VeriSign drops outright in active trade but improves on hedge; larger, liquid names active

By Rebecca Melvin

New York, Nov. 30 - VeriSign Inc. was the name of the day in the convertible bond market on Friday, with the Reston, Va.-based registry of Web domain names dropping outright but better on a dollar-neutral, or hedged, basis after word that the U.S. Department of Commerce renewed the company's agreement to run the dot com internet registry but took away its ability to raise prices.

Elsewhere, the secondary market was dominated by larger, liquid names like Gilead Sciences Inc. and Amgen Inc., which were flattish in trade, market players said.

The convertibles of bankrupt AMR Corp. were in trade again and higher, continuing to ride news that a bondholder group has offered to provide restructuring financing.

Otherwise, the convertibles market was quiet, with not much in the way of month-end activity on the last day of November.

"There are some loose ends being tied up here and there," a New York-based trader said of the session.

For the month as a whole, there was anecdotal evidence that returns for convertible players were flat to slightly higher, according to a New York-based trader.

Boosting returns was an outsized gain in Knight Capital Group Inc., which pushed higher this week to near par on news of a buyout agreement. But weighing down market players' returns were losses in Central European Distribution Corp., which slumped 20 points to 30 points for the month to about 52, and Suntech Power Holdings Co. Ltd.'s convertibles, which moved down about 10 points to 32, according to a New York-based trader.

DryShips Inc. was also an active name, which bounced back strongly but was still seen down about 5 points for the month.

New issuance was light, with about $975 million brought in seven deals, which was down compared to $2.65 billion in seven deals for October and down also from November 2011 when $1.43 billion in five deals were issued.

Jefferies & Co. topped the league tables for U.S. issuance in November with $230 million, or 24%, of total volume.

VeriSign up dollar neutral

VeriSign's 3.25% convertibles due 2037 traded down to about 115.125 versus an underlying share price of $33.50 during the session, according to a West Coast-based trader.

VeriSign shares slid $5.19, or 13.2%, to $34.15 in active trade.

The drop in the convertible bonds was about 15 points outright, but represented about a 0.75 point improvement in the paper for hedged players using a delta hedge of 82%, some sources said.

One source said that the improvement at the 82% hedge was lower at 0.125 point improvement, and that at higher hedges, the improvement was better.

VeriSign's convertibles have moved sharply in the past six weeks on speculation regarding whether it would get Commerce Department approval to retain the internet registry. In late October, the convertibles dropped to 126 from 147 when uncertainty regarding the renewal first surfaced.

A week or so later when the company put out a news release reassuring investors of the likelihood of renewal, the notes recovered to trade at 136 versus an underlying share price of $42.40.

"VeriSign is the winner," a Connecticut-based analyst said regarding Friday's session.

A second source said that with VeriSign down 15% on news that its ability to increase domain charges had been changed, the paper dropped outright but improved on hedge.

"Those look somewhat interesting," a trader said, adding that he wondered if outright investors would step in as buyers at this point. He said the paper is rather long dated but has good volatility and is a solid credit.

Trading volume in VeriSign's convertibles was about $90 million of bonds out of $190 million total as of midday Friday, according to Trace data, a New York-based trader said.

As for the new restrictions on VeriSign's registry business, the company said it will no longer be allowed to increase prices by up to 7% in four separate price hikes, but instead will retain current pricing of $7.85 per domain name registration for the duration of the six-year term ending Nov. 30, 2018.

VeriSign can petition Commerce for permission to make increases, however, due to extraordinary circumstances, including expenses related to security threats.

Before the latest move, the long-dated bonds were treated like preferred securities.

AMR continues to fly

AMR debt was "clearly stronger," a trader said Friday, as the company sought to extend its exclusivity period.

"It was the hottest name of the day," the trader said, seeing the benchmark 6.25% convertible notes due 2014 trade "as high as 78."

Another trader said the bonds "continue to move up," placing them in the high-70s as well.

As previously reported, the market learned Thursday that a group holding about $885 million of the bankrupt airline's debt - a group that includes JPMorgan Chase & Co. and Pentwater Capital Management LP - has said it will provide restructuring financing for the Fort Worth-based parent of American Airlines, which would allow the company to emerge as a stand-alone business. But the group has one demand: fire the entire current board of directors.

Speculation is that the group wants to get rid of the board so that upon emergence it can seek a merger with U.S. Airways. However, U.S. Airways might only be interested in buying the company while it remains in bankruptcy, as it would likely get it for a cheaper price.

Stephanie Rotondo contributed to this article

Mentioned in this article:

Amgen Inc. Nasdaq: AMGN

AMR Corp. NYSE: AMR

Central European Distribution Corp. Nasdaq: CEDC

DryShips Inc. Nasdaq: DRYS

Knight Capital Group Inc. NYSE: KCG

Suntech Power Holdings Co. Ltd. NYSE: STP

Gilead Sciences Inc. Nasdaq: GILD

VeriSign Inc. Nasdaq: VRSN

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