Convertibles weaker in light trade as Greek referendum torpedoes broader markets; MF bobs

By Rebecca Melvin

New York, Nov. 1 - The convertible bond market weakened slightly in light volume Tuesday as shockwaves roiled the broader markets on Greek prime minister George Papandreou's decision to call a referendum on that nation's bailout package.

If the package doesn't survive a vote, it would likely cause Greece to default on its sovereign debt and further destabilize the euro region.

Traders expressed frustration that Greek debt woes reared their head again to derail markets. One suggested that the likely ultimate outcome for Greece is for it to leave the European Union and the common currency.

In convertibles, shorter-dated credits and low-premium, high-delta names were pretty much unchanged on a dollar-neutral basis, one sellside trader said.

Meanwhile, MF Global Holdings Ltd. - a casualty of the Euro debt crisis, having had to file for bankruptcy Monday after ratings downgrades and clients began pulling business away from the broker amid fears regarding its outsized European debt holdings - saw its trio of convertibles trade actively again on Tuesday. The convertibles first swooned into the upper 30s and then back pedaled to the lower 40s on a positive headline regarding client funds coming out of bankruptcy court, a New York-based trader said.

In related action, the convertibles of Jefferies Group Inc. moved sharply lower along with lower underlying shares as investors questioned the New York-based investment bank's exposure to both European and MF Global debt.

Jefferies was the bookrunner on MF's latest straight bond offering in August, which raised $325 million of 6.25% senior notes.

General Cable Corp.'s convertibles fell after the Highland Heights, Ky.-based wire maker reported third-quarter results that missed expectations and guided lower for the fourth quarter.

Equities tumbled. The Dow Jones industrial average fell 297 points, or 2.5%, to 11,657.96; the S&P 500 stock index lost 35 points, or 2.8%; and the Nasdaq Stock Index careened almost 3% lower, shedding 77 points, to 2,607.

"I would say things are generally a bit weaker...." a convertibles trader said. But he said, "convert market valuations seemed to outperform broader equity and high-yield markets on their intraday lows."

MF Global bobs on headlines

MF's 3.375% convertibles due 2018 traded down to 38 or 39 on Tuesday, down from 40 on Monday, and then recovered a couple of points to trade in the low 40s later in the session.

MF's 1.875% convertibles due 2016 and MF's 9% convertibles due 2038 traded in similar fashion, boosted some at the end of the day by headlines that client funds were accounted, which was in contrast to earlier reports that funds were missing.

MF legal counsel told a U.S. bankruptcy court judge during a hearing Tuesday that all of the firm's assets are accounted for and most are held at its brokerage unit, which is not part of the main bankruptcy case.

The statement contradicted initial findings by regulators. Meanwhile, the ranks of those starting investigations into MF grew. The Federal Bureau of Investigation plans to investigate MF in the wake of possible missing client funds, the Wall Street Journal reported. The CME exchange and Commodity Futures Trading Commission are also looking into MF's books.

MF Global was one of the leading brokers in markets for listed derivatives and one of 20 primary dealers authorized to trade U.S. government securities with the Federal Reserve Bank of New York.

Jon Corzine's role as head of the firm was deemed very important to the firm. For example, there is a covenant in the senior notes priced in August that called for the coupon to increase by 1% if Corzine was appointed to a federal position by the U.S. president and a Senate confirmation was done prior to July 1, 2013. The covenant also said that the rate could also be adjusted if the company's debt rating was downgraded.

Jefferies drops sharply

Jefferies' 3.875% convertibles due 2029 dropped 5 or 6 points to about 83.5 versus an underlying share price of $12.10 on Tuesday, compared to 89 bid, 90 offered previously, a New York-based trader said.

The convertibles had come in on Monday as well by about 1.5 points, according to a second trader.

Shares of Jefferies fell $1.25, or 9%, to $12.01 on Tuesday, on the heels of a loss Monday.

Whether Jefferies was under more pressure from its MF Global exposure or potential European debt exposure was a matter of discussion.

"Based on the news out...with the company discussing its limited European sovereign exposure, I'd say it is fallout from MF," a New York-based sellside desk analyst said.

Jefferies confirmed Tuesday, in response to questions from investors and analysts, that it currently has no meaningful exposure to the sovereign debt of the nations of Portugal, Italy, Ireland, Greece and Spain.

To the extent Jefferies has taken positions in such debt, they are short term in nature, are recorded in the trading book of Jefferies' regulated U.K. broker-dealer, are marked to market daily, and fluctuate depending upon customer demand, auction activity, and market opportunities, the company said.

Jefferies does not have any repo-to-maturity activity or related off-balance-sheet derivative activity.

General Cable drops sharply

General Cable's 0.875% convertibles due 2013 and 4.5% convertibles due 2029 were said to be lower in active trade, but traders queried had not been involved in the name.

According to Trace data, the General Cable 0.875% notes were down 3 points to 91.625 around midsession. The 4.5% convertibles due 2029 were down more than 16 points to 88. Those 4.5% convertibles had been seen in trade on Monday at 105 versus an underlying share price of $29.00.

On Tuesday, shares of the cable company slid $5.73, or 20%, to $22.31.

The company said it earned $3.6 million, or 7 cents a share, during the quarter that ended Sept. 30. That was down from net income of 418.1 million, or 34 cents per share, for the year-earlier period. Revenue rose 26% to $1.52 billion from $1.2 billion a year earlier.

Excluding one-time items such as debt interest and mark-to-market losses, the company would have earned 33 cents per share. And excluding currency losses and taxes, it would have earned 69 cents per share. The estimate was for earnings of 71 cents a share.

Third-quarter results reflect lower results for its electric utility and telecommunication business in North America, the company said, as well as planned reduced global inventories. It also said results were hurt by weaknesses in Iberia and the summer holiday season in Europe. Growth in other parts of the world was still strong, it said.

Looking ahead, General Cable now expects revenue of $1.4 billion to $1.45 billion, with results expected to be hurt by higher pricing in volatile metal markets. Analysts had been expecting fourth-quarter revenue of $1.54 billion.

Mentioned in this article:

General Cable Corp. NYSE: BGC

Jefferies Group Inc. NYSE: JEF

MF Global Holdings Ltd. NYSE: MF

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