Convertibles weaker; Cobalt ‘comes in’ on hedge after earnings miss; Endeavour lower

By Rebecca Melvin

New York, Aug. 5 – U.S. convertibles were under pressure Tuesday and traded mostly lower in tandem with weakness in the broader markets, including lower equities, slightly wider credit markets, and generally light volumes as vacation season remained underway.

“When there’s lighter liquidity, it doesn’t take much to make things weaker,” a New York-based trader said.

Qihoo 360 Technology Co. Ltd.’s two new convertibles, as well as the older Qihoo convertibles, were down slightly in continuing active trade since the $450 million of newer, dual tranches debuted in the market on Friday. The complex was called down by about 0.375 point to 0.5 point on a hedged basis, a New York-based trader said.

In addition, the three Tesla Motors Inc. convertibles were a little lower on hedge, as were business development companies like Ares Capital Corp., which saw its whole complex off, the trader said.

The losses were “nothing dramatic,” but the weakness was fairly consistent “across the board” as outright players turned sellers in response to the broader markets.

“On the margin, the outright investment base sells on weakness in the broader markets,” he said.

Earnings news was driving a lot of the action in convertibles on Tuesday, and there were several reports from the oil sector.

Cobalt International Energy Inc.’s two convertible issues were lower outright and “came in” on a dollar-neutral, or hedged, basis after the Houston-based oil exploration and production company reported a bigger-than-expected quarterly loss and disclosed it received a Wells notice from the U.S. Securities and Exchange Commission on Monday related to its oil operations in Angola. A Wells notice is an SEC letter stating its intension of bringing an enforcement action against a person or company. Cobalt shares fell 11%.

Endeavour International Corp. saw its 5.5% convertibles due 2016 quoted at 41 bid, 45 offered as shares of the Houston-based oil and gas exploration and production company fell about 12% after the company posted a wider adjusted net loss for its quarter but said that physical production exceeded revised guidance. The Endeavour bonds had recently been at about 50.

Penn Virginia Corp.’s perpetual preferred shares traded at 100.60 bid, 101.30 offered with the underlying shares of the Radnor, Pa.-based oil and gas driller at $13.14, which was Monday’s closing mark. However, the Penn Virginia common shares fell 5.6% to $12.41 on Tuesday.

Meanwhile, shares of some convertibles issuers jumped to the upside.

GT Advanced Technologies Inc.’s stock jumped after earnings, and its newer 3% notes due 2020 were quoted 149 bid, 148.75 offered with the shares at $15.25 at late morning. That was eight to 10 points higher on an outright basis, but it wasn’t known how the issue performed on a hedged basis.

Akorn Inc.’s shares were up a chunk after the Buffalo Grove, Ill.-based pharmaceutical company said it won U.S. antitrust approval to buy VersaPharm for $440 million on condition that it sell its rights to a generic version of the tuberculosis drug rifampin, which it has agreed to do.

Akorn also beat earnings and revenue estimates and raised its full-year guidance above consensus.

Akorn’s 3.5% convertibles due 2016 were not heard in trade.

Equities were down despite two better-than-expected economic reports. The ISM services report for July rose to 58.7 from 56.0 in June, and economists had been expecting it to come in at about 56.3 to 56.5.

Also factory orders rose 1.1% in June, which was better than the forecast for a 0.5% rise.

But earlier, China’s services sector grew at its slowest pace in nearly nine years in July, according to a report from HSBC/Markit.

Cobalt ‘comes in’

Cobalt’s issue of 3.125% convertibles due 2024, which is the company’s newer bond that priced in May, traded at 93.343, according to Trace data at mid-afternoon.

Cobalt 2.625% convertibles due 2019 changed hands at 85.25.

Cobalt shares were down $1.81, or 11%, at $14.16 at that point.

The two bond issues were called down by 1 point on a dollar-neutral basis.

Earlier in the session, a second New York-based trader said that Cobalt “was the No. 1 trader posting earnings” and that the stock down was 10% but the bonds were “just nuking,” or moving lower in line, or flat, on a hedged basis with lower shares.

As for what was weighing on the securities most, one trader said, “I think it’s both, but more the Wells notice.

The investigation news has been out there, he said, but there was nothing good about the earnings. “They abandoned one of their wells,” he noted.

The investigation related to the Wells notice has been ongoing since 2011.

As for the recommendation of an enforcement action alleging violations of certain federal securities laws, the company said in a filing that the SEC staff “may recommend that the SEC seek remedies that could include an injunction, a cease-and-desist order, disgorgement, pre-judgment interest and civil money penalties.”

The company also said the Wells notice “is neither a formal allegation nor a finding of wrongdoing. It allows the company the opportunity to provide its reasons of law, policy or fact as to why the proposed enforcement action should not be filed and to address the issues raised by the staff before any decision is made by the SEC on whether to authorize the commencement of an enforcement proceeding. The company intends to respond to the Wells notice in the form of a ‘Wells Submission’ in due course.”

The company said it believes its activities in Angola have been compliant with all laws, including the U.S. Foreign Corrupt Practices Act.

As for its quarterly results, Cobalt said it lost $95 million for the second quarter, or 23 cents per share, compared with a net loss of $79 million, or 19 cents per share, in the year-earlier period. Analysts were expecting a loss of 17 cents per share.

Endeavour slides

Endeavour’s 5.5% convertibles due 2016 were seen at 41 bid, 45 offered on Tuesday. Recently the bonds had been at about 50.

Endeavour shares fell 19 cents, or 13.5%, to $1.22 on Tuesday.

A slide of that amount for a $1.00 stock isn’t much, a New York-based trader said of Endeavour, and “the converts trade like once every few months.”

The convertible trades in oil/energy sector names were not associated with a sector move, a New York-based trader said. The trading was company specific. Trading in Penn Virginia, for example, was related to amounts the company will be receiving from an asset sale and arbitration settlement. The company will receive $73 million from the closing on its sale of Mississippi assets and about $35 million in an arbitration settlement related to its 2013 Eagle Ford acquisition.

Mentioned in this article:

Akorn Inc. Nasdaq: AKRX

Ares Capital Corp. Nasdaq: ARCC

Cobalt International Energy Inc. NYSE: CIE

Endeavour International Corp. NYSE: END

GT Advanced Technologies Inc. Nasdaq: GTAT

Penn Virginia Corp. NYSE: PVA

Qihoo 360 Technology Co. Ltd. Nasdaq: QIHU

Tesla Motors Inc. Nasdaq: TSLA

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