Short-dated, credit names well bid; Tower bounces after reinsurer deals; Molycorp gains

By Rebecca Melvin

New York, Oct. 2 - Convertibles trading picked up some on Wednesday with a good deal of action in short-dated, credit-oriented names, which were well bid, while at-the-money convertibles were seen underperforming amid a pickup in volatility, market players said.

Flows were still limited, a New York-based trader said, and the primary market racked up another goose egg in terms of new issuance, but it no longer felt like the convertible market was in partial shutdown mode as it did earlier in the week. The primary market has seen no new issues since last Wednesday.

Tower Group International Ltd.'s convertibles bounced back into the 90s after the ailing Bermuda-based property and casualty insurance and reinsurance company announced that it has inked three agreements with reinsurers aimed at relieving its financial constraints for the time being.

The "reinsurance announcements may also provide the company with a bit of breathing room," CRT Capital convertibles analysts David Epstein and Jack Chan wrote in a note published Wednesday. The analysts said that at or near Tuesday's 87.5 Trace level, the 5% Tower convertible "looks interesting."

Molycorp Inc.'s 6% convertibles jumped after the Greenwood Village, Colo.-based rare earths minerals miner said that its last major construction projects at the Mountain Pass, Calif., plant have been completed and the units are expected to be commissioned and begin production in the fourth quarter.

Peabody Energy Corp. saw its 4.75% convertibles due 2066 trade a little higher with higher shares of the St. Louis-based coal company.

Overall, "it was largely quiet," a New York-based trader said. Short-dated, credit oriented issues were firm and well bid, while many at-the-money names underperformed vol., so there was not a lot of movement in terms of valuation, he said.

Select names were better to buy like Electronic Arts Inc., which was for sale early in the session before buyers stepped in amid weaker shares of the Redwood City, Calif.-based video game publisher.

U.S. stocks were lower after a disappointing Automatic Data Processing jobs report, which showed the private sector created 166,000 jobs in September. Forecasts were for 178,000 new jobs. In addition, August job growth was revised lower to 159,000 from 176,000.

Meanwhile, the U.S. Labor Department's August jobs report, slated for Friday, may not be released if the government shutdown continues. The government remained in partial shutdown mode for a second day.

Tower recoups

Tower Group's 5% convertibles due September 2014 traded up multiple points to 92 to 95, from 87 ish on Monday and 95 on Friday.

Tower shares jumped 53 cents, or 7.2%, to $7.93.

Tower's convertibles and stock had plunged amid speculation that it might be forced into a reorganization in the face of a reserve crisis.

"They are bid up," a New York-based trader said of the convertibles on Wednesday, adding that the name has been very volatile.

Late Tuesday, Tower said it had entered into agreements with three reinsurers that would improve the company's financial flexibility. The reinsurers included Arch Reinsurance Ltd., Hannover Re and Southport Re.

"They provide a little flexibility," CRT's Epstein said of the agreements, as they allow Tower to take some of its risk off its balance sheet.

However, the company may need to take additional measures to improve its financial strength, depending on how large an adverse loss reserve is reported next week in the company's delayed second-quarter earnings report.

Epstein and Chan said, "...from a high level we believe the 5% convertible looks interesting at or in the vicinity of where it Traced late yesterday: $87.50 (20.1% YTM, 179%)."

"We have not done the work (which may be nearly impossible to do) necessary to predict how big the adverse loss development might be for Q2. However, we think the risk that it would be so large as to lead to impairment of the convertibles is not as likely as what's currently priced into the convertible," the analysts wrote in their note.

Tower was the original issuer of this $150 million convertible. "While we think there is likely enough asset value to cover the convertible, the company may need to find some avenue to refinance the issue as opposed to having readily available cash with which to pay it off," Epstein and Chan wrote.

And in the event that the company does sell itself, an acquisition "could accelerate some of the returns that investors might otherwise earn on the convert through the maturity next September," they wrote.

Molycorp gains

Molycorp's 6% convertibles due 2017 jumped to 84 bid, 84.5 offered, according to a New York-based trader. The paper was quoted on Trace in the early going at 82.625, which was reported up 3.875 points.

Molycorp's other convertibles were not heard in trade.

Molycorp shares surged 70 cents, or 10.5%, to $7.36 in heavy volume.

The rare earths minerals miner said that at its Mountain Pass, Calif.-based facility both the chloralkali plant and cracking facility are now "mechanically complete" and that full-scale commissioning operations have begun. The plant is expected to help the facility achieve its cash production cost targets, making the company one of the low-cost producers globally.

Mentioned in this article:

Electronic Arts Inc. NYSE: EA

Molycorp Inc. NYSE: MCP

Peabody Energy Corp. NYSE: BTU

Tower Group International Ltd. Nasdaq: TWGP

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