Jefferies weakens again in active trade; Central European tanks on earnings, outlook

By Rebecca Melvin

New York, Nov. 4 - Convertibles trading this past week was concentrated in a handful of names that mostly did worse, and that trend continued on Friday.

By Friday, trading in MF Global Holdings Ltd.'s trio of convertible bonds slowed to a trickle as "any investors who needed to get out of it were out of it," a New York-based trader said. But that didn't take away from it being the name of the week starting Monday when its convertibles fell sharply in very active trade when the New York-based brokerage filed for bankruptcy amid concerns about its European debt.

All three MF Global bonds traded at around 40 on Friday.

Jefferies Group Inc. moved a little lower to 77.75 from about 80 in active trade Friday. The underlying shares wavered from negative to positive territory amid yet more financial disclosures from the New York-based midsized investment bank.

Central European Distribution Corp.'s convertibles took a huge 15-point hit after the Polish vodka maker reported earnings that missed estimates and lowered its outlook for the second time this year. Shares of the company also plunged, but the convertible trades on an outright basis, not against the stock.

Also on disappointing earnings, Endeavour International Corp. traded lower.

In the broader markets, equities continued their downward move amid fears about the European debt crisis and ahead of a confidence vote expected by the Greek parliament late Friday.

The focus on Europe meant news of a modestly better U.S. labor market picture went largely unnoted. Nonfarm payrolls for October totaled 80,000, which is slightly less than 85,000 expected. Nonfarm private payrolls rose by 104,000, which is less than the increase of 117,000 that had been expected.

In addition, the jobs reports for September and August were upwardly revised. For September, nonfarm payrolls were revised to 158,000 from 103,000, and nonfarm payrolls for August were revised to 104,000 from 57,000.

U.S. unemployment now stands at 9.0% down from 9.1%. It had been broadly expected to remain at 9.1%.

Jefferies weakens again

Jefferies' 3.875% convertibles due 2029 shed another 2.5 points in active trade to 77.75. That represents about a 12-point drop from Monday.

About a third of Friday's trading volume in the convertible bond market was Jefferies.

"It had gone back up to over 80 but now it's down," a New York-based trader said.

The convertible trades on a very low delta or outright. A trader said that if players didn't think that the shares were going to go back up, they'd make a heavier bet, or delta.

Jefferies shares plunged as much as 20% on Thursday with trading halted twice when circuit breakers kicked in. Subsequently, the shares improved significantly, settling down only 26 cents, or 2%, to $12.01 at the close.

The cause of the tumble was Egan-Jones' downgrade of Jefferies to BBB- from BBB, citing concerns about $2.7 billion of sovereign debt exposure, and tipping its hat to the problems of MF Global, which have increased scrutiny of other medium-sized financial companies.

Central European plunges

Central European's 3% convertibles due 2013 traded down 15 points to 54 in heavy volume Friday, while shares of the vodka maker and beverage distributor, with U.S. headquarters in Pennsylvania, plunged.

At the market close, the Central European shares were down 36.5%, or $1.83, at $3.20. Their previous close was $5.04.

Investors were unnerved after the company, which has shed more than a third of its market value this year, cut its full-year outlook for earnings to 24 cents to 45 cents a share and reduced projected revenue to $850 million to $950 million. That is down from previous guidance - which was also cut - of 80 cents to $1 of profit on sales of $900 million to $1.05 billion.

Central European also said net income was $4.2 million, or 6 cents a share, compared to $8.5 million., or 12 cents a share, for the year-earlier period, and missed estimates. But revenue rose 45% to $228.9 million and was better than the $220.9 million expected.

The company ended September with $111.2 million in cash, down from $122.3 million at the start of the year.

Endeavour slips

Endeavour's 5.5% convertibles due 2016 traded at 80.25 versus an underlying share price of $7.95 on Friday, from about 81.25 versus $7.85 on Thursday.

It trades on about a 36% delta and with 37.8 points of premium over parity. The yield to maturity is 10.99%, according to Citigroup's convertibles sales and trading desk.

Shares of the Houston-based oil and gas company fell 49 cents, or 6%, to $7.45. That extended a 20% slide earlier in the week.

The company announced disappointing third-quarter earnings on Wednesday that resulted from a production shortfall in the Bacchus field of the North Sea. But despite the production hiccups, Citigroup said it thinks production should ultimately ramp up at Bacchus and generate a significant amount of cash flow.

"The Rochelle field is scheduled to drill in the spring and may also start production and generate cash later in the year," Citigroup said in a note published Thursday.

While operating cash flow for the company, which has a $282 million market cap, is likely to come in negative in 2011, "we expect a sharp uptick next year once North Sea production begins in earnest," Citigroup said.

Citi said it is recommending the convertibles because cash flow should increase a lot in 2012, potentially pushing the stock higher.

The company has no debt due until August 2013.

Using 40% vol. and a credit spread of 1,000 basis points over Libor, the bonds look about 8% cheap, Citigroup said.

Mentioned in this article:

Central European Distribution Corp. Nasdaq: CEDC

Endeavour International Corp. NYSE: END

Jefferies Group Inc. NYSE: JEF

MF Global Holdings Ltd. NYSE: MF

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