Intel trades mixed to little changed after warning; NextEra adds 0.5 point dollar neutral

By Rebecca Melvin

New York, Sept. 7 - The convertible market quieted down Friday after a flurry of activity midweek, following markets being closed Monday in observance of Labor Day.

Friday's low $260 million of bonds having changed hands by midafternoon made the market feel very quiet, according to a market source, citing Trace data.

"There is nothing going on. It feels like a holiday but it's not a holiday," the trader said.

The only real volume was in investment-grade names like Intel Corp., Amgen Inc. and Medtronic Inc.

Intel's two convertible bond issues were active, but mixed after the Santa Clara, Calif.-based chipmaking giant cut its third-quarter revenue estimate, citing dropping demand as customers reduce inventories and businesses buy fewer personal computers. The company also said it was scaling back capital spending.

The Intel news was not considered a credit issue, however, a New York-based convertibles analyst.

The week brought three new deals of which NextEra Energy Inc.'s $650 million of convertible equity units was seen as the most interesting to market participants.

The discounted NextEra mandatories traded up in line with shares and were quoted late Friday at 49.35, which represented an expansion of 0.5 point on a dollar-neutral, or hedged, basis. The paper debuted Thursday, pricing at 48.50, a discount to their 50 par.

Toll Brothers Inc.'s new $250 million of convertibles was of limited interest to hedged players given its 0.5% coupon and 50% premium, and M/I Homes Inc.'s new $50 million of 3.25% convertibles wasn't heard in trade on Friday.

Back in established issues, Knight Capital Group Inc. was also trading, and continued to inch up as it has been doing for the past two weeks. The paper was seen to have moved between 2 points and 2.5 points over the past 15 days to 89.990.

There was news that Jefferies Group Inc., which helped arrange a $400 million bailout for Knight following the electronic trading firm's computer glitch debacle midsummer, has converted almost all of the preferred shares it acquired in the transaction to common stock.

Jobs data for August was disappointing. Nonfarm payrolls rose by 96,000 jobs, the Labor Department said Friday, which was less than the 125,000 gain that markets expected. The payrolls count for July was revised lower to 141,000 jobs from 163,000.

Non-farm employment in August saw the greatest gains in food services and bartending.

The unemployment rate fell to 8.1% from 8.3% in June. But that was a function of the labor force participation rate falling to 63.5%, the lowest reading since 1981.

A convertibles analyst said the jobs data was "obviously lower than expected. But equities were up slightly and vol. is not that high.

"If it gets us more action from the Fed, that may help the stocks, and help valuations of convertibles," the analyst said.

Apart from Intel, the top volume names were a combination of non-rated names and high investment-grade names, the analyst said.

Intel mixed to little changed

Intel's older 2.95% convertibles due 2015 slipped about 1% outright to 110.5 on Friday, but expanded on a dollar-neutral basis by about 0.125 point, a market source said.

The older Intel trades on about a 40% delta hedge.

Intel 3.25% convertibles due 2039 traded down 2 or more points on an outright basis but were flat on a hedged basis at 126.875 on Friday.

Intel shares were down about $1, or 4%, to $24.05 in late afternoon trading after the company said that it now expects third-quarter revenue of $13.2 billion, which would be a 7% decline from the same quarter a year earlier when revenue totaled $14.2 billion.

The estimate was below the company's July forecast for third-quarter revenue of $13.8 billion to $14.8 billion.

Still, the revision was somewhat expected after PC makers Hewlett Packard and Dell Inc. warned of slowing demand last month.

As for how Intel convertibles are affected by the warning, it wasn't expected to be significant, an analyst said.

Credit should not be impacted, he said. "It's such a solid credit that that's not a concern yet," he said referring to future performance of the company.

Knight inching up

Knight Capital's 3.5% convertibles due 2015 traded Friday at nearly 90, which is up 2 points or more in the past two weeks.

Shares of the Jersey City, N.J.-based electronic trading firm slipped during the same period, but on Friday they jumped 52 cents, or 5.75%, at $9.65.

Jefferies' conversion almost doubled the outstanding stock of Knight, which was near bankruptcy in the middle of the summer after a computer glitch deluged the markets with untimely trades, which ultimately cost the company about $400 million.

Jefferies helped assemble the group of investors that bought convertibles representing a 73% stake in the company.

Mentioned in this article:

Amgen Inc. Nasdaq: AMGN

Intel Corp. Nadaq: INTC

Knight Capital Group Inc. NYSE: KGC

Medtronic Inc. NYSE: MDT

M/T Homes Inc. NYSE: MHO

NextEra Energy Inc. NYSE: NEE

Toll Brothers Inc. NYSE: TOL

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