Newmont Bs expand on hedge; short-dated Textron flat; RTI tracks little changed with stock

By Rebecca Melvin

New York, April 17 - Commodity-related convertibles continued to trade fairly actively on Wednesday with healthy expansion on a hedged basis given weakness in the underlying shares. But elsewhere the convertible space remained unchanged or quiet in the face of a third straight day of triple-digit moves in equity markets.

Monday and Wednesday were big down days in equities, while stocks rallied on Tuesday.

Newmont Mining Corp.'s 1.625%, or B, convertibles were more active Wednesday and lower outright, but they expanded by about 0.5 point on a dollar-neutral, or hedged, basis. The Newmont As were also in trade and have expanded this week amid sharp losses in the common shares of the Denver-based gold and copper mining company. But the As on Wednesday quieted some, as "people seemed to move on to the Bs," a New York-based trader said.

Textron Inc.'s 4.5% convertibles, which are currently convertible and mature May 1, traded actively on Wednesday but were unaffected by news that the Providence, R.I.-based manufacturer missed earnings estimates and lowered guidance, citing expectations of lower business-jet deliveries this year. Shares dropped 13%.

Meanwhile, business software maker Tibco Software Inc.'s 2.25% convertibles were also seen tracking with shares of the Palo Alto, Calif.-based business software and services company at about 97 at the close, a New York-based trader said.

Meanwhile, RTI International Metals Inc.'s 1.625% convertibles, which debuted in the market on Friday, were lower outright, but steady on a dollar-neutral, or hedged, basis.

In the last two days, they have moved down on theoretical 60% to 65% delta. "It's kind of the same deal: it was pretty active and in the same context dollar neutral at about 97.5 bid, 98 offered at the close," a trader said.

"It's been a healthy sell-off," the trader said.

The CBOE Volatility index, or VIX, which had been very low since February, jumped to 16.67, or up 2.71 points, on Wednesday as stocks dropped amid concerns over European debt and global growth worries.

"Vol. was so low in February and March, and now with the VIX spiking, some of the more in-the-money type names have definitely done better. There's been some expansion," a trader said.

"So far, so good," the trader said. The credit markets, including the high-yield index, have not sold off that much compared to stocks, and convertibles tend to follow high yield. If the downturn is more extended, it could change however and have a negative impact on convertibles.

Some market players in outright names and more balanced convertibles have been more quiet this week as that profile has not done as well as the in-the-money, high delta names.

"It's been very quiet. When you have moves of 150 points, guys are just trading stocks, not convertibles," a New York-based sellsider said.

LDK Solar Co. Ltd., which has 4.75% convertibles that have already matured but have not been paid off, were quiet, sources said.

"There's not any kind of a market in those," a trader said of LDK. The company settled with bondholders on about $16 million of the issue, so there's only about $7 million left that haven't been paid off.

The Xinyu City, China-based producer of solar wafers and photovoltaic products said Wednesday that it has "partially defaulted" on $23.8 million of the bonds due Tuesday. It is "ready and willing" to discuss a settlement with the others. Back in September, LDK said it was facing a liquidity challenge and working with lenders to improve its debt maturity profile.

Equities ended sharply lower. The Dow Jones industrial average fell 138.19 points, or nearly 1%, to 14,618.59, following a 136- point rebound Tuesday. The S&P 500 stock index lost 22.56 points, or 1.4%, to 1,552.01, after jumping 22 points, or 1.4%, on Tuesday; and the Nasdaq stock market fell nearly 60 points, or 1.8%, to 3,204.67, after rising 48.14 points, or 1.5%, on Tuesday.

Newmont expands on hedge

Newmont's 1.625% convertibles due 2017 were seen ending the session at 112.25 bid, 112.75 offered versus the closing share price of $32.36.

That was down about 1.25 points outright, but the issues expanded on swap by about 0.5 point, a trader said.

The Newmont 1.625% convertibles are the longer-dated of the company's sister issues, and it is typically less actively traded, but that was not the case on Wednesday.

"It picked up today. They were more active," a trader said.

Newmont's 1.25% convertible due 2014 ended the session at 104.75 bid, 105.25 offered versus the $32.36 share price. That extended an expansion which for the week is about 2 points.

The B convertibles have expanded about 1.5 points for the week, the trader said.

Newmont shares slid another $1.42, or 4.2%.

"The As have been kind of expanding so much so that people are now pushing up the Bs," the trader said.

The deltas on the two issues have changed as the underlying share price has come in. The A convertibles' delta has moved to about 25% from 40%, and the B convertibles, which are longer-dated, have moved to 50% from 60%.

Goldcorp Inc.'s convertibles have come in with weaker shares and were seen at 102.5 at the end of Wednesday. But that issue has virtually no delta. Prior to the downturn, the Goldcorp convertibles had a delta of about 15% to 20%.

Another issue that has expanded significantly this week is the Stillwater Mining Co. convertible.

Textron steady at parity

Textron's 4.5% convertibles due May 1 were seen well above double par at 229 on Wednesday despite a slide in Textron shares due to the company's quarterly earnings miss and reduced full-year guidance for earnings.

The Textron convertibles traded unchanged at about parity.

"It traded actively," a trader said, calling it a parity-type item.

Textron shares fell $3.94, or 13.4%, to $25.41 in heavy volume.

Textron's quarterly net income was up slightly at $119 million, or 41 cents a share, compared to $118 million, or 40 cents per share, from the year-earlier period. Analysts had been expecting net income of 46 cents per share.

Profit for Textron's Bell helicopter unit fell 11% to $129 million.

Textron reported revenue that was flat at $2.86 billion. Analysts had been expecting higher revenue of $2.88 billion.

Textron said it now expects full-year earnings of $1.90 to $2.10 per share for 2013, which was down from previous guidance of $2.10 to $2.30 per share.

The Textron convertibles trade on a high delta and in step with the stock.

Tibco tracking with stock

Tibco's 2.25% convertibles due 2032 traded some on Wednesday and were seen at 97 at the close.

Shares of the Palo Alto, Calif.-based business software company shed 37 cents, or 1.9%, to $19.43.

Convertibles players in technology names were said to be "taking it on the chin," along with shareholders in the technology sector.

"We call Tibco the cheapest chip," a New York-based trader said.

He said it is one of the higher beta names tracking with equity.

A month ago, Tibco reported quarterly revenue that missed analysts' estimates and an in-line profit, sending its shares down. Net income was more than halved to $9.5 million, or 6 cents per share, in the first quarter, from $20.6 million, or 12 cents per share, a year earlier.

Revenue rose 5% to $237.8 million. Analysts on average had expected adjusted earnings of 18 cents per share on revenue of $242.5 million.

Mentioned in this article:

Goldcorp Inc. NYSE: GG

LDK Solar Co. Ltd. NYSE: LDK

Newmont Mining Corp. NYSE: NEM

RTI International Metals Inc. NYSE: RTI

Stillwater Mining Co. NYSE: SWC

Textron Inc. NYSE: TXT

Tibco Software Inc. Nasdaq: TIBX

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