Convertibles mostly sideways in quiet trade; CA recoups; Chesapeake edges up; primary quiet

By Rebecca Melvin

New York, Sept. 4 - Convertibles moved mostly sideways in quiet action Friday, marking the end of a subdued trading week ahead of Labor Day weekend and the unofficial end of summer.

The week's trading volumes were better than usual for a pre-holiday week, however. "It was off $100 million to $150 million nominal, compared to average, which wasn't too bad considering not much changed," a New York-based sellside trader said.

The reason why volumes held up could have been due to the fact that Monday was a month end, which freed up some investment options, and also because Labor Day was a week further out than normal, the sellsider said.

"That combination could have helped," he said.

Most trading represented only fine-tuning of portfolios, and there wasn't much to suggest directional bets or sector plays.

Activity was similar to the equities markets, in which event-driven trades took individual names either up or down, but overall the market moved sideways. Friday was the exception for equities markets, which posted strong gains.

One surprise that spurred trade during the week was CA Inc.'s news Tuesday that its chief executive officer John A. Swainson plans to retire on Dec. 31, or earlier if a successor is found before then.

CA's convertibles swung lower with the underlying shares on the news, which was unusual for that paper which matures in December, a sellsider said.

Also during the week, Textron Inc. gained after the defense company was added to Goldman Sachs' conviction buy list and its shares jumped.

On Friday, Chesapeake Energy Corp.'s 2.25% bonds were in play and looking a little stronger as natural gas prices bounced from historic lows.

U.S. primary quiet, Europe prices three deals

While no new issues were launched or priced in the U.S. during the week, marking the continuation of a quiet period that extended through much of August, three new issues priced in the European market, the most significant of which was Alcatel-Lucent's €1 billion of 6% convertibles priced on Wednesday.

Ahead of Alcatel-Lucent was a new issue for €135 million of five-year convertible bonds priced by Soitec, a maker of SOI wafers for the semiconductor industry, on Tuesday. On Friday, Euronav NV priced a downsized $135 million of six-year convertibles to yield 6.5%.

Soitec "was the first deal post-summer, and Alcatel-Lucent was the second, both are tech deals," a London-based syndicate source said.

The source expected that the European market would see new issuance activity pick up in September, resuming the high level of activity seen in the first half of the year.

In the U.S., only two issues priced during August, including Onyx Pharmaceuticals Inc., which sold a $230 million offering, and Rayonier TRS Holding (Rayonier Inc.), which priced $172.5 million in the primary market.

The U.S. primary market is also expected to pick up in September, and without that there doesn't appear to be any catalyst for sustainable directional trends.

"Everyone is waiting for a calendar, and there is some cash to put toward it. They are going to drive their alpha from the calendar, and without that, people are going to be hugging their benchmarks," a sellside trader said.

CA regains some ground

CA's 1.625% convertible senior notes due Dec. 15, settled at about 108 on Friday, which was up 2 points from previous levels. Shares of the Islandia, N.Y.-based information technology company added 58 cents, or 2.8%, to $21.45.

"CA came out of nowhere. The bond goes away in a few months, and we just haven't seen much volume in it," a sellsider said. "But the stock collapsed after the CEO quit unexpectedly, and it's a high delta name, so we saw about $16 million of bonds traded."

Chesapeake edges up

Chesapeake's 2.25% convertibles due 2038 traded at 66.5 versus a share price of $21.60, according to a sellsider, and the paper was later seen higher at 69, according to Trace data, while its shares closed higher at $22.20, which was up 62 cents, or nearly 3%.

Chesapeake Energy is a major natural gas producer, and over the last few days natural gas futures price hit seven-year lows, dropping to $2.68 per MMBTU and headed lower, which represented a 70% decline from a high of more than $9 per MMBTU notched a year ago.

On Friday, natural gas futures settled at $2.72 per MMBTU, which was up 22 cents, or 8.8%, from the previous session.

Natural gas is a particularly volatile energy market because it is a domestic market, and doesn't trade internationally the way crude oil does.

Lower industrial activity and reduced cooling demand this summer reduced demand for natural gas at the same time that supply and production levels are elevated.

Mentioned in this article:

CA Inc. NYSE: CA

Chesapeake Energy Corp. NYSE: CHK

Textron Inc. NYSE: TXT

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