Jefferies extends losses; New Human Genome paper flat dollar neutral; MGM adds premium

By Rebecca Melvin

New York, Nov. 3 - Jefferies Group Inc. dropped sharply and then pared losses in active trade Thursday as the New York-based investment bank responded to an Egan-Jones credit ratings downgrade and related concerns with a volley of press releases regarding its European debt exposure.

For the second time in three days, Jefferies made public statements that it had "no meaningful net exposure to European sovereign debt." Its short positions balance the long ones, and the short positions are in securities, not credit default swaps, Jefferies specified in separate statements.

Human Genome Sciences Inc.'s 3% convertibles, which priced Wednesday, moved up a little in trade on an outright basis but was flat on a dollar-neutral basis.

Dendreon Corp.'s convertibles took a dive in outright trade after the Seattle-based biotech reported weaker-than-expected sales for its new Provenge prostate cancer drug.

Meanwhile, earnings reports pulled a few other convertibles into trade. Eastman Kodak Co. saw its 7% convertibles trade at 38 after the Rochester, N.Y.-based digital photography company reported a wider quarterly loss on continuing operations on lower revenue and warned that it needs to raise funds either through a sale of its patent portfolios or a debt offering. The convertibles were steady to a little higher on levels seen earlier in the week.

MGM Resorts International Inc. slipped in tandem with its underlying shares, but its points of premium expanded to 40 points from about 38 after the Las Vegas-based casino operator reported a narrower third-quarter loss on disappointing revenue and shares fell.

Transocean Ltd.'s very short-dated convertibles looked immobile even as shares of the Switzerland-based oilfield services company dropped on weaker-than-expected earnings.

The broader markets traded up smartly amid of raft of news headlines, not the least of which was that Greece's national referendum on the bailout package was likely to be scrapped. Word of the referendum roiled markets starting Tuesday.

The European Central Bank, sporting a new president in Mario Draghi, made a surprise 0.25% rate cut, saying Europe is headed toward a mild recession by the end of the year and that inflation in Europe next year is set to decline.

The Group of 20 began a meeting in Cannes. European leaders were reported to be withholding €8 billion of scheduled aid to Greece needed for December debt payments until questions are answered regarding the referendum and prime minister George Papandreou's government.

Jefferies extends losses

Jefferies' 3.875% convertibles due 2029 dropped 5 or 6 points to about 77.5 in early trade Thursday before recovering some of that loss to trade actively around 79 to 80 at midday.

The 3.5-point to 4.5-point loss followed on the heels of a 5- or 6-point drop on Wednesday.

Jefferies shares plunged as much as 20% to $9.79 in early trade before being halted briefly when circuit breakers kicked in. Subsequently, the shares improved significantly, settling down only 26 cents, or 2%, to $12.01 at the close.

On Wednesday, the 83.5 trade in Jefferies' 3.875% convertibles was against a $12.10 underlying share price.

Egan-Jones downgraded Jefferies to BBB- from BBB and said it was concerned about $2.7 billion of sovereign debt exposure, noting that the problems of MF Global have increased scrutiny of other medium-sized broker-dealers.

Jefferies came under the microscope following MF Global's bankruptcy filing on Monday following credit rating downgrades the previous week. Those downgrades cited concerns about MF's $6.3 billion in European sovereign debt.

Jefferies has responded to concerns about its own exposure in the region, saying it had a net short exposure to Portugal, Italy, Ireland, Greece and Spain of just $38 million.

Referring to the $2.7 billion exposure estimate, Jefferies said: "Recent reports and calculations appear to have been focusing only on long inventory." The bank said it had offsetting short positions of $2.5 billion and that it had "no meaningful net exposure to European sovereign debt."

Human Genome flat

Traders said they saw Human Genome's new 3% convertibles due 2018 change hands with a 99 handle on Thursday, but a syndicate source said they also traded at 101.5 versus an underlying share price of $9.90. While that looked higher on an outright basis, it was flat on a dollar-neutral basis.

Shares of the Rockville, Md.-based biopharmaceutical company closed down 16 cents, or 1.6%, at $9.75 on Thursday.

"...stock has traded in a 69 cent range today, which can easily account for the change in convert price on an outright basis. I don't think they have traded in a 1.5 point dollar-neutral range," a sellside trading source said.

On their debut Wednesday, the new convertibles were trading at 100 bid, 100.5 offered during the session versus an underlying share price of $9.85.

The new paper was initially offered at 99, following 98.5 to 99 offer talk. The upsized $430 million of seven-year convertibles priced at the cheap end of talked terms, which were 2.5% to 3% for the coupon and 30% to 35% for the premium.

Dendreon lower outright

Dendreon's 2.875% convertibles due 2016 traded in the 69.5 bid, 70 offered context and were down about 6 points on an outright basis. The convertibles were not seen to be traded on swap and if there was a delta against the name, it was thought to be low in the 10% area.

With such a large premium, it was not considered a hedged name, one trader said.

Dendreon shares fell $3.91, or 37%, to $6.55.

Dragging the shares and bonds lower was the company's outlook for only modest growth in sales of its Provenge prostate cancer therapy for the next few quarters.

Goldman Sachs cut its rating on the stock to "neutral" from "buy." Also pressuring shares was news that a drug being developed by Medivation Inc. and Astellas Pharma Inc. helped patients with advanced prostate cancer live nearly five months longer.

MGM adds premium

MGM's 4.25% convertibles due 2015 traded down to 96 versus an underlying share price of $10.45 on Thursday, compared to 99.75 versus an underlying share price of $11.50 on Wednesday, according to a New York-based sellside pricing source.

The MGM 4.25% convertibles also traded at 98, which was down 1.5 points, according to Trace data. The paper traded at 82.5 versus an underlying share price of $8.35 in early October.

The MGM convertibles had about 40 points of premium at the end of the session, which compared to 38 points of premium on Tuesday.

Shares of the Las Vegas-based gaming company fell 66 cents, or 5.8%, to $10.73 on the day.

The casino operator lost $123.8 million, or 25 cents per share, for the three months ended Sept. 30. That compares with a loss of $318 million, or 72 cents per share, a year ago. MGM's impairment charge of 11 cents compares to 51 cents per share in impairment charges in the prior-year period.

Removing the 11 cents per share charge, MGM Resorts lost 14 cents per share. Analysts polled by FactSet predicted a loss of 15 cents per share.

Revenue climbed 42% to $2.23 billion from $1.57 billion, buoyed by MGM China Holdings Ltd., which runs a Macau casino. But Wall Street expected higher revenue of $2.25 billion.

The stocks and bonds took a hit in October on slowing growth in China, which would impinge on wealthy gamblers from China that have bolstered the overseas operations of MGM and other gaming companies.

Mentioned in this article:

Human Genome Sciences Inc. Nasdaq: HGSI

Jefferies Group Inc. NYSE: JEF

MF Global Holdings Ltd. NYSE: MF

MGM Resorts International Inc. NYSE: MGM

Transocean Ltd. NYSE: RIG

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