Convertibles mostly quiet; planned Ally Financial equity units eyed; Ixia expands on hedge

By Rebecca Melvin

New York, July 9 - The convertible bond market continued to trade quietly on Tuesday as market players tread cautiously amid speculation about when the U.S. Federal Reserve will begin tapering its bond-buying program and as equity markets continued to regain ground lost in recent weeks, market sources said.

The Nasdaq stock market had its best close in 12 years since October 2000.

With the exception of word that the U.S. Treasury Department plans to offer equity units of Ally Financial Inc. concurrently with an initial public offering of common stock for the auto financing company, the U.S. convertible primary market remained quiet again.

Only two convertible deals have priced since June 19 when the Federal Open Market Committee said it would begin tapering in tandem with improved U.S. economic conditions as per its standing accommodative policy.

Price talk, timing and deal size on the Ally deals weren't yet available, a syndicate source said.

New issuance eyed

Sources said that the primary market was likely to pick up in the next few days or few weeks, but it was unlikely issuers would want to launch or price deals ahead of the release of the Federal Reserve's policy meeting minutes expected Wednesday.

"We could have a deal after that, late Wednesday," a New York-based syndicate source said.

The slowdown of the primary market following the fairly rapid clip of issuance up until mid-June was driven mainly by market volatility, a New York-based syndicate source said.

That and the earnings blackout period that has set in was said to hinder the primary market.

"People want things to settle down before they hit the market," he said. He thought tone had improved, however, and that issuers had gotten over the "sticker shock" of the rates move.

The move in rates means that issuers will have to increase the amount of coupon on the convertibles by roughly 50 basis points, he said.

"Obviously, it's a case-by-case basis, but if you look where indices for B or BB bonds have moved, it's about 100 bps, and if you consider that converts are half debt and half equity, that makes it about half," the syndicate source said.

In general, tone is more positive now, and that will foster issuance. "The markets have stabilized, rates are not spiking and equity markets have done well, which will renew interest," he said.

He suggested that after the Fed minutes are released Wednesday issuers might wade into the market.

Back in the secondary market, Ixia Inc.'s convertibles dropped on an outright basis, but expanded on a hedged, or dollar-neutral, basis depending on delta, as underlying shares dropped after the Calabasas, Calif.-based technology company warned its second-quarter revenue will be lower than forecast. Shares plunged 19%.

Cemex SAB de CV improved on swap Tuesday amid modestly higher shares compared to midweek last week. Two Cemex convertible bond issues were seen 0.5 point better on swap or more, according to a New York-based trader.

The Cemex 4.875% convertibles were as high as 114.5 versus the stock close of $10.49, and the Cemex 3.25% convertible printed as high as 121.6875 versus the same reference price, the trader said, quoting Trace data.

But Redwood Trust Inc. was mentioned as a name that has "come in" amid sellers, and was that was seen better to buy.

Better to buy means that the bid is stronger and the offer possibly nebulous.

The Redwood Trust 4.63% convertibles due 2018 were seen going out at 98 bid.

"Overall, I noticed names better for sale yesterday and today, and now better to buy, with outright buyers," a New York-based trader said.

Stocks gained again. The Dow Jones industrial average jumped 75.65 points, or 0.4%, to 15,300.34; the S&P 500 stock index climbed 11.86 points, or 0.7%, to 1,652.32; and the Nasdaq stock market gained 19.43 points, or 0.6%, to 3,504.26, its best close since October 2000.

Ixia mostly holds on hedge

Ixia's 3% convertibles due 2015 traded down 10.5 points to 108.698 with the underlying shares down at about $14.30.

That was down outright, but on a hedged basis they were holding up, an East Coast-based buysider said.

If you were on a 65% delta coming into the day, you gained 1.5 points on a hedged basis, the buysider said. And if you were on a 60% delta, you were up about 0.25 point.

But if you were on a 55% delta, you were down 0.5 point, he said.

Shares fell $3.44, or 19%, to $14.30 after the technology company issued a revenue warning and a couple of analysts followed on with downgrades.

Ixia's total revenue for the second quarter is now expected to be in the range of $114 million to $116 million, which is below the previous guidance of $119 million to $122 million, the company said in a news release.

Revenue from Ixia's 2012 acquisitions, Anue Systems Inc. and BreakingPoint Systems Inc., is expected to be at the high end of the previously given range of $28 million to $32 million, the company explained.

"We are disappointed with our topline performance this quarter, which was impacted by several factors, including lower-than-expected revenue from network equipment manufacturers and certain service providers as customers extended review cycles and certain large deals that were pushed into future quarters," president and chief executive Vic Alston said in a news release.

Ixia went on to say that it did see positive trends. Sales to its two largest customers, AT&T and Cisco Systems, were strong and in line with expectations and its overall book-to-bill ratio was in excess of one.

In addition, the performance of its 2012 acquisitions, Anue and BreakingPoint, was "encouraging," and revenue is expected to register at the high end of expectations for the second quarter.

"These indicators give us confidence that our competitive position remains strong although we remain cautious about the near-term spending environment," according to the release.

Ixia will release results for the second quarter on July 30.

Ally IPO, units offered

The U.S. Treasury Department is offering tangible equity units of Ally Financial, one of the largest providers of automotive financing products, including wholesale and retail loans, retail leases and direct banking. The units are being offered concurrently with an initial public offering of common stock.

Ally will not receive any of the proceeds from the sale.

Timing, talk and deal sizes weren't yet available, a syndicate source said.

Bookrunners of the offerings are Citigroup Global Markets Inc., Goldman Sachs & Co., Morgan Stanley & Co., Barclays and Deutsche Bank Securities.

The shares are expected to be listed on the New York Stock Exchange under the symbol ALLY.

Previously known as GMAC Inc., Ally is a bank holding company based in Detroit.

Mentioned in this article:

Cemex SAB de CV NYSE: CV

Ixia Inc. Nasdaq: XXIA

Redwood Trust Inc. NYSE: RWT

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