Convertibles quiet despite strong equity rally; Cobalt stronger; Lam Research in trade

By Rebecca Melvin

New York, Jan. 2 - The convertibles market remained mostly quiet on Wednesday, the first trading day of the new year, despite a rally in equities after lawmakers finally passed legislation to avert the so-called fiscal cliff by raising taxes on top earners only, while leaving government spending cuts untouched.

"Stocks are rallying, and bonds do not seem to be trading in step," a New York-based trader said, saying that many market players were busy valuing their portfolio holdings rather than trading on the news that was widely expected.

"I think everyone knew something was going to be thrown together," he said of the budget deal legislation.

Cobalt International Energy Inc.'s 2.625% convertibles, a $1.2 billion deal that priced in mid-December, looked to be a little stronger in active trade as the underlying shares of the Houston-based oil company gained in the overall equities updraft.

Lam Research Corp.'s convertibles traded fairly actively as underlying shares of the Fremont, Calif.-based semiconductor-equipment company notched an outsized 7.2% gain on the day in comparison to the overall 2% rally in equities.

The Lam Research 2.625% convertibles due 2041 traded up to 130.6 from about 125.5.

The convertibles of a pair of steelmakers were also in play with the underlying shares of those companies rallying strongly. Shares of United States Steel Corp. surged 8.5% on the day amid a Credit Suisse upgrade, which raised the shares to "outperform" from "neutral," and raised the bank's 2013 and 2014 earnings per share estimates as well as the 12-month stock target to $30 from $20.

Credit Suisse backed its actions, saying that the fourth quarter of 2012 would be a low point for U.S. Steel earnings and that higher steel prices would push up the shares in 2013.

The convertibles of Cemex SAB de CV, the Mexican steelmaker, were also in trade with its underlying shares pushing upward.

Avis Budget Group Inc.'s convertibles were not heard in trade after news that the Parsippany, N.J.-based car-rental company has agreed to buy car-sharing network Zipcar Inc. for $491 million, or a 49% premium to Zipcar's closing share price on Monday.

Alpha Natural Resources Inc.'s convertibles started the session a point lower, but bounced a point higher despite a drift lower in the underlying equities of the coal maker.

A convertibles trader said coal names were not trading Wednesday.

The budget deal that was finally agreed to will raise the top income tax rate to 39.6% for individuals making $400,000 a year or more and couples making $450,000 a year. It also lifts the inheritance tax to 40% on estates of $5 million or more, and boosts the tax on capital gains and dividends to 20% from 15% for high income earners.

The tax increases were expected to raise about $600 billion in revenue for the government over the next 10 years. The sequester side of the equation, or spending cuts, was put off.

Cobalt strengthens

Cobalt's new 2.625% convertibles due 2019 traded up more than 2 points to about 102.25 with underlying shares moved up to $25.33, or higher by 3.1%.

That compares to the Cobalt convertible having closed at about 102 bid, 102.5 offered versus a higher stock price of $25.45 in recent trade.

The convertibles priced initially at a 0.75-point discount to par but traded up quickly in the secondary market amid high demand for the large issue of the Houston-based oil exploration and development company focused on deepwater U.S. Gulf of Mexico and offshore Angola and Gabon.

The deal was intended to fund Cobalt's capital expenditures and for general corporate purposes.

Avis quiet despite stock gain

Avis' 3.5% convertibles due 2014 traded up to 142 and were last seen around 141.1, which was up 7 points on the day, according to Trace data.

Shares of the Parsippany, N.J.-based company jumped 95 cents, or 4.8%, to $20.77 in heavy volume.

Avis is buying Zipcar, a car-sharing network, for $12.25 per share in cash, a 49% premium over the closing price of Zipcar shares on Dec. 31.

The deal is expected to be completed this spring and to generate $50 million to $70 million in annual synergies.

In particular, Avis expects significant cost reductions across the fleet life cycle from procurement to operations and maintenance to disposition, according to an Avis press release.

In addition, Avis reiterated its previous estimates of full-year 2012 results. It continues to expect that its full-year 2012 revenue will be about $7.3 billion, a 24% increase compared to 2011, and that its 2012 adjusted EBITDA will be about $825 million to $840 million, excluding certain items, an increase of 35% to 38% compared to the prior year.

Avis also continues to expect that its 2012 pretax income will be $450 million to $465 million and that its diluted earnings per share will be about $2.35 to $2.45, excluding certain items.

Mentioned in this article:

Avis Budget Group Inc. NYSE: CAR

Alpha Natural Resources Inc. NYSE: ANR

Cemex SAB de CV NYSE: CX

Cobalt International Energy Inc. NYSE: CIE

Lam Research Corp. Nasdaq: LRCX

United States Steel Corp. NYSE: X

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