Convertibles quiet; Walter improves on hedge; MGIC slips on hedge; Dendreon wavers

By Rebecca Melvin

New York, March 22 - The convertible bond market quieted this past week amid a combination of current and upcoming spring break vacations as well as distractions like the NCAA basketball tournament, which discouraged some trade, market sources said.

Two notable names that traded during the week and on Friday were mortgage-related names Walter Investment Management Corp.'s and MGIC Investment Corp.

Walter's convertibles were active and lower on an outright basis but better on a dollar-neutral, or hedged, basis Friday as shares dropped. The bonds had moved up and down midweek after dropping outright and on a hedged basis Tuesday when the Tampa, Fla.-based mortgage services company reported an earnings miss that dragged shares down 21%.

MGIC Investment's 2% convertible, which was issued earlier this month, extended losses on a hedged basis on Friday, contracting about 0.25 point on hedge, after slipping about 0.125 point on a hedged basis on Wednesday.

The two mortgage-based companies have different business models. Walter Investment is a mortgage servicer involved in the administration of mortgage transactions, and MGIC is a mortgage insurer that was hit by huge losses after the housing bubble and debt crisis, but which has new wind in its sails with recent capital raises.

Dendreon Corp.'s convertibles traded slightly lower early Friday and then higher in muted action.

Meanwhile, United States Steel Corp.'s new 2.75% convertibles were modestly higher at 102.7 with the underlying shares at $19.85. The upsized $275 million of six-year convertibles was released for secondary market action on Thursday after pricing at the midpoint of talk late Wednesday.

Meanwhile the banks in Cyprus remained closed on Friday and weren't expected to reopen before next week. The Cypriot banks have been closed since March 16, when Cyprus agreed to a €10 billion bailout from the euro zone and the International Monetary Fund. Lawmaker votes on measures to restrict noncash transactions once banks are reopened were delayed on Friday, but expected to occur before the day was out. Eyes were trained on an upcoming meeting set Tuesday to decide whether Cyprus receives the funds needed to stabilize its financial system.

Walter churns

Walter's 4.5% convertibles due 2019 fell to 100 bid, 101 offered, with trades on the tape at 100.5 while the stock was lower at about $32.00 on Friday.

That was down more than 2 points outright but improved on a dollar-neutral, or hedged, basis with the underlying shares down 5.75%, a New York-based analyst said.

Shares of the Tampa, Fla.-based mortgage services company were down about 5% at $32.19 around midsession but pared losses to end down $1.43, or 4.2%, at $32.49.

The price level of the bonds was slightly lower outright on Friday from the level to which they dropped Tuesday, which was down nearly 10 points. On Tuesday, the paper was 100.5 bid, 101.5 offered versus an underlying share price of $33.50. Walter shares skidded $8.61, or nearly 21%, to $32.98 on Tuesday.

The bonds recovered midweek to the 103 context but were down again on Friday on an outright basis, although they were better on a hedged basis.

"The stock got hit again, but the bonds are probably up half a point from yesterday," a New York-based analyst said.

"Earlier this week, they reported earnings and missed pretty badly. The stock got creamed, and there's been drift from there," the analyst said.

Walter provides services when mortgages are originated and sold as investments to Fannie Mae and Freddie Mac and securitized. The company provides administrative services and they clip a portion of the income that results from the mortgage business.

On Tuesday the company announced a loss for the quarter ended Dec. 31 of $34.1 million, or $0.98 per share, compared to a loss of $36.9 million, or $0.14 per share, for the same period a year earlier.

Core earnings after taxes for the fourth quarter were $22.5 million, or $0.64 per share, compared to $16.1 million, or $0.56 per share, in the fourth quarter of 2011. That represented a 3-cent-per-share miss from the $0.67 per share that investors were expecting.

Looking ahead, the company said it expects EBITDA of $650 million to $725 million, which was well ahead of existing estimates.

"I'm not sure what's wrong with their portfolio," an analyst said, referring to Walter's disappointing earnings and drop in securities.

MGIC slips on hedge

MGIC's 2% convertibles due 2020 traded at 97 bid, 98.5 versus an underlying share price of $4.35 on Friday.

Shares of the Milwaukee-based mortgage insurer dropped 5.2% by midsession but pared losses to end lower by 9 cents, or about 0.5%, to $4.50.

The hedge didn't protect the trade, an analyst said, regarding the contraction of value in the convertibles on a hedged basis. It may have been related to a change in credit. MGIC credit default swaps widened during the session Friday to about 555 basis points but came back in to the unchanged mark at 550 bps. Other reasons behind a hedge not protecting could be a change in vol. or a change of interest rates.

"It doesn't look like the CDS has moved that much. It was wider but has come back in," the analyst said.

When released for secondary market trading on March 7, the MGIC 2% convertibles expanded on hedge even though they slipped below par on first day trading after issue.

The new paper was seen near the market close March 7 at roughly 99.25 bid, 100.25 offered versus a share price of $4.96.

MGIC shares closed down 70 cents, or 12.6%, at $4.91 that day. And the paper was held on about a 70% delta.

Dendreon slightly lower

Dendreon's 2.875% convertibles due 2016 were slightly lower at 79.375 at about midsession on Friday. But they were seen later at 82.

The Dendreon convertibles trade outright.

Shares of the Seattle-based biotechnology company were also down, settling at $4.90, which was off by 20 cents, or 3.9%.

The Dendreon convertibles were "maybe in a bit," an East Coast-based trader said, adding that he didn't see any real activity in the name.

Mentioned in this article:

Dendreon Corp. Nasdaq: DNDN

MGIC Investment Corp. NYSE: MTG

United States Steel Corp. NYSE: X

Walter Investment Management Corp. NYSE: WAC

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