MGM jumps amid spinoff chatter; energy names hit again by lower oil; Molycorp slumps

By Rebecca Melvin

New York, March 17 – MGM Resorts International’s convertibles jumped in active trade Tuesday amid chatter over activist Land and Buildings’ push for the Las Vegas-based casino operator to convert to a real estate investment trust and spin off its real estate assets.

MGM’s 4.25% convertibles due April 15, 2015 jumped back up to 116, which was up more than 9 points, on Tuesday, according to Trace data. That level is up from about 107 on Monday – a level to which the bonds had slipped in recent sessions ahead of the issue’s upcoming maturity in less than a month.

Selling hit some energy names as oil prices extended losses into a sixth session.

Energy XXI (Bermuda) Ltd.’s 3% convertibles dropped to as low as 25 before recouping some of their fall to close around 28. The bonds also fell on Monday.

But shares of Energy XXI, a Houston-based energy exploration and production company, were higher again, adding 4.5% on Tuesday on top of a 2.6% rise on Monday.

Goodrich Petroleum Corp.’s 5% convertible due 2032 traded down 0.375 point to 52.375, according to Trace data.

The Emerald Oil Inc. 2% convertible was down a couple of points, a trader said, as the underlying shares of that Denver-based oil company fell nearly 9%.

Elsewhere, Molycorp Inc.’s 6% convertibles traded at 8.5 after the Greenwood Village, Colo.-based rare earths producer reported a wider-than-expected quarterly loss.

Equities were weak although the Nasdaq Composite stock index pared losses and turned positive by the end of the session as investors eyed the conclusion of the Federal Reserve’s two-day policy meeting on Wednesday. Markets intend to glean further guidance on when the central bank intends to begin to raise interest rates. Many market pundits are predicting the first rate increase in June, while others predict a late-year rate rise.

MGM expands ahead of maturity

MGM’s 4.25% convertibles, which mature April 15, surged about 9 points on an outright basis to 116 and were seen to have expanded on a dollar-neutral, or hedged, basis by about 0.5 point, according to a New York-based trader.

However, the amount that the bonds expanded was difficult to determine as investors are holding the paper on different deltas, he said.

“It’s hard to tell, but it’s probably up 0.5 point. It depends on where you sold your stock and where you sold your delta,” the trader said.

“It still has a lot of gamma to it,” the trader said.

Tuesday’s spike is exactly the kind of event that encourages investors to hold onto the paper until maturity. Before Tuesday, the paper had been leaking value heading into its maturity.

MGM shares rose sharply and closed up $2.08, or 10.6%, to $21.74.

Land and Buildings, an activist fund, said its spinoff plan for MGM, which also includes reducing leverage through asset sales and paying a MGM China special dividend, could unlock net asset value by as much as 70%, and send MGM shares higher.

“We strongly believe the U.S. real estate of MGM (MGM REIT) is worth $25 per share alone, more than the entire MGM share price today of $19.41,” Land and Buildings said in its presentation.

Energy weak with lower oil

West Texas Intermediate crude oil for April delivery fell another $1.45, or 3.3%, to $42.43 per barrel on Tuesday, which was the sixth straight session of declines. Falling oil prices was what was behind the Energy XXI convertibles taking a leg lower, sources said.

Energy XXI was “significantly lower,” a trader said. The 3% bonds traded down to as low as 25 bid, 26 offered from 33.5 on Monday. The last print was 28, a trader said. On Monday the bond was off 2 points from 35.5.

“Oil is slamming it, but the stock is up,” a New York-based trader said.

Energy XXI shares added 14 cents, or 4.5%, to $3.27.

Also lower on Tuesday was Emerald Oil’s 2% convertibles due 2019. Those bonds were seen about 2 points lower at 58 bid, 59 offered. Emerald Oil shares shed 9 cents to close at $0.90.

“Lots of the energy names are getting abused. Stocks are getting annihilated,” a trader said.

West Texas intermediate crude oil for April delivery traded down 2.25% to $43.83 on Monday.

Molycorp severely distressed

Molycorp’s 6% convertibles due 2017 traded at about 8.5 on Tuesday, which was 0.25 point lower than where the bonds traded earlier this month.

Molycorp shares skidded 26 cents, or 35%, to $0.48 on Tuesday.

Molycorp reported a fourth-quarter loss of 39 cents per share on revenue of $116.2 million. That was greater than the 26-cent-per-share loss that analysts expected. But revenue was better than the $104 million expected.

In January the company was given notice by the New York Stock Exchange that it had six months to get its 30-day average share price above $1.00 or face delisting.

Mentioned in this article:

Emerald Oil Inc. NYSE: EOX

Energy XXI (Bermuda) Ltd. Nasdaq: EXXI

Goodrich Petroleum Corp. NYSE: GDP

MGM Resorts International NYSE: MGM

Molycorp Inc. NYSE: MCP

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