Convertibles sell off; GMX, MGM trade lower; Kodak drops sharply on restructuring fears

By Rebecca Melvin

New York, Sept. 30 - The convertible bond market saw some of its lesser credits gapping down on Friday and just about anything "yield-related" was for sale, market sources said. But short put names and high-delta names held up better.

The selling on Friday, which was the last day of the month and the last day of the quarter, was more pronounced than in had been earlier in the week, although certainly the market has been wobbly for much of the past several weeks, sources said.

"It's starting to look like '08. We're not quite there yet, but it's starting to look like it," a Connecticut-based sellside analyst said.

Convertibles were hit harder than other parts of the capital structure during the credit crisis of 2008. A short sale ban spurred by credit problems and the Lehman Brothers bankruptcy caused such horrific returns that it prompted mass investor redemptions, and convertible bond prices fell dramatically, especially when the leverage inherent in the convertible arbitrage strategy magnified losses.

GMX Resources Inc. was a name mentioned Friday as gapping down recently.

MGM Resorts International traded down about 4 points on the day, which was equivalent to 2.75 points on a hedged, or dollar-neutral, basis, depending on the delta, as China worries weighed on gaming companies.

Eastman Kodak Co., which has been languishing all week, took a sudden dive Friday afternoon on restructuring fears after the Wall Street Journal reported that the Rochester, N.Y.-based digital photography company had hired law firm Jones Day for restructuring advice.

Ares Capital Corp., a BBB-rated credit, was noted for being for sale, trading a little bit on swap and falling 2 or 3 points. Early in the day, the Ares convertibles were said to be down 1.5 points at 94.25.

But Ares isn't in the same category as some of the other names, a sellsider noted. "Nobody is going to panic over those."

USEC Inc. was another name to the downside, slipping to the low 50s from about 55 with its shares lower after the developer of uranium enrichment projects said it was suspending contracts with some suppliers and laying off workers following financing problems.

Amgen Inc. was very active, accounting for a sizable chunk of overall volume, with the paper changing hands at 98.5, according to a New York-based sellside desk analyst.

Even pharmaceutical names, which have held up to date, were heavier as outright sellers looked for liquidity, a New York-based trader said.

But Cubist Pharmaceuticals Inc. traded at 137 versus an underlying share price of $35.60, which was steady on previous levels, and it was recommended as a trade idea of the week by Citigroup's sales and trading desk.

The Cubist convertible trades currently on a 90% delta, at about 16 points over parity.

Convertibles weren't the only ones that had a bad quarter; equities also had their worst quarter since the end of 2008. The S&P 500 stock index settled Friday at 1,131.42, which was down 29 points, or 2.5%, on the day and down about 13% since the end of July.

Prompting selling on Friday was data that showed some weakness in China. The country's manufacturing shrank for the third month in a row.

Meanwhile, European markets were also very weak. Consumer prices in the 17-member euro zone rose by 3% in the 12 months to September, up from 2.5% in August and well above the European Central Bank's target of just below 2%. It was the fastest rise since October 2008.

Kodak tanks

Kodak's 7% convertible notes due 2017 traded down to around 26 with the underlying shares at $0.75, which was down from 37.5 versus an underlying share price of $1.60 earlier in the day, and down from 47.5 on Monday and about 60 a week ago Monday.

The Journal's report that the company has hired lawyers for restructuring advice caused the stocks and bonds to plunge, and the company put out a news release after the markets closed saying that it has no intention of filing for bankruptcy.

According to the release, "Kodak is committed to meeting all of its obligations and has no intention of filing for bankruptcy. The company also continues to actively pursue its previously announced strategy to monetize its digital imaging patent portfolio. Kodak remains focused on meeting its commitments to customers and suppliers, and on delivering on its strategy to become a profitable, sustainable digital company."

The release went on to say, "It is not unusual for a company in transformation to explore all options and to engage a variety of outside advisers, including financial and legal advisers. Jones Day is one of a number of advisers that Kodak is working with in that regard."

The current slide began on Monday when the company filed an 8-K in which it stated that it drew down $160 million on its credit facility, a move that suggested the company was becoming liquidity constrained.

Kodak's stock fell 64 cents, or 26.89%, to $1.74 on Monday.

Kodak is working on licensing out its patents in order to increase cash flows. In an e-mail sent to Bloomberg, a company spokesperson attempted to make light of the credit facility draw.

The revolver "has been a part of Kodak's cash- management tool kit for quite some time," wrote Christopher Veronda, a spokesman for Kodak, in an e-mailed statement. "The purpose of the revolving credit facility is to bridge timing differences between cash outflows and inflows, which is a common practice at many corporations."

MGM, GMX move lower

MGM's 4.25% convertibles due 2015 traded early in the day at 90 versus a stock price of $9.20, and were also seen lower at 88.75 bid, 89.25 offered versus an underlying share price of $9.29.

Shares of the Las Vegas-based gaming company fell 64 cents, or 6.5%, to $9.29 on the day.

In August, the MGM convertibles were close to par, trading in the upper 90s.

Slowing growth in China would impinge on wealthy gamblers from China that have bolstered the overseas operations of MGM and other gaming companies.

GMX Resources' 5% convertibles due 2013 went out Friday at 61 bid, 62 offered, which was right around where they had been trading, with some trading at 59 in recent sessions and then trading a small amount at 63, a Connecticut-based sellside trader said. But that is lower in recent weeks as shares of the Oklahoma City-based oil and gas exploration and development company currently trade at the low end of their 52-week range.

GMX shares on Friday actually ended on the upside by 4 cents, or 1.8%, at $2.27.

Mentioned in this article:

Amgen Inc. Nasdaq: AMGN

Ares Capital Corp. Nasdaq: ARCC

Cubist Pharmaceuticals Inc. Nasdaq: CBST

Eastman Kodak Co. NYSE: EK

GMX Resources Inc. Nasdaq: GMXR

MGM Resorts International NYSE: MGM

USEC Inc. NYSE: USU

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