Convertibles quiet, ride stronger equity markets; SanDisk holds on to gains; Agco improves

By Rebecca Melvin

New York, Sept. 3 - Strong performance in the equity markets over the past week - pulled higher by generally positive economic data - helped support the convertible bond market, even if the convertible bond market was challenged by weak volumes. In addition, takeover chatter helped stimulate trades in specific convertible names.

The week's trading activity was generally quiet, however, and the convertibles primary market was silent in the pre-holiday week that unofficially marks the end of summer.

On Friday, markets were open, but there was no significant activity on the last day before the long weekend, convertibles traders said. Markets are closed Monday for Labor Day.

One of the week's most active names was SanDisk Corp., which saw its newer 1.5% convertibles continue to push lower early in the week but mark a turnaround Thursday. On Friday, the newer paper lost a little steam in favor of the older SanDisk 1% convertibles due 2013, which moved higher.

There's normally a "balancing act" between sister bonds of a single issuer; and having a nearly "indifferent" equilibrium between them is a healthy thing for the market, a New York-based sellside trader said.

"Different people do different things with them," the trader said regarding which SanDisk issue was favored by hedge players.

Another name of interest this week was Agco Corp., which saw its two convertible bond issues move up amid strong performance in their underlying common shares, which gained 13.5% from Monday in a general updraft in equities, a sellsider said Friday afternoon.

Also topping the most-actives list Friday were the convertibles of Beckman Coulter Inc. and Allergan Inc. and the 2.25% convertibles of Best Buy Co. Inc.

Jobs data eyed

On Friday, the August jobs report was mixed but helped buoy market sentiment.

The Labor Department said the economy gained 67,000 jobs in the private sector, but that was better than economists expected; and the unemployment rate increased to 9.6%.

Total nonfarm employment declined by 54,000 over the month, as 114,000 temporary census jobs wrapped up between July and August and offset private sector gains, the Labor Department said.

There were also revisions upward to June and July's reports that showed the economy added more jobs than the government had previously stated. In addition, hourly wages rose more than expected, and temporary employment was up, which is seen as a sign of future growth.

The jobs data "helped" outright convertibles holders, a sellsider said Friday.

Overall, credit spreads tightened and risk went down. Interest rates keep creeping up, "but that's OK," the sellsider said. "Prices are improving on convertibles relative to the stocks."

But as good as pricing has gotten, the convertibles market cannot get beyond the fact that it needs new supply to spur market action. Volume was down this week not only because of the upcoming holiday, but also because there has not been any new issuance, a sellsider said.

Without new paper, investors are inhibited to sell since they can't easily replace it, he said.

SanDisk holds on to gains

SanDisk's 1.5% convertibles due 2017 mostly held on to their gains from Thursday, although some momentum upward moved to the older SanDisk 1% convertibles.

The SanDisk 1.5% paper traded last at 94.5, according to Trace data at 2:30 p.m. ET, which was down 0.125 point from Thursday. On Monday, the SanDisk 1.5% paper - which initially priced only two weeks ago - traded at 89.

The SanDisk 1% convertibles due 2013 traded at 94.55 Friday afternoon, according to Trace data, which was up 3.4 points.

Shares of the Milpitas, Calif.-based flash storage company gained $1.12, or 3%, to $37.14 in late afternoon trading.

The SanDisk turnaround this week was attributed to takeover rumors involving Toshiba.

The newer convertibles' longish, seven-year maturity was counted as a big strike against the paper when it first priced.

"The new paper did poorly because it didn't compare well to the existing paper. The older ones looked better," a sellside trader said.

"Everything is magnified. It will have more sensitivity to future events, and that's not always a positive," a sellsider said of the seven-year paper.

The more duration the paper has, the more potential it has for gains or losses.

In addition, the sister issues are going to try to find a balance between them. Initially, the newly priced paper competes with the older one for capital. But they will eventually maintain equilibrium that should always be as close to indifferent as possible, the sellsider said.

Agco pulls up with shares

Agco's 1.25% convertibles due 2036 traded last at 114, which was up from about 110.5 on Thursday.

Agco's 1.75% convertibles due 2033 were not seen in trade on Friday but were last at 154.4.

Shares of the Duluth, Ga.-based maker of agricultural equipment were up about 3%, trading at around $37.00.

Agco is a hedged convertible name that was benefiting from a strong stock move this past week, with the Agco 1.25% "tracking up a little heavier than the shares," a sellsider said.

The 1.25% bonds were seen having a 55% to 60% delta, but they were tracking up on about a 65% delta.

"It's more of a gain to the stock," the sellsider explained.

The Agco 1.75% convertibles "have been pretty good," but they are considered short-term paper now with a put set Dec. 31, 2010, and there has been some variation in its valuation.

"The Agco 1.25% paper in the last couple of weeks had traded 2 points and then 1 point, and nobody knows why considering that the stock has been moving," the sellsider said.

Shares of Agco bottomed out in June, after having started to fall in May with the overall market. On July 1, the shares were at $26.00. Then they went all the way back up to $37,000, fell back to $32.00, and recently moved back up to $37.00 again.

"It's been a sharp move in the last couple of days. The market was a lot stronger," the sellsider said.

Mentioned in this article:

Allergan Inc. NYSE: AGN

Agco Inc. Nasdaq: AGCO

Beckman Coulter Inc. NYSE: BEC

Best Buy Co. Inc. NYSE: BBY

SanDisk Corp. Nasdaq: SNDK

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