Alcoa flat, lower on hedge in active trade; Allegheny better; Toll Brothers up on hedge

By Rebecca Melvin

New York, Sept. 9 - Names in the materials and home builders sectors were active in the convertibles market on Monday amid higher underlying shares, but these bonds were narrowly mixed to in line in terms of hedged performance, sources said.

Two materials metals companies - Alcoa Inc. and Allegheny Technologies Inc. - were active, with Alcoa the most actively traded name of the day, according to Trace data, and a little higher outright but flat to slightly lower on a dollar-neutral, or hedged, basis, sources said.

Allegheny's 4.25% convertibles were slightly better on a hedged basis.

Among homebuilders Toll Brothers Inc. traded better with their underlying shares up nearly 5% and with the bonds better on a dollar-neutral basis by about 0.25 point, one New York-based trader said.

Ryland Group Inc.'s 0.25% convertibles due 2019 was also in trade at 88, which was up a point on an outright basis, while D.H. Horton Inc.'s 2% convertibles due 2014 traded at 150.125, according to Trace data.

Elsewhere, Tesla Motors Inc.'s 1.5% convertibles traded down in line with the underlying shares of the Palo Alto, Calif.-based electric car maker, which were off nearly 4%.

Traders said it was difficult to identify catalysts to trade, but names with exposure to interest rates seemed to be a theme, a New York-based trader said.

Despite the stock and bond markets trading better on the day, the convertibles market was mostly moving sideways: paper was neither "opening up" nor "crunching down," a New York-based trader said.

Another source thought there seemed to be a "little upward bias."

"Rates were a little better, five-year swaps were in 6 basis points, 10-years were in 5 bps," a trader said.

"Fixed income is a little better. I think the market is coming to the consensus that 3% on 10-year treasuries is going to be the near-term top," the trader continued.

The primary market was quiet, although traders expected issuance to pick over the next few weeks.

"After the market close, California-based alternative fuel company Clean Energy Fuels Corp. launched a $200 million offering of five-year convertible senior notes and Alon USA Energy Inc., a Dallas-based oil products refiner, launched an offering of $130 million of five-year convertibles. Both deals are being sold under Rule 144A."

Back in the secondary, a trader said, "I really think guys are going to start picking up the volume. It just feels busier than it really is."

Alcoa flat to lower on hedge

Alcoa's 5.25% convertibles due 2014 traded up to nearly 2 points on an outright basis to 128.223 versus $8.07 at one point on Monday. Later, the market was seen 128.5 bid, 129.125 offered versus an underlying share price of $8.10.

Shares of the New York-based aluminum maker ended up 16 cents, or 2%, at $8.08 in heavy volume. The stock has been on the rise for several sessions, although it is lower for the year to date.

One trader said the Alcoa convertibles were trading in line with shares on an 88% delta.

"I'm looking at the bigger trades and they seem to be in line," the trader said.

A second trader said he saw them down 0.125 point on a dollar-neutral basis.

The delta on this issue is generally 85% to 88%.

A month ago, on Aug. 6, a level of 126.875 versus a share price of $8.00 on the Alcoa 5.25% convertibles represented about a 0.5 point contraction on a dollar-neutral basis.

Alcoa was the name of the day, but there was no news in particular that seemed to be driving it, a New York-based trader.

"I don't know. There's a half year to go [on the notes]. I'm not sure of the impetus; it seemed to be driven by buyers," the trader said.

Allegheny edges up

Allegheny Technologies' 4.25% convertibles due 2014 were called 102.75 bid, 103.5 offered versus an underlying share price of $28.35 at the end of the day.

That looked about 0.25 point higher on a 10% delta, a trader said.

Shares of the Pittsburgh-based specialty metals maker ended up 84 cents, or 3%, at $28.36 in light volume.

Toll Brothers edges up

Toll Brothers' 0.5% convertibles due 2032 traded at 99 bid, 99.5 offered with the underlying shares at $31.87 on Monday.

That level was seen up about 0.25 point on a dollar-neutral basis from the last prints.

Shares of the Horsham, Pa.-based home builder gained $1.43, or 4.7%, to $31.87 on Monday.

"TOL has traded historically rich, but it's been one of the ones that has gotten beaten up," a trader said. "The stock has been for sale for quite some time."

"But the home builders have exposure to interest rates, and maybe they are getting some legs behind it," the trader said.

The $250 million issue of 0.5% 20-year convertibles priced a year ago on Sept. 6, 2012.

Mentioned in this article:

Alcoa Inc. NYSE: AA

Allegheny Technologies Inc. NYSE: ATI

D.R. Horton Inc. NYSE: DHI

Ryland Group Inc. NYSE: RYL

Tesla Motors Inc. Nasdaq: TSLA

Toll Brothers Inc. NYSE: TOL

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