Investment-grade issues dominate convertibles market; Medtronic higher; MF Global dips

By Rebecca Melvin

New York, March 26 - The convertible bond market saw its large, investment-grade names move up in trade along with a rally in equities on Monday.

Medical device maker Medtronic Inc. was higher, and the two convertible issues of chip giant Intel Corp. were both in trade.

Equities were cheered by Fed chairman Ben Bernanke's comments early Monday, reaffirming the U.S. central bank's commitment to lower interest rates and monetary policy aimed at fueling the market.

"He wants to keep rates low and force people to buy stocks," a New York-based convertibles sellsider said during a conversation about the convertibles market.

The low-rate environment has generally hurt the convertible primary market by encouraging issuers to tap the straight bond markets instead where rates are low enough and equity is not involved.

But on the other hand, traders also see higher equities as giving a boost to the convertible bond market both in terms of pricing and new issuance.

"Maybe [issuers] will want to sell their equity up here," a sellsider said, referring to the stock reference price at which a convertible bond offering is priced. The higher price begets a higher premium at which the bond can be converted into shares even if shares subsequently go lower.

In fact, there has been a flurry of new issuance in recent weeks, with Salix Pharmaceuticals Ltd.'s $600 million of 1.5% seven-year convertibles, Medivation Inc.'s $225 million of 2.625% five-year convertibles and Priceline.com Inc.'s $875 million of 1% six year convertibles among notable new issues.

Another feature of the convertible market of late has been the sense of a greater European influence on the U.S. market, both in terms of European accounts trading in the U.S. markets, and U.S. investors looking at ideas overseas to supplement perhaps picked-over markets here.

For example, a large Medtronic trade by a European account kept one firm busy for part of Monday.

Perhaps the European account wanted in to be liquid in case the new issue market heats up later this week, a sellsider said.

"We always do a fair amount with European counterparties in the morning; we had two-way flow in the European accounts in the morning, and then it got slow in the afternoon with only U.S. accounts trading," a New York-based trader said.

On the other end of the spectrum from investment grade, there was a flurry of trading in bankrupt MF Global Holdings Ltd.

The MF bonds traded a little bit lower, a Connecticut-based trader said in the 32.25 to 32.5 context. But he also saw prints much higher at 35. He hadn't heard any comments about what was spurring the activity.

Meanwhile, A123 Systems Inc. stock plunged after the Waltham, Mass., rechargeable battery maker said it would spend about $55 million to replace battery modules and packs that might be defective.

The additional costs come at a time when spending by the company is outpacing revenue. A123 System's 3.75% convertibles due 2016 traded down to 37.886 on the day and as high at 38.938, according to Trace data, which compares to a level at 40.5 in the middle of last week. Shares of A123 plunged 12% on the day to $1.49.

There is only a minimal amount of Lions Gate Entertainment Corp.'s 3.625% convertibles and 2.9375% convertibles left outstanding, so they were not heard in trade, despite the fanfare surrounding the Santa Monica, Calif.-based movie and entertainment company Monday after its new movie blockbuster "The Hunger Games" hit the box office.

The dystopian action story earned nearly $153 million over the weekend, making it the third biggest debut of all time.

Lions Gate shares rallied 4.5%. Due in good part to the record box office performance, Moody's Investors Service said its rating on Lions Gate B2 corporate family is well positioned for an upgrade in its current review.

Overall, the convertibles universe was quiet with the liquid, investment-grade names the notable traders, sources said.

"Those trades seem to be more popular right now, giving people the ability to move money in and out of the market quickly,' a sellsider said.

A second sellsider said that recent quiet trade was due to the lack of catalysts to trade along with the slow grind higher in equities and cash on the sidelines.

Medtronic adds

Medtronic's 1.625% convertibles due 2013 traded last at about 100.6, which was up about 0.5 point on the day, according to Trace data.

Medtronic shares gained $1.30, or 3.4%, to $40.00 in average to slightly higher volume.

There was a European buyer of Medtronic that came in "out of the blue," a sellsider said.

Mentioned in this article:

Intel Corp. Nasdaq: INTC

Medivation Inc. Nasdaq: MDVN

MF Global Holdings Ltd. Pink Sheets: MFGLQ

Priceline.com Inc. Nasdaq: PCLN

Salix Pharmaceuticals Ltd Nasdaq: SLXP

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