Knight Capital bounces on potential buyout; Molycorp plunges on warning; MGIC stumbles

By Rebecca Melvin

New York, Aug. 3 - Knight Capital Group Inc. bounced Friday and lifted more than 10 points as headlines continued to swirl around the distressed electronic trading firm following a massive trading glitch that left it with a $440 million loss on Wednesday.

Knight obtained enough financing to ensure that it could continue operating through Friday, and it was actively seeking additional funding or a buyer, including the possibility of a private equity acquirer coming to its rescue. Still, the outfit remained a heartbeat away from bankruptcy.

"It's a very binary situation. We'll know by Sunday night or Monday morning. If we haven't heard anything by Monday morning, I'd take it as a bad sign," a New York-based analyst said.

There was also tons of trading in Symantec Corp., which has been edging up with higher shares since speculation began to grow that the Mountain View, Calif.-based security software company could split up its security software and storage businesses.

Molycorp Inc.'s convertibles tumbled as the underlying shares fell to an all-time low after the Greenwood Village, Colo.-based rare earth minerals company warned that it will need to secure additional financing to cover a substantial portion of capital expenditures and other cash requirements this year. The news came together with an unexpected loss.

Meanwhile, MGIC Investment Corp.'s convertibles remained severely depressed after the Milwaukee-based mortgage insurer reported a large loss Thursday and announced it needs a large capital infusion. The news sent MGIC's 9% convertibles tumbling into the teens and the MGIC 5% convertibles into the low 50s in tandem with lower shares.

Also in focus was BroadSoft Inc. ahead of its earnings report expected out Monday. The company's shares were up 11% Friday. The convertibles weren't seen to have traded Friday, but on Thursday they printed at 90.68 bid, 91.1 offered versus an underlying share price of $24.44, according to a New York-based trader.

Despite equity markets getting a big boost Friday from the July U.S. jobs report, which showed employers added 163,000 jobs in July, the most since February, the convertibles market was feeling shaky.

Multiple shocks to the downside this past week, including Suntech Power Holdings Co. Ltd.'s, which left its convertibles trading down in the 20s, has created some "big portfolio shakeups and rebalancing," an analyst said of the convertibles market.

"There have been a lot of crazy situations that have materialized this week," the analyst said.

Knight Capital bounces

Knight Capital's 3.5% convertibles due 2015 traded up to more than 80 on Friday before settling at 78, which was up from 67 late Thursday.

The convertibles were pummeled on Wednesday, falling to 82.5 bid, 84 offered from about 92.5 previously, and then freefell down to 40 before recovering to 67 on Thursday.

Knight Capital shares jumped $1.47, or 57%, to $4.05 on Friday in ultra-heavy trading.

It was looking like a much more positive outcome with huge rebounds in both the shares and convertibles when customer confidence in Knight Capital, which was shattered by Wednesday's debacle, began to repair.

On Wednesday, Knight Capital had trading orders in 140 to 150 New York Stock Exchange-listed stocks run amok due to what was described as a software glitch.

But with fresh eyes on Friday, potential investors were looking over the Knight Capital assets and balance sheet and seeing potential value in a company which offers best-in-class technology and readily valued assets in the form of liquid assets and ETFs on its balance sheet, a New York-based analyst said.

The company needs a capital raiser or a takeover from a competitor or private equity, which is looking like a possibility, the analyst said.

"The core business has a lot value. They have 10% to 20% of equity flow in the U.S. and that doesn't come without good technology and good relationships," the analyst said.

"If they survive through Tuesday, then I think the outcome is good," he said. "But if they can't get cash in the door by the end of the weekend, they will probably have to file on Monday."

The appeal to would-be investors is that Knight Capital doesn't have billions of dollars of illiquid securitized assets that they can't value," the analyst said. "Eighty-five percent of its assets can be liquidated in five days. The vast majority are liquid equities, which have mark to market, by-the-tick pricing."

"You can look at it and see that is the value, and it's not going to present major problems for the acquirer," the analyst said.

Symantec extends gains

Symantec's 1% convertibles due June 2013 traded up to about 106 on Friday, with a late trade at 105.578. That was up 1.36 points from Thursday, according to Trace data.

A large amount of volume traded in Symantec's 2013, which is pretty short dated and pretty boring, an analyst said.

It's like other large, liquid, investment-grade names that trade in large quantities without a meaningful spread for profit potential, the analyst said.

Symantec shares have had a good run in the past few days, up $3 in the past week, and that's about 27% in the past week.

"So for an IG name, that's a lot of volatility," the analyst said.

Molycorp plunges

Molycorp's 3.25% convertibles due 2016 dropped sharply to trade at 56.75 early in the session, which was down from the mid-70s previously.

Shares of the Greenwood Village, Colo.-based rare earth minerals producer sank to an all-time low during the session, closing just slightly off the lows at $11.49, which was down $4.58, or 28.5%.

Spurring the plunge was Molycorp's quarterly results released late Thursday in which the company reported not only an unexpected second-quarter loss, but also that cash flow from operations will be less than anticipated.

Additional financing is needed for a substantial portion of its remaining 2012 capital expenditures and other cash requirements. The company is in negotiations with various third parties about potential equipment leasing arrangements, asset-based revolving credit facilities and other debt financing arrangements.

If the company is unable to raise sufficient capital through public or private securities offerings or other alternative sources of financing, it will implement a short-term business plan in 2012 under which discretionary capital expenditures and, if necessary, non-discretionary capital expenditures will be curtailed during the second half of the year.

The company also reported a $67.6 million loss, or 71 cents per share, for its second quarter, which was contrary to a small profit that analysts expected, and that compared with net income of $47.8 million, or 53 cents per share in the year-earlier period.

Revenue rose 5% to $104.6 million, which was slightly below expectations.

MGIC slumps

MGIC's 5% convertibles due 2017 remained weak on Friday at 53 bid, 53.5 offered after sliding 11 points to the 53 level on Thursday.

MGIC's 9% convertible junior subordinated debentures due 2063 extended losses, trading in the teens, down from the 40s, a New York-based trader said.

MGIC shares fell 4 cents, or 4.6%, to $0.84 on Friday after sliding as much as 56% on Thursday.

Credit default swaps on the name soared.

Spurring the losses was news Thursday that the Milwaukee-based mortgage insurer risk ratios for its main unit continue to climb and it will have to add another $200 million in capital to its main unit to continue writing insurance throughout the United States.

The company also reported a net loss of $273.9 million.

Many market players were hedged with CDS in this name.

The peculiarity in the convertibles is that they are in different parts of the capital structure, one being junior subordinated and the other unsecured.

Mentioned in this article:

BroadSoft Inc. Nasdaq: BSFT

Knight Capital Group Inc. NYSE: KCG

MGIC Investment Corp. NYSE: MTG

Molycorp Inc. NYSE: MCP

Suntech Power Holdings Co. Ltd. NYSE: STP

Symantec Corp. Nasdaq: SYMC

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