Convertibles players eye high-grade names; Medtronic, EMC in focus; Energy XXI talk emerges

By Rebecca Melvin

New York, Dec. 2 - Convertibles traders saw a continued pick up in activity Wednesday compared to earlier in the week, with investment-grade names such as Medtronic Inc. and EMC Corp. among those primarily in focus.

But lesser quality credits were also trading, albeit lightly, like UAL Corp. and Eastman Kodak Co. UAL jumped amid a surge in its underlying shares, which gained on a Morgan Stanley upgrade, and Kodak held gains.

Price talk emerged Wednesday on the Energy XXI (Bermuda) Ltd. $75 million of convertible perpetual preferred stock that launched Tuesday. The deal is expected to come with a coupon of between 7.25% to 7.75% and an initial conversion premium of 15% to 20%, according to market sources.

The deal was expected to price Dec. 8, after the close of markets.

No talk was yet heard on Sino-Forest Corp., which plans to price $400 million of seven-year convertible bonds on Dec. 10.

That deal, which is being eyed as a way to update pricing on Sino-Forest's existing 5% convertibles due 2013, is being sold by way of a private placement in the United States, a short form prospectus offering in Canada, and internationally via a syndicate of initial purchasers including Credit-Suisse Securities Canada and TD Securities as joint bookrunners.

Investment-grade names were favored more so than usual as convertibles players looked to put some money to work but with relative safety going into year-end as they continue to shepherd gains notched earlier in the year.

Convert Arb has been the best performing hedge fund strategy year to date, up 39.37%, according to Barclays Capital convertibles research, and that figure is in line with a 45.13% return of the Barclays Capital Convert Composite index return. The HFRX Convert Arb index was down 0.79% in November, the first negative month since December 2008, however.

While overall volume in the convertibles market was anemic, it picked up Wednesday from Monday and Tuesday to just over the recent average daily volume figure of about $700 million, according to a New York-based sellside analyst.

Medtronic attracts buyers

Despite the paper being seen as pretty rich, the Medtronic convertibles maturing in 2011 and 2013 comprised a substantial chunk of trading on Wednesday.

Medtronic's 1.5% convertibles due 2011 were seen settling at 101.9 versus a share price of $43.62, which compared to 101.1 versus a closing share price of $42.69 on Tuesday.

Medtronic's 1.625% convertibles due 2013, which have a little bit more delta compared to the 2011 paper, were seen settling at about 103.1 versus a share price of $43.62 on Wednesday, compared to 102.2 versus a share price of $42.69 on Tuesday.

Shares of the Minneapolis-based medical device maker were up 93 cents, or 2%, at $43.62.

The Medtronic papers' deltas are pretty low, and it is set up primarily against credit default swaps.

The delta on the Medtronic 1.5% notes of 2011 is just under 10%, and the delta on the Medtronic 1.625% convertibles is about 30%, and given the low delta, they are particularly sensitive to credit, according to an analyst.

The market is pretty rich, but there is still demand because it's pretty well picked over, the sellsider said.

"Anything worthy in high yield has already been bought and set up; if you have extra cash at this point, you're going to play it safe," the sellsider said.

UAL jumps

UAL's 6% convertibles due 2029 traded at 124 versus a share price of $9.20, which was up from 110 versus a share price of $7.80 on Tuesday.

Shares of the Chicago-based legacy airline surged $1.03, or 12.47%, to $9.29.

The 12% move up in the shares moved the bonds again, but given the highly leveraged equity and the in the money issue, volume wasn't that heavy.

Airline equities climbed following an improved revenue report from Continental Airlines and after Morgan Stanley upgraded UAL and AMR Corp. to overweight and attractive.

Kodak adds in trade

Kodak's 7% convertibles due 2017 traded at 88.25 versus a share price of $4.25, compared to 86.25 versus a share price of $4.08 on Tuesday.

The issue has been trading regularly and is a convert arbitrage name as well as possibly being traded by high-yield crossover buyers doing relative value trading.

"It's a large enough issue, with straight debt outstanding, there might be some crossover buyers," a sellsider said.

Shares of the Rochester, N.Y.-based photography and printing company settled up 4 cents, or nearly a percentage point, at $4.19.

Mentioned in this article:

Eastman Kodak Co. NYSE: EK

EMC Corp. NYSE: EMC

Energy XXI (Bermuda) Ltd. Nasdaq: EXXI

Medtronic Inc. NYSE: MDT

Sino-Forest Corp. Toronto: TRE

UAL Corp. Nasdaq: UAUA

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