Convertibles see strong bid; Ctrip.com improves dollar neutral; Alcoa mandatories active

By Rebecca Melvin

New York, July 9 – A strong bid in U.S. convertibles early Thursday – encouraged by the snapback in Chinese stocks and better U.S. stocks at the open – faded by midsession, leaving the market in the category of little changed on the day, a New York-based trader said.

A slide in China-related convertibles names came to an end, however – after three straight days of declines – in response to a 5.8% climb in China’s Shanghai Composite index on Thursday, allowing the index to recoup nearly all of its tumble on Wednesday, which marked a three-month low.

“People are still trying to figure out what is going on in China,” a New York-based analyst said.

Ctrip.com International Ltd.’s convertibles, including the newer C and D bonds, were a little better on a dollar-neutral basis, a trader said, following sharp losses earlier in the week.

Ctrip shares were higher by about 3%.

Among other China issues, there was not a lot of demand. The convertibles of Qihoo 360 Technology Co. Ltd. saw a weak bid despite shares being up nearly 10%. Vipshop Holdings Ltd. and YY Inc. were also slack even though YY received an offer from management to go private for $68.50 per share, representing a 17.5% premium to the shares’ prior-day close.

The YY buyer group currently owns about 36% of the company’s shares, or 75% of the voting power, according to the Guangzhou, China-based social media company’s press release.

Convertibles players remained anxious about energy names and focused on Alpha Natural Resources Inc.’s convertibles and its upcoming maturity Aug. 1, a New York-based trader said.

The Alpha Natural 4.875% convertibles due 2020 traded at 6.25, which was up from 5.75 on Wednesday.

Elsewhere, SanDisk Corp.’s 0.5% convertible was among the issues catching a bid in the early going, with that bond quoted at 95, or flattish compared to Wednesday.

Alcoa Inc.’s 5.375% mandatory convertible preferreds due 2017 were active and last seen up $1.03, or 2.7%, to $39.79 in the early going, but those gains were pared intraday. That compared to the aluminum producer’s common stock’s early level, which was up 30 cents, or 3%, to $10.80.

Alcoa kicked off a new earnings season late Wednesday when it reported second-quarter results that missed on earnings but were better than expected on revenue. Shares ended up 0.9%.

Overall, convertibles players remained in a wait-and-see mode, watching the Greek debt crisis and China stocks for direction from here.

In the International Monetary Fund’s World Economic Outlook revision published Thursday, the bank cut its forecast for global growth, citing a weaker first quarter in the United States, and the U.S. growth outlook was downgraded to 2.5% for the year from an April forecast of 3.1% growth.

The IMF said that the outlook is murky due to financial-market turbulence in China and Greece. But it left its growth forecasts for China and Europe unchanged. It also said it expects the world economy will grow at 3.3% in 2015, which was down from its 3.5% pace projected in April, and less than the 3.4% expansion in 2014.

This week, the IMF also reiterated its recommendation that the Federal Reserve keep interest rates unchanged at near zero until the first half of 2016, when wage and price inflation are expected to pick up.

Ctrip weaker again

Ctrip’s 1% convertibles due 2020, or the C tranche, traded at 94.25 during the session with Ctrip shares around $71.00, which was up 3% on the day.

The bonds were said to have improved on a dollar-neutral basis by 0.25 point to 0.5 point, following a 0.75 point drop on Wednesday dollar neutral and a large drop on Tuesday.

The Ctrip 1.99% convertibles, or the D tranche, were quoted in trade at 92.5.

Ctrip also has an older convertible that was seen to have improved by a similar amount, an analyst said.

The Ctrip C bonds are considered cheap and traded pretty actively, the analyst said.

YY’s 2.25% convertibles due 2019 were indicated up at the close at 92.25, compared to 87 previously.

But “no one wants to touch Qihu or VIPS,” a source said.

There is skepticism about the China markets, especially after government authorities imposed restrictions on stock sales in an effort to stem the slide that has taken the market down more than 25% in the last four weeks.

Alcoa mandatories add

Alcoa’s 5.375% mandatory convertible preferreds closed up 24 cents, or 0.6%, to $39.00. Gains were pared during the session.

Alcoa shares ended up 9 cents, or 0.9%, at $10.59.

The convertibles were fairly active. “We traded them back and forth,” one trader said.

The New York-based aluminum producer kicked off a new earnings season late Wednesday when it reported second-quarter results that missed on profit but were better than expected on revenue.

Alcoa reported net income of $140 million, or 10 cents a share, compared to net income of $138 million, or 12 cents per share, in the year-earlier quarter.

Excluding one-time items, earnings were 19 cents, which was below expectations for earnings of 22 cents per share.

Revenue was up 1% to $5.90 billion, compared with the $5.81 billion estimate.

Mentioned in this article:

Alcoa Inc. NYSE: AA

Alpha Natural Resources Inc. NYSE: ANR

Ctrip.com International Ltd. Nasdaq: CTRP

Qihoo 360 Technology Co. Ltd. Nasdaq: QIHU

SanDisk Corp. Nasdaq: SNDK

Vipshop Holdings Ltd. Nasdaq: VIPS

YY Inc. NYSE: YY

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