DFC Global bonds drop after weak earnings; InterMune paper 'holds in' despite stock drop

By Rebecca Melvin

New York, Jan. 31 - Convertibles players were focused primarily on a couple of names moving lower in tandem with their underlying shares on Friday. Meanwhile, the broader stock markets sold off amid disappointing earnings and growing turmoil in emerging markets that are roiled by the prospect of continued tapering of monetary stimulus.

DFC Global Corp.'s two convertible bond issues traded down in active trade amid a 29% slide in the underlying shares of the Berwyn, Pa.-based provider of financial services. The company posted a disappointing earnings miss and lowered guidance for fiscal 2014 earnings.

The DFC Global 3.25% convertibles due 2017, or Dollar, as traders call it due to its DLLR stock symbol, tumbled more than 10 points to about 78.

The shorter-dated Dollar 3% convertibles due 2028, which are putable in 2015, dropped only to about 91, from about 95.

InterMune Inc.'s 2.5% convertibles slipped on an outright basis but were flat to slightly better on a dollar-neutral, or hedged, basis as shares of the Brisbane, Calif.-based biotechnology company sold off sharply on drug competition concerns, a trader said.

Take-Two Interactive Software Inc.'s newer 1% convertibles of 2018 were up slightly at 112.15 bid, 112.55 offered versus an underlying share price of $19.05, a Connecticut-based trader said.

Workday Inc. was catching a fairly strong bid as investors have begun to gravitate to cloud computing names in an effort to find better credits with high vol., a Chicago-based trader said.

Otherwise, traders were mostly focused on month end, and there wasn't a lot of trading going on, besides DFC Global, traders agreed.

With Friday marking the last day of the month, how convertible arbitrage players did will depend as always their view on the markets going into January.

"It depends on how you were slanted coming into the new year. January is typically an up month, so if you were positioned for that, you didn't do very well, but if you were bearish going in, you'll probably be up," a trader said.

Equities slid. The Dow Jones industrial average lost 149.76 points, or nearly 0.9%, to 15,698.85; the S&P 500 stock index lost 11.60 points, or 0.7%, to 1,782.69; and the Nasdaq stock market, which put in the best showing, came in 19.25 points, or 0.5%, 4,103.88.

Dollar drops sharply

The Dollar 3.25% convertibles due 2017, which priced in April 2012, tumbled more than 10 points to about 78.

The Dollar 3% convertibles due 2028 dropped to about 91 offered from about 95.

Dollar shares plunged, closing at their lows for the day, at $7.52, which represented a drop of $3.05, or 29%.

"It missed pretty big, and guided lower," a Connecticut-based trader said of the company's results and why the 3.25% bonds tumbled.

A second trading source said that the bonds "came in for sure, with obvious widening of the credit. There are issues there with the credit."

Both traders said the company's convertibles were a primary focus of the market on Friday.

"That's definitely the big name of the day," one trader said.

The company, which provides financial services to unbanked and under-banked consumers, reported net income, excluding items, of 6 cents per share, which was down from 46 cents from the year earlier.

Revenue fell 10.4% to $262.3 million for the latest quarter, compared to the year-earlier period.

Looking ahead, the company lowered its EBITDA guidance to $170 million to $200 million from $200 million to $240 million.

Operating earnings were revised lower to 35 cents per share to 80 cents per share, from 65 cents per share to $1.27 per share for fiscal 2014.

The company cited a decrease in commodity gold prices, regulatory transition issues in the U.K. and increasing weakness in the Canadian dollar for its weak performance.

InterMune flat to higher

InterMune's 2.5% convertibles slipped 2 or 3 points on an outright basis to 89 bid, 90 offered from about 92.

The underlying shares of the Brisbane, Calif.-based biotechnology company ended down $2.90, or 18%, to $13.35, although it did pare losses slightly by the day's end.

Compared to the shares, the bonds didn't look too badly, a Chicago-based trader said.

"They are barely down or slightly better on delta," the trader said. The bonds would be held on a delta of 30% to 40%.

Earlier this month, the InterMune bonds had made the reverse move, adding to the 92 mark, from 89, and rising on a 40% to 45% delta when the company, which focuses on treatments for pulmonary, infectious and hepatic diseases, said fourth-quarter revenue for its lung disease drug Esbriet was better than expected and it guided full-year 2014 revenue in line with consensus.

Responsible for Friday's move were investor worries over drug competition, the trader said.

Workday catches bid

The two convertible tranches of Workday, a 0.75% convertible due 2018 and a 1.5% convertible due 2020, didn't really move pricewise on Friday but were better bid and seen at 125 bid, 125.5 offered versus an underlying share price of $90.50 at the end of the session.

Workday was "slightly better bid," a trader said, as investors look for names with better credit quality and vol. in anticipation of a rocky tape in the short term.

Shares of the Pleasanton, Calif., cloud-based human resources, payroll and financial management company ended little changed but on the negative side at $89.54, which was up 23 cents, or 0.26%.

There were "people looking for bonds," the trader said.

Mentioned in this article:

DFC Global Corp. Nasdaq: DLLR

InterMune Inc. Nasdaq: ITMN

Take-Two Interactive Software Inc. Nasdaq: TTWO

Workday Inc. Nasdaq: WDAY

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