Convertibles firm, but market pauses after volatile week; DryShips up after equity raise

By Rebecca Melvin

New York, Oct. 24 – Convertibles remained firm but quieted on Friday from the hectic and volatile pace of the week overall, a New York-based trader said.

“There is good two-sided flow, with buyers outnumbering sellers. But I think people are taking a breath right here after one of the more active and volatile weeks that we’ve seen,” the trader said.

Volume among many smaller deals was inhibited by a lack of sellers and spreads remained wide for some issues, a second New York-based trader said.

DryShips Inc.’s 5% convertibles, which mature Dec. 1, were very active and gained another point to 99.5 bid, 99.75 offered after the Athens-based shipping company announced that it has raised $350 million in an equity offering of 250 million shares of common stock.

The equity raise boosted the DryShips convertibles, which sank to 90 last week as investors worried about whether the bonds would be repaid, but the company’s shares slid more than 20% on the news.

Ford Motor Co.’s convertibles, which have been called, were seeing “small trading,” but buyers were waiting in the wings if sellers emerged. The bonds traded down as the shares declined after weak earnings.

BioMarin Pharmaceutical Inc.’s convertibles popped on an outright basis, according to Trace data, after the California-based biopharmaceutical company reported earnings that beat estimates but missed on revenue. The company also raised full-year revenue below consensus. Shares jumped 8%.

American Realty Capital Properties Inc.’s 3% convertibles, which have been in trade all week, were higher again.

Traders were watching some issues that did not end up trading on Friday. Chiquita Brands International Inc.’s 4.25% convertibles did not trade after news that shareholders of the Charlotte, N.C.-based fruit distributor have voted against a planned link up with Fyffes plc, which was announced in March. Instead, the company will pursue a proposed deal with Latin America’s Cutrale-Safra Group.

“The shareholders have spoken,” a New York-based convertibles trader said. He said the Chiquita bonds were last at 99.875 bid, 100.375 offered, but that they didn’t trade on Friday.

Also not seen in trade were Jakks Pacific Inc.’s three convertible issues despite a 6% drop in the underlying shares of the Malibu, Calif.-based toy and leisure products company after it reported earnings that beat estimates and raised 2014 guidance.

The Jakks 4.875% convertibles due 2020, which priced earlier this year, were last seen at 86 bid, 88 offered.

The Jakks 4.25% convertibles due 2018 traded last at 100 bid, 101 offered.

There is also a small issue of 4.5% convertibles that matures Nov. 1.

Given the volatility in which convertibles dropped sharply over the course of two weeks before bouncing up at the tail of last week, there are issues that aren’t appropriately priced.

“Stuff is out of whack. Whether it’s due to the size of the issue or its industry, the fact is that pricing went down, and when stuff doesn’t trade, spreads are going to be wider. People are not going to be selling at last week’s prices,” a trader said.

“Some stuff got better, but some stuff didn’t trade,” the trader said. “The universe is striving for some kind of balance.”

He said that logically single B credits of one-year, three-year and five-year duration should flow into one another in terms of pricing, but it hasn’t sifted out yet, so there is no incentive to sell.

DryShips gains

DryShips’ 5% convertibles due Dec. 1 traded at 99.5 bid, 99.75 offered, which was up about a point on the day and up around 9 points in the last week.

“DryShips is going away, and they have been raising money so it’s going to go to par, if not this week, then next week,” a trader said.

There had been uncertainty whether DryShips was going to be able to pay out the $700 million issue.

Earlier this month the company said it expects to refinance part of the notes using proceeds of new straight notes, but that deal was pulled, and instead the company was looking to do a bridge facility for $350 million to help fund the upcoming maturity.

Now the company has raised another $350 million in equity.

Ford falls

Ford’s 4.25% convertibles due 2016 traded down to 159, which was down about 7 points, according to Trace data. Ford shares fell 62 cents, or 4.3% at $13.78 after the company reported lower quarterly profit that beat estimates. Revenue was off 3%.

“We have people who are asking us to tell them if any sellers come out, but holders are not selling yet. I think they are waiting for one more big pop in the stock,” a New York-based trader said.

On Friday, though, shares fell after the company reported third-quarter earnings of $1.2 billion, excluding one-time items, down from $1.4 billion in the year-earlier period. Revenue fell to $34.9 billion from $35.8 billion a year ago.

Last month, Ford cut its full-year profit outlook to about $6 billion for 2014, down from $7 billion to $8 billion previously forecast. The lowered outlook was attributed to weak sales in Russia and a loss for its European operations of more than $1 billion for the year.

Mentioned in this article:

American Realty Capital Properties Inc. Nasdaq: ARCP

BioMarin Pharmaceutical Inc. Nasdaq: BMRN

Chiquita Brands International Inc. NYSE: CQB

DryShips Inc. Nasdaq: DRYS

Ford Motor Co. NYSE: F

Jakks Pacific Inc. Nasdaq: JAKK

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