Convertibles better bid; Alcoa, Ingersoll-Rand up; Schlumberger premium widens; PNC, Webster trade

By Rebecca Melvin

New York, April 2 - Alcoa Inc. jumped Thursday, as many convertibles saw better bids in active trading, with recently priced new issues accounting for the biggest volume names, convertibles players said.

Trading was especially active in the morning as paper strengthened in tandem with a rally in stocks and better credit.

"Everything was ramping with credit and equities higher," a Connecticut-based sellsider said of early trading.

Ingersoll-Rand Co. Ltd. convertibles extended gains notched Wednesday on the issue's debut in the secondary market.

Several commodity and energy names were mentioned in trade as energy stocks extended gains on top of a rise in the previous session on bullish sentiment about economic recovery. Among these was Schlumberger Ltd.

Among financials, convertible preferred shares have been notably quiet in recent sessions even as their underlying common stock has added. On Thursday, financials were strong in the morning amid word that the Financial Accounting Standards Board adopted new guidelines for mark-to-market accounting, which will relax standards for how financial companies account for assets on their books.

Names like Bank of America Corp., which has been a mainstay among financial preferreds in recent months, weren't really active. But PNC Financial Services Group Inc. and Webster Financial Corp. were mentioned in trade, at firmer levels.

Other new issues from Newell Rubbermaid Inc, Johnson Controls Inc. and Newmont Mining Corp. were mentioned in trade as well.

"The fact that Ingersoll-Rand, Teradyne and Newmont all priced better, beyond the initial talk, and then proceeded to trade up reflects positively for convertibles. JCI was the only one that priced at the wide end," a sellside source said.

"People are still looking for senior, shorter-dated paper with visibility and more bond floor," the sellsider said, by way of explanation regarding Johnson Controls' wider pricing.

Prospects for more issuance

In light of the revived action in the primary market in March, convertibles players were optimistic that a higher level of new issuance will continue. That prospect cheered players in the convert space.

"We need more paper in the market," one sellsider said.

A buysider said, "Companies can finance via converts - many other venues remain closed. The issues are cheap, but I think they need to come cheap as the arb community is not as big, and primary desks are wary of capital committed."

The West Coast-based buysider observed that the new issues that have been coming to market are well-known and have broad appeal to many asset managers, not just convertible outright players.

He noted, as well, that, "arbitrage may suffer a little gamma on their delta hedging as high beta credits gap tighter. To stay delta neutral, you are buying stock as the stock goes up!"

Alcoa surges higher

Alcoa's 5.25% convertibles due 2014 traded at 146 versus a share price of $8.30 on Thursday, compared to 132 on Wednesday.

The paper was seen settling at 145.625 versus a share price of $8.18, compared with 135.6 versus a share price of $7.60 on Wednesday, according to a pricing source.

Although the equity market lost a little momentum late in the session, blue chips including Alcoa were soaring earlier on and settled higher. Shares of the Pittsburgh-based aluminum producer added 7.6%.

FASB's new guidelines, which require companies to value assets at prices reflecting current market conditions, was said to be providing overall lift.

The changes will allow assets on banks' books to be valued at what they would be in an orderly sale as opposed to forced or distressed sales.

The new guidelines also allow banks to avoid reporting some losses on securities by splitting them among factors like fluctuating interest rates that won't have to be counted toward net income or loss.

For its own part, Alcoa, a raw materials supplier, stands to benefit if global economic activity regains steam.

The day's economic data was mixed, with initial jobless claims jumping 12,000 to 669,000 for the week ended March 28, higher than the 650,000 expected.

However, total February factory orders rose 1.8%, which was slightly above the expected 1.5% increase. Orders for the prior month were revised lower to reflect a 3.5% decline.

Schlumberger premium widens

Schlumberger's 2.125% convertible senior debentures due 2023 traded at 131 versus a share price of $44.15 on Thursday.

Schlumberger common shares settled up $2.69, or 7%, at $43.79.

The Houston-based oilfield services company's convertibles used to be so far out of the money that they didn't trade much. But the convertible's premium is now "a bit wider using the bid sides of the market, from about 10% to 18% now," a New York-based sellside desk analyst said.

PNC, Webster trade among financials

The 4% convertibles due 2011 of Pittsburgh-based PNC traded firmer at 91.75 bid, 92 offered.

The bonds have been steady at 9% to 10% yield to maturity, and are considered purely a debt instrument since they have a $482.51 strike.

Nevertheless, "as prices on new paper tighten, we'll probably see some tightening in this issue as well," a New York-based sellsider said.

Meanwhile, the Webster Financial 8.5% convertible preferred traded stronger at plus 19 points. Shares of the Waterbury, Conn.-based bank holding company added 10 cents, or 2%, to $4.70.

There has been interest in the name of late perhaps due to the fact that it's among companies that may swap preferreds for common equity.

Mentioned in this article:

Alcoa Inc. NYSE: AA

PNC Financial Services Group Inc. NYSE: PNC

Webster Financial Corp. NYSE: WBS

Schlumberger Ltd. NYSE: SLB

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