasdaq: NTAP

Rambus Inc. Nasdaq: RMBS

Tech Data Corp. Nasdaq: TECD

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