NQ Mobile in focus after fraud allegations; Rayonier drops after earnings; AMR holds in

By Rebecca Melvin

New York, Oct. 25 - NQ Mobile Inc.'s 4% convertibles due 2018, which priced earlier this month, were in focus on Friday as the China-based mobile security company addressed allegations of fraud in a research report by Muddy Waters that surfaced Thursday.

The two-week-old convertibles, which lifted to a little above par on their debut in the secondary market Oct. 9, were heard at 30 bid but were not believed to have traded and were not being quoted in the Street, market sources said.

Rayonier Inc.'s convertibles dropped sharply on an outright basis, but weren't heard on a dollar-neutral, or hedged, basis, after the Jacksonville, Fla.-based timber real estate investment trust reported earnings that missed estimates and suffered several downgrades.

AMR Corp.'s convertibles, which touched above 120 on Thursday, held gains despite a sudden plunge in the underlying shares of the bankrupt Fort Worth, Texas-based air carrier. The shares, which trade over the counter, dropped as much as 25% Friday afternoon but regained their footing to trade down about 10% on the day.

Theravance Inc.'s convertibles rose in line with the underlying shares of the San Francisco-based biotechnology company after it posted a wider quarterly loss that was less than expected.

The Theravance convertible bonds moved up in line, or flat on a dollar-neutral basis, on about an 80% delta, a New York-based trader said, quoting the paper at 165.5 with the underlying shares at $38.72.

Covanta Holding Corp.'s convertibles, which plunged on an outright basis with lower shares on Thursday, were finding their footing on Friday at the lower end of Thursday's range at around 112. Shares of the Fairfield, N.J.-based waste disposal and renewable energy slipped another 25 cents to $17.29, after a 12% drop on Thursday, after the company lowered full-year 2013 guidance.

Overall, the convertibles market saw two sizable new deals this past week, or more than $2 billion in new issuance, that priced at the tight end of revised talk. Both those deals, Crown Castle International Corp.'s upsized $850 million of mandatory convertible preferreds and SanDisk Corp.'s upsized $1.3 billion of seven-year convertible senior notes, were well received by investors and traded well in the aftermarket.

NQ Mobile bid sinks

NQ Mobile's 4% convertibles due 2018 were heard at 30 bid, according to one trader. A market was called 30 bid, 50 offered, according to a second trader.

Shares of the Dallas- and Beijing-based mobile internet services provider dropped another $1.46, or 12%, to $10.63 after trading resumed after being halted much of Friday. On Thursday, the shares dropped more than 50%.

"These were just issued, so why would they not have the cash," a New York-based trader said, referring to the company with proceeds from a new $172.5 million convertible bond issue.

The trader also said that he didn't believe that the convertible bonds had traded on Friday, saying, "They may be bid, but who is going to sell them?"

Convertibles players queried said they were not surprised by the Muddy Waters report, alleging that at least 72% of NQ's 2012 China security revenue was fictitious.

"It's a Chinese company," one trader said.

Another trader referred to Sino-Forest Corp., which was another company with convertibles that was brought down by Muddy Water, which is owned by short seller Carson Block. The research firm initiated coverage on NQ with a strong sell rating.

For its part, NQ said the accusations were false, and it released details of its bank accounts, threatening legal action against Muddy Waters. It was also forming a special committee of independent directors to investigate the allegations.

The new convertible was sold with a 4% coupon and a 30% initial conversion premium via Morgan Stanley & Co. International plc and Deutsche Bank Securities Inc.

The notes are non-callable until Oct. 20, 2016 and then are provisionally callable if shares rise to 130% of the conversion price.

There is an investor put on Oct. 15, 2016. Settlement will be for shares only.

Proceeds were earmarked for general corporate purposes, including working capital needs and potential acquisitions of complementary businesses.

Rayonier drops

Rayonier's 4.5% exchangeable senior notes due 2015 dropped to 143 to 144 on Friday from a range of 169 to 171 on Thursday, according to Trace data.

Rayonier shares fell $7.98, or 14.5%, to $46.98.

Rayonier has forest products, real estate, fiber and other businesses.

The convertibles hadn't traded in early action, but a few prints went up on Trace later in the day, sources said.

Rayonier posted earnings that missed forecasts by 2 cents on lower revenue. Downgrades followed from Deutsche Bank, Raymond James and BofA Merrill Lynch. Deutsche Bank and Raymond James cited problems expected in Rayonier's pulp business for their actions.

Traders queried by Prospect News had been watching the Rayonier convertibles but were not active in the name.

AMR holds in

AMR's 6.25% convertibles due 2014 held on to this week's trading gains, changing hands in the range of 119 to 120 on Friday, according to Trace data, despite a drop in the underlying shares. The notes had traded at 116 earlier in the week.

"AMR held in there despite the stock getting smoked," a New York-based trader said. He cited rumors about a meeting with the Department of Justice, "but with a closed door meeting, who knows what happened."

Bankrupt AMR is fighting the Justice Department suit that is attempting to block its proposed merger with U.S. Airways.

Mentioned in this article:

AMR Corp. Pink sheets: AAMRQ

Covanta Holding Corp. NYSE: CVA

Crown Castle International Corp. NYSE: CCI

NQ Mobile Inc. NYSE: NQ

Rayonier Inc. NYSE: RYN

SanDisk Corp. Nasdaq: SNDK

Theravance Inc. Nasdaq: THRX

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