Vornado finds buyers, trades with premium; BPZ adds; United States Steel gains 0.25 point on hedge

By Rebecca Melvin

New York, March 19 - On a relatively quiet Monday in the convertible bond market, Vornado Realty Trust was active and trading a little higher at 100.75 to 100.875 as market players weighed the issue's potential upcoming call against how close it is to being in the money.

BPZ Resources Inc.'s convertibles gained in active trade, especially for that name, which has been relatively illiquid and lacking in decent stock borrow.

United States Steel Corp. was also mentioned as an active trader on Monday and higher, with the underlying shares jumping 6% in an extension of a run that began early this month.

But overall, convertibles were seen as relatively quiet and a little weaker as the fair to fully valued assets lag gains in equities.

Dendreon Corp., for example, traded down on Monday, a New York-based trader said.

Dendreon's 2.875% convertibles due January 2016 traded last at 78.25 on Monday, after having traded as high as 80 and as low as 77.47.

"Vol [atility] names have been coming in; credit names have been holding to getting better," the trader said.

The Dow Jones industrial average ended in the green but pared most of its earlier gains for a plus 6.51 point, or fractional percentage, gain to 13,239.13; the S&P 500 stock index added 5.58 points to 1,409.75 on Monday and the Nasdaq Stock index gained 23 points, or 0.75% to 3,078.32.

There were no new issues in the U.S. convertible primary market on Monday, but internationally, Amtek India Ltd. priced a $100 million Regulation S deal of five-year convertible bonds, which priced at par to yield 6% with a 5% initial conversion premium. The issue has a $30 million greenshoe.

Also in the overseas primary market, Insurance Australia Group Inc. planned an offering of at least A$350 million of floating-rate convertible preference shares at par of A$100 for pricing March 27.

Vornado eyed

Vornado's 3.875% convertibles due 2025 ended the session higher by 0.25 point to 0.375 point to about 100.75 to 100.875, which was up on an outright basis from 100.125 to 100.25.

Shares of the New York-based real estate investment trust ended the session higher by nearly $1, or 1.1%, at $84.76 in active trade.

The convertibles trade mostly outright or on a small amount of delta, a New York-based trader said.

"Someone woke up this morning and wanted to buy Vornado," the trader said.

The issue may get called as there is an upcoming call date April 18, and if that happens holders would lose the small amount that it is trading above par. But the bet being made is that there may be a rise in the underlying shares and then the paper would be in the money, the trader said.

It is also close to, but over parity, trading at 3.5 points of premium over parity.

The bond was very actively traded on Monday, with about $40 million of the bonds changing hands, according to Trace data.

"People are buying them because they haven't officially called them," the trader said.

If they were called, holders would lose the amount above par, he said, but there is also the cash flow and the fact that the convertible "strikes at $87 and change and currently the shares are at $84 and change," the trader said on Monday

Parity is close to par, he said.

With the bond trading at 3.5 points of premium, market players are willing to risk the amount that it's trading over par in order to capture the return if the stock gets some movement to it, he said.

BPZ adds

BPZ's 6.5% convertibles due 2015 traded mostly around 93.5, which was higher by about a point on Monday. But it also was higher at 94.75.

Shares of the Houston-based oil and gas company gained 6 cents, or 1.5%, to $4.17 in active trade.

"Tons of BPZ" traded, a New York-based convertibles sellsider said, nothing that the oil and gas exploration and development company has Peruvian and Ecuadorean assets.

The sellsider said the convertible has a tough borrow, but it is a good stock substitute.

U.S. Steel extends gains

U.S. Steel's 4% convertibles due 2014 traded actively on Monday and were seen ending the session at 123.25 bid, 123.50 offered versus an underlying share price of $31.90.

That was about a 4-point climb on an outright basis and an improvement of about 0.25 point on a dollar-neutral, or hedged, basis, a New York-based trader said.

Shares of the Pittsburgh-based integrated steelmaker ended the session higher by $1.89, or 6.4%, at $31.64 in active trade.

The U.S. Steel convertibles were "extremely active," the trader said.

U.S. Steel was the leader in a sector rally that has been underway for a couple of weeks. On Monday a UBS analyst lifted his target price on U.S. Steel to $47.00 a share from $38.00 a share and left his "buy" rating on the shares unchanged.

Steelmakers have gained in recent weeks on optimism that recent price hikes appear to have taken hold as demand gains from improved sales of autos and manufactured goods. There is also the expectation that demand from the construction sector may improve. In addition, steelmaker costs are coming down as iron ore prices are easing and natural gas prices are very low.

Since March 6, U.S. Steel shares have rallied 25%.

Mentioned in this article:

Amtek India Ltd. Bombay: 534482

BPZ Resources Inc. NYSE: BPZ

Dendreon Corp. Nasdaq: DNDN

Insurance Australia Group Inc. Australia: IAG

United States Steel Corp. NYSE: X

Vornado Realty Trust NYSE: VNO

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