Convertibles improve; Jaguar Mining, MGM add outright, dollar neutral; PMI extends gains

By Rebecca Melvin

New York, July 7 - Convertibles were generally better on a dollar-neutral basis on Thursday as pricing moved up in tandem with higher underlying shares and then some.

There were no identifiable trends regarding sectors or companies, but Thursday's session marked something of a turnaround from a pullback in June in U.S. convertibles as weak economic data in the United States and the Greek debt crisis caused widespread de-risking.

"I think it's telling us that credit was also tighter" in addition to stock markets, a New York-based analyst said of Thursday's improved convertibles session.

"Market conditions were better, and people were willing to put risk on [today]," the analyst said, adding that convertibles are correlated strongly to the Standard & Poor's 500 index.

Volumes were still light, and there was no action in the primary market again, as has been the case for going on two weeks.

Interest rates have stepped back again, discouraging issuer's from tapping the convertible bond market when they can access the straight bond markets more cheaply.

The technology space has been gravitating to the straight bond market for funding, for example, the analyst pointed out.

Meanwhile, Jaguar Mining Inc. saw its 2014 convertibles trade up about a point to about 90 - which was also up dollar neutral - as the underlying shares pushed higher by 5% on no obvious news.

MGM Resorts International moved up more than 3 points outright and looked to have gained about 0.375 point on a dollar-neutral basis, with the stock up 5.4% amid easing credit concerns, an analyst said. MGM's credit default swaps were tighter by about a point as well.

PMI Group Inc.'s 4.5% convertibles due 2020 were higher by about 2 points, changing hands at 57, as the underlying shares gained for a second straight day after affirmed ratings by S&P Tuesday and being removed from negative watch.

Additionally, bank settlements with companies like MBIA Inc. and a Chapter 11 plan filed by Ambac Financial Group Inc. based on a global settlement "could just be spill-over optimism in this name," a New York-based analyst said.

School Specialty Inc.'s convertibles were also in trade and looked to be little moved after the company announced an exchange offer for its 3.75% convertibles and an amended credit agreement.

Volume remains light

In general, convertibles were still lightly traded.

"Everything looks like small trades. There were no real themes today, but stuff was generally a little better dollar neutral," the analyst said.

Although there was no action in the U.S. primary, internationally there was news of a deal from Hanjin Shipping Co. Ltd., which sold $150 million of 4% five-year convertible bonds at the cheap end of talk.

The new Hanjin convertibles were quiet in secondary action.

"Valuation of the Hanjin convertibles was attractive at the midpoint of talk or better, but [the] outlook for the sector in the medium term is bleak," according to London-based Barclays Capital analyst Heather Beattie.

Assuming a credit spread of 750 basis points over Libor and a 27% volatility (37% in a credit-calibrated model) and 3.5% borrow, the new bond was valued at 99.2 to 102.0, which equates to an implied volatility of 23% to 29% (34-38% calibrated), Beattie wrote in the report.

But Barclays analysts recently downgraded their sector view to neutral from positive, driven by the belief that the entire marine vertical will eventually be threatened by oversupply. Container volumes have increased by 10% year over year in Asia. However, the supply of vessels has hampered container shipping profitability.

"Therefore, our analysts prefer stocks that are direct plays on volume growth, such as container terminal operators, container box manufactures and container vessel shipyards. We note liquidity in the bond may be an issue given its small size but the shares are approximately 40% lower than their KRW 41,700 peak in January this year," Beattie wrote.

Korea-based Hanjin is a marine transportation services company with different types of vessels, including LNG carriers, bulk carriers and oil tankers.

Equities moved up amid a positive Automatic Data Processing June employment survey, which showed U.S. private-sector jobs rose by 157,000 last month, outstripping economists' forecast of a gain of 95,000.

Jaguar Mining adds

Jaguar Mining's 4.5% convertibles due 2014 were seen at 89.875 bid, 90 offered versus a share price of $5.19. That compared to 89 versus a share price of $4.93 on Wednesday.

Shares of the Concord, N.H.-based gold producer, with properties in Brazil, added 26 cents, or 5.3%, to $5.19 in average volume on Thursday.

"They were wrapped around 89 yesterday and they are wrapped right around 90 today, so they are up a point and better dollar neutral," an analyst said.

PMI gains

PMI's 4.5% convertibles due 2020 went out at 57 bid, 60 offered on Thursday. Earlier the PMI bonds traded at 55 versus an underlying share price of $1.49.

Shares of PMI extended strong gains, adding 6.3%, or 9 cents, on Thursday to $1.52, which was on top of a 24% gain on Wednesday.

The PMI bonds traded on Wednesday afternoon at 55.25 and on Wednesday morning at 54. Tuesday morning they were 54 and before that, the last round lot trades were at 51.375 on June 30.

The bonds trade overwhelmingly outright, but there were quotes on swap.

PMI's ratings were affirmed by S&P Tuesday, and they were removed from negative watch. Additionally, with the news about bank settlements with companies like MBIA and the filing of the Ambac plan, the activity "could just be spill-over optimism in this name," the analyst said.

The move represents a sharp turnaround for names in the mortgage insurer space. Most mortgage insurers have slid sharply lower in the first half of 2011.

"Look at where [PMI's] stock is in relation with where they did the deal; the strike is at $7.84 and the stock is at $1.50. There are concerns about the viability of mortgage insurers," a convertibles player said.

S&P lessened the risk of an additional downgrade on PMI Mortgage Insurance Co. and parent firm PMI Group Inc., saying it expects the mortgage insurer to maintain solvency through at least the second quarter of 2012.

The ratings had been downgraded by two notches each and put under review for further downgrades last month, when S&P said it expected the company would continue to post operating losses throughout this year and next.

Mentioned in this article:

Hanjin Shipping Co. Ltd. Korea: 117930

Jaguar Mining Inc. NYSE: JAG

MGM Resorts International NYSE: MGM

PMI Group Inc. NYSE: PMI

School Specialty Inc. Nasdaq: SCHS

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