Equities boost convertibles; Vornado, Amgen climb; KeyCorp rises on TARP nod; Transocean still soft

By Kenneth Lim

Boston, Oct. 28 - The convertible market had a positive day for outrights Tuesday as equities shot up to reverse a two-day slide.

Real estate investment trusts like Vornado Realty Trust took off, while in the financials KeyCorp gained in the wake of news that it was receiving federal capital in a sale of preferreds.

Oil and gas play Transocean Inc., however, continued to struggle amid persistent weakness in the price of crude.

The market started out on a positive note as the stock market opened higher, but the bidders only began to make their major moves in the afternoon as the equity benchmarks started to surge. The Dow Jones Industrial Average rose 889.35, or 10.88%, to finish at 9,065.12 on Tuesday.

"It was a good day before and I think it just accelerated as the day went on," a sellside convertible desk analyst said.

Most of the activity Tuesday remained centered on the usually liquid investment grade names, market sources said.

Amgen, Inc.'s 0.375% convertible due 2013 gained about 3 points outright to trade at 85 against a stock price of $57.50. The common stock (Nasdaq: AMGN) closed at $60 on Tuesday, up by 9.61% or $5.26.

Amgen is a Thousand Oaks, Calif.-based biotech.

Volume remained thin beyond the usual names, a buyside convertible trader said.

"I literally trading nothing today," the trader said.

The market was on firmer ground Tuesday, but on a dollar-neutral basis things remained largely the same, the trader said.

"It's just based on, as things move up, you kind of move along with your delta," the trader said. "I would say it's probably an in-line movement with a 5% day in the market. If you see some of these that are now bid versus where they were two to four days ago, you're going to see it's richer, it's not as depressed as it was...But things were extremely depressed."

Vornado rises with stock

REITs were among the major beneficiaries Tuesday as their stocks got a boost from the broad market upswing.

Vornado's 2.85% convertible due 2027 was up about 3 points outright at 64.75 bid against a stock price of $60. Vornado common stock (NYSE: VNO) jumped 20.89% or $11.58 Tuesday to close at $67.01.

Vornado is a New York-based REIT that focuses on commercial and retail properties.

"A lot of the REITs were very active as you might imagine with the equity markets doing so well," said a sellsider who noted that most of the REIT paper have been trading like stocks. "They were tearing it up, especially with Vornado, they were up especially over the last two days."

The rally on Tuesday was given extra lift by the view that the sector had been depressed, the sellsider said.

"The reality is they had been crushed so bad that there was probably an overextension on the downside," the sellsider said. "Is this a big rally or just getting to closer to fair value? I think they may have overshot on the downside."

KeyCorp improves on confidence

KeyCorp's 7.75% perpetual convertible preferred was up by about 2 points outright as its stock gained amid optimism about its application to receive federal capital.

The convertible traded at 84 against a stock price of $10.75 Tuesday, while the common stock (NYSE: KEY) rose 19.56% or $1.94 to close at $11.86.

KeyCorp is a Cleveland, Ohio-based regional bank.

"I think some of these regional banks are doing better because a number of them are going to get some additional capital from TARP [capital purchase program]," a sellside trader said. "Investors appreciate well-capitalized companies today."

KeyCorp said Monday it had received preliminary approval to take part in the U.S. Treasury Department's capital purchase program that is intended to inject capital into banks and improve liquidity in the credit markets. KeyCorp plans to sell $2.5 billion worth of preferred stock to the U.S. government under the plan.

Transocean under pressure

Oil and gas names remained weak Tuesday despite the stock rallies, as oil prices remained soft.

Transocean's convertibles were about a point weaker outright, with the 1.625% convertible due 2037 trading at 84.5 against a stock price of $64. The series B 1.5% convertible due 2037 was 74.5, while the series C 1.5% convertible due 2037 was 70, all against the same stock price.

Transocean common stock (NYSE: RIG) closed at $66.59 Tuesday, up by 4.14% or $2.65.

Transocean is a Houston-based offshore drilling contractor.

"The energy names are still pressured, even with the equity markets up," a sellside analyst said.

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