ViroPharma convertibles add on hedge; Trinity contracts; ArcelorMittal mandatories flat

By Rebecca Melvin

New York, Aug. 1 - Action in the convertible bond market picked up some on Thursday as earnings season continued and as market players seemed to focus more on an updraft in equities than a move up in rates, a New York-based trader said.

The S&P 500 stock index jumped to a fresh high above 1,700, while U.S. Treasuries fell, pushing benchmark yields to near two-year highs, as encouraging economic data apparently supports an earlier taper of the Federal Reserve's $85-billion-per-month bond-purchasing program.

ViroPharma Inc.'s convertibles slipped outright but were better by about 0.25 point on a dollar-neutral, or hedged, basis after the Exton, Pa.-based biopharma said it will end a mid-stage study of a drug to prevent severe swelling related to a genetic disease. ViroPharma also reported decent earnings, but shares ended down 7%.

Affymetrix Inc.'s convertibles jumped to 97.5 in thin trade after the Santa Clara, Calif.-based provider of technology for pharmaceutical research and diagnostics reported second-quarter results that beat estimates.

But Trinity Industries Inc. was flattish outright, and down 0.75 point on a dollar-neutral, or hedged, basis in active trade after the Dallas-based maker of rail cars posted higher second-quarter earnings that beat estimates.

There was a lack of notable trade following the earnings reports of two big convertible issuers: ArcelorMittal SA and Chesapeake Energy Corp.

ArcelorMittal's mandatory convertibles were unchanged dollar neutral after the world's largest integrated steelmaker posted a net loss for the quarter, and Chesapeake's convertibles complex were all up about a point or two but in thin volume after the Oklahoma City-based natural gas company posted better-than-expected earnings, market sources said.

Elsewhere, Tesla Motors Inc. was better by about 0.125 point on a dollar-neutral basis, after doing even better on Wednesday. The bonds trade on about a 70% delta.

International Game Technology continued to grind higher, adding about 0.5 point on swap on Thursday.

U.S. equities gained. The S&P 500 stock index put in a fresh high, closing up 21.14 points or 1.3%, at 1,706.87; the Nasdaq stock market jumped 49.37 points, or 1.4%, to 3,675.74, and the Dow Jones industrial average added 128.48 points, or 0.8%, to 15,628.02.

"There was a little bit going on; I won't say that it was ever busy, but it was enough...." a second New York-based trader said of Thursday's convertible bond market.

On Thursday, the Institute for Supply Management said its broad index jumped to 55.4 in July from 50.9 in June, its biggest one-month jump in nine years. The Department of Labor reported that initial jobless claims dropped 5.5% to 326,000 for the week ended July 27, which was lower than expected and the lowest figure since January 2008.

In a statement Wednesday afternoon, the Fed said it will keep buying $85 billion a month in bonds and plans to hold its key short-term rate at near zero as long as the unemployment rates stays above 6.5% and inflation remains low.

ViroPharma adds 0.25 point

ViroPharma's 2% convertibles due 2017 were seen ending the day at about 178.125 bid, 178.625 offered versus the close on the underlying shares of $32.00.

ViroPharma shares fell $2.32, or nearly 7%.

On a dollar-neutral basis, the bonds were up about 0.25 point if holders were coming into the day on a delta in the mid-80% range, a New York-based trader said.

The Exton, Pa.-based biopharmaceutical company said that is will discontinue a mid-stage study of subcutaneous Cinryze with recombinant human Hyaluronidase after some patients developed unexpected antibodies.

"The antibodies have not been associated with any adverse clinical effects and are of unknown clinical significance," ViroPharma said in its release when announcing the canceled trial.

ViroPharma also announced net income for the second quarter of $11 million, or $0.15 per share, compared to $5 million, or $0.07 per share, in the same period of 2012.

Sales for the second quarter were $104 million, compared to $95 million in the year-earlier quarter.

The sales increase was driven by the commercial product growth of both Cinryze in the United States and higher European product sales, the company said.

The quarter "represented a period of strong commercial execution coupled with significant progress in our clinical development pipeline, despite this morning's news related to our combination efforts with Halozyme," ViroPharma's chief executive Vincent Milano said in the release.

The company reiterated forward guidance, saying it expects world net product sales of $440 million to $465 million. Cinryze sales are expected to be $390 million to $400 million, and research and development and selling, general and administrative expenses are expected to be $240 million to $260 million.

Trinity sees sellers

Trinity's 3.875% convertibles due 2036 traded at 116.5 bid, 117.75 offered versus an underlying share price of $40.70, according to a New York-based convertibles analyst.

In recent sessions, the bond has been changing hands at between 115 and 117.5.

But Trinity shares added $1.42, or 3.6%, to $40.79 on Thursday.

On a dollar-neutral basis, the bonds came in about 0.75 point if they were held on a 55% delta.

Sellers stepped into the name to take profits, but there was good two-way flow, the analyst said.

A second source said the bonds were very active.

"Earnings were better than expected and improved the credit story a little," the analyst said. "The bonds are at the top end of their valuation but on a dollar-neutral basis it came in quite a bit."

Trinity said that its net income for the second quarter was $84 million, or $1.06 per share, compared with $67.8 million, or 84 cents per share, in the year-earlier period.

Analysts had been expecting earnings of 95 cents per share, and Trinity had forecast second-quarter earnings of 88 cents to 95 cents per share.

Revenue rose 7% to $1.1 billion. The company also raised its outlook, citing strong demand for tank cars to ship crude oil by rail. For the full year, Trinity said it expects to earn $4.20 to $4.40 per share. That was up from its forecast in May of $3.80 to $4.05 per share for 2013.

ArcelorMittal unchanged

ArcelorMittal's 5% mandatory convertible senior notes due May 2014 were seen at 24.45 near the close, and that was unchanged on a dollar-neutral basis.

ArcelorMittal's shares ended the session down 44 cents, or 3.4%, to $12.53.

"They traded some on earnings, but they always trade," a New York-based trader said.

Luxembourg-based ArcelorMittal reported a net loss of $780 million, or $0.44 per share, compared to a profit of $1.02 billion, or $0.66 per share, for the year-earlier quarter.

Sales were $20.2 billion, which was down from $22.5 billion in the year-earlier period.

Steel shipments were down to 21.3 tonnes from 21.7 tonnes.

The company said again that profitability is set to improve for 2013, driven by a 1% to 2% increase in steel shipments, an increase in marketable iron ore shipments of about 20% and the realized benefits from asset optimization and management gains initiatives.

Mentioned in this article:

Affymetrix Inc. Nasdaq: AFFX

ArcelorMittal SA NYSE: MT

Chesapeake Energy Corp. NYSE: CHK

International Game Technology NYSE: IGT

Tesla Motors Inc. Nasdaq: TSLA

Trinity Industries Inc. NYSE: TRN

ViroPharma Inc. Nasdaq; VPHM

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