Ford gains on debt reduction; Microsoft slips with shares; Transocean lower

By Rebecca Melvin

New York, June 30 - The convertible market was pretty mute Wednesday after holding in Tuesday amid a heavy sell off in equities. Wednesday's quiet was despite the fact that it was month-end and quarter-end, which can sometimes spur activity related to portfolio rebalancing.

Players were encouraged that convertibles as a hedge against stock drops performed as they were meant to on Tuesday, "which has not been the norm in most cases over the last two years," a New York-based trader said.

However Wednesday's market was "dead," the trader said, with most people just getting out of the way at this point in anticipation of more "sloppy" markets to come.

Although Wednesday's session sported some stock market gains early on, it ended with more selling into the market close.

Among names mentioned in convertibles trade Wednesday, Ford Motor Co. saw its newer 4.25% convertibles trade better, with a gain in the stock, after an announcement that the Dearborn, Mich.-automaker was reducing its debt by another $4 billion and bringing total debt reduction in the second quarter to $7 billion.

Microsoft Corp. saw its 0% convertibles, which priced earlier this month, trade lower at 99 in tandem with a lower share price.

Transocean Ltd. was a little lower too in line with shares that toed the flat line and then slipped at the end of the session.

"I'm hoping that credit holds with the volatility. Volatility and credit have not been on the best of terms for about the past two long years," a trader said, anticipating more of the same from equity markets in the days to come.

Equities had been doing better Wednesday before the headline that Moody's Investors Service had placed Spain's debt on review for possible downgrade.

While the announcement shouldn't have been a surprise given that both Fitch Ratings and Standard &Poor's had previously downgraded Spanish debt, it seemed to be able to tip an already destabilized market lower.

The ADP Employment Change Report, which had come out earlier in the session without too much immediate reaction, could also have undercut confidence. It showed that private payrolls for June increased by only 13,000, which was below the expected gain of 61,000 new hires.

The Dow Jones Industrial Average shed another 96.38 points, or nearly 1%, settling Wednesday at 9,774.02, after a 268-point, or 2.7%, slide on Tuesday.

The Nasdaq Stock Market lost 25.94 points, or 1.2%, to 2,109.34 at the Wednesday close, after a 3.9% fall on Tuesday; and the S&P 500 index slid another 10.53 points, or 1%, to 1,030.71, which came on top of a 3.1% fall on Tuesday.

June betters May

Although the quarter was rough, June returns were expected to be better than May's. And in the convertible primary market, June certainly exceeded May's anemic new issuance pace.

In June, $3.55 billion of new convertible paper priced, compared to May's $1.01 billion, according to data compiled by Prospect News.

For the year so far, "volume is down a little bit...but on an annualized pace, we're still on track for about $30 billion, which is in line with last year," a Connecticut-based syndicate source said.

Given the double whammy of the high-yield primary market having a gangbuster year early on and with a significant amount of market volatility that has caused companies to postpone deals, the convertible market didn't do that badly, the syndicate source said.

In the last few weeks, the high yield-market has backed off a little bit, with rates moving higher by about 150 basis points, at the same time as convertibles have improved, but the syndicate source didn't see those two trends as correlated.

Rates moving 150 bps wouldn't have prevented anyone from doing a straight bond if that's what they were planning, the syndicate sources said, who instead posited that the pick up in convert issuance was "natural issuance," meaning that it was coming from companies that were planning on doing convertible bond issues anyway.

Pipeline seen in second half

Investor demand for new paper does exist. The problem is supply not demand, the syndicate source said. And that is the case for hedged and outright accounts; both of which want to be involved.

A pipeline does exist, with some new deals expected before August, but with the lion's share anticipated staring in September, when markets regroup after summer vacations.

"We're seeing a decent pipeline for the latter half of the year," the syndicate source said.

Ford bounces back

Ford's newer 4.25% convertibles due 2016 traded at 128 versus a share price of $10.40, compared to 123.5 versus a share price of $10 on Tuesday.

Volume picked up Wednesday, compared to trading in odd lots on Tuesday. Shares were also very active and higher, settling up 20 cents, or 2%, at $10.08, even after the selloff into the close. At their peak, the underlying shares were up 6.5% on the day at $10.52.

News that the automaker is cutting its debt pulled its stocks and bonds higher.

The company said it will pay $255 million of previously deferred quarterly distributions on Ford Motor Co. Capital Trust II's 6.5% cumulative trust preferred securities on July 15, at which time quarterly distributions will resume following a 14-month lull.

Liquidity and the ability to generate positive cash flow were sufficient to warrant reinstatement of the distributions, the company said.

Ford will also pay $3.8 billion in cash to the UAW Retiree Medical Benefits Trust by making scheduled debt payments due on notes A and B held by the trust and paying the entire remaining balance of note A ahead of schedule.

As previously reported, the company repaid $3 billion of its outstanding revolving credit facility due 2013 on April 6.

Microsoft lags

Microsoft's 0% convertibles due 2013 traded at 99 versus an underlying share price of $23.30, compared to 101.25 versus a share price of $26.35 two weeks ago on June 15.

Technology names have been hard hit in this latest equities sell off, and the giant software company based in Redmond, Wash., is no exception.

The fact that the company was able to get its $1 billion plus deal priced earlier this month, however, is an indicator of the convertible market's strong demand. It was the first 0% coupon, 0% yield deal to get done since 2005.

The 0% yield and coupon paper, referred to as a no-no deal, had quite an aggressive structure, a syndicate source said.

Mentioned in this article:

Ford Motor Co. NYSE: F

Microsoft Corp. Nasdaq: MSFT

Transocean Ltd. NYSE: RIG

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