Transocean extends fall, then bounces; Cameron steadies; Amgen sideways; REITs active

By Rebecca Melvin

New York, June 2 -Transocean Ltd. convertibles dropped again early Wednesday in what sources described as "panicky" selling and as the oilfield services company's credit default swaps blew out. But then a bid came into the market, spurring a turnaround that was viewed as favorable for the overall convertible market.

"This is a sentiment trade for now, and this upturn looks very positive to me," a New York-based sellside trader said.

Concern about the Gulf oil spill situation was still a front burner issue, although the equities of many energy companies rebounded Wednesday. Energy sector shares had fallen since an April 20 explosion of a BP plc-operated Transocean rig and a U.S. government announcement of an extended ban on deepwater oil drilling permits for six months.

Transocean accounted for fully half of all convertibles trading on Wednesday, or $540 million bonds out of $1.02 billion that changed hands as of 2:45 p.m. ET, according to Trace data.

Cameron International Corp. convertibles were steady Wednesday as their underlying shares sprang back 7%, compared to where they were indicated late Tuesday.

Other names seemed to be moving sideways as well, if at all.

Amgen Inc. convertibles didn't move up that much despite news that the biotech giant received earlier-than-expected regulatory approval for its Prolia osteoporosis treatment. Amgen stock moved sharply higher.

Also seeing some trading action - although not all that much - were real estate investment trusts ProLogis and BRE Properties Inc. ProLogis saw its 2.25% convertibles higher by about half a point, and BRE was essentially flat at par.

Equity markets rebounded Wednesday, trading stronger into the close, representing a move that was opposite of Tuesday's action, when selling accelerated into the close.

Favorable economic data, including an increase in pending home sales, was cited for the gains. The S&P 500 stock index and Nasdaq Stock Market each jumped 2.6%, and the Dow Jones Industrial Average jumped 225.52 points, or 2.25%, to 10,249.54.

Transocean drops, climbs

Transocean's 1.625% series A convertibles due 2037 traded as low as 95.7, which was down a point from 96.7 late Tuesday. But the paper bounced back to 97.5, which was up slightly on the day.

The Transocean 1.5% series C convertibles due 2037 traded as low as 81.5 in the session, down from 86.5 late Tuesday and down from 89.5 on Friday. Later, the paper traded at 83.75, which was down 2.625 points on the day.

The Transocean 1.5% B convertibles due 2037 were seen in trade at 88.5 on Wednesday, compared to 90.25 on Tuesday and 92.875 on Friday.

The paper pared losses when a big bid entered the market, sources said. They said that they believed the earlier drop was related to selling by European holders and said the rebound coincided with the close of European markets.

Transocean stock traded near its lows for much of the day. The shares ended down $1.69, or 3.4%, at $48.35 on Wednesday.

"Some of the RIG converts found support since their yield to put became more attractive than the straight RIG bond's yield to maturity. Hence you had high-yield and high-grade investors come into the convertible space and buy some of the converts, a relative value trade," a New York-based sellside analyst said.

"Plus you saw valuation changes between the cash bonds and the CDS levels. The movement of CDS spreads dictates, depending on the bonds, the price of the cash bonds," the analyst said.

Gimme Credit analyst Philip Adams said in a note published early Wednesday that he continues to believe that Transocean's strong cash flow and ongoing market capabilities means a fairly swift recovery, although it won't escape all financial consequences.

Transocean has had to fend off suggestions that it had not been properly maintaining the well's blowout preventer, Adams wrote.

Transocean's position has been that it wasn't poor maintenance, but a "catastrophic failure of an essentially completed well, designed, drilled and cemented to BP's specifications, with operations on April 20 dictated by BP [that] rendered the blowout preventer inoperable," Adams wrote.

Adams reiterated several of Transocean's rebuttals of allegations put forward during an investor call on Friday. Transocean president and chief executive Steven L. Newman said that the alleged "dead battery" on one of two control system pods had been retrieved, tested, and found to exceed "the manufacturer's suggested minimum voltage."

Regarding the "chunks" of rubber returning to the surface in drilling fluid (suggested to be a failed annular), Newman pointed out that these devises are designed to have pipe pulled through them, and are expected to lose some material, and that the annular in question is a 2,000-lb. disk, not likely to miss two handfuls of material. In fact, follow-up testing had indicated the annular was intact.

A hydraulic leak cited by BP was not severe enough to prevent the BOP from applying maximum hydraulic pressure - the actuating cylinders were extended, indicating an effort by the rams to close off the wellbore. The BOP exceeds federal requirements for bore-closing redundancy, and had passed two inspections in April, the last on April 17, Adams wrote of information from the call.

Gimme Credit ranked Transocean debt at "outperform."

Transocean has 14 rigs in the Gulf, with varied contract terms. In 2009, 81% of Transocean revenue was outside of the U.S. All contracts have "force majeure" clauses, with varying timing and termination fees. Some rigs will move to other parts of the world for a fee. And Transocean believes that the majority of its Gulf of Mexico contracts will still be economically OK despite the moratorium, Adams wrote.

Amgen little changed

Amgen's 0.125% convertibles, which mature in seven months, traded last at 98.75, which was down 0.8 point on the day, according to Trace data.

Amgen's 0.375% convertibles due 2013 traded last at 98.5, after having moved between 98.5 and 100.384, which was down 0.5 point on the day.

Shares of the Thousand Oaks, Calif.-based biotech giant jumped $5.33, or 10.5%, to $56.09 on Wednesday.

The company received approval from the Food and Drug Administration for an osteoporosis drug that had not been expected until late July.

"Amgen stock was on fire; but the converts are boring here. Yet you have to be involved," a New York source said.

The paper is very cheap here, he said.

ProLogis, BRE flat to higher

ProLogis' 2.25% convertibles due 2037 traded at 93.88, which was up 0.625 point on the day; while the ProLogis 2.625% convertibles due 2038 were trading at 90.25 Wednesday.

Shares of ProLogis, a Denver-based industrial REIT, closed higher by 23 cents, or 2%, to $11.03 on Wednesday.

One sellsider said that he still finds the ProLogis 3.25% convertibles due 2015 to be unattractive.

Meanwhile, BRE's 4.125% convertibles due 2026 traded last at 100, while shares of the San Francisco-based apartment REIT closed up 63 cents, or 1.6%, at $40.18 on Wednesday.

"It was a RIG day. There was $500 million or $600 million of RIG, so who cares," the sellsider said when asked about the REITs.

Mentioned in this article

Amgen Inc. Nasdaq: AMGN

BRE Properties Inc. NYSE: BRE

Cameron International Corp. NYSE: CAM

ProLogis NYSE: PLD

Transocean Ltd. NYSE: RIG

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