High-grade credits show strength; Microchip unchanged dollar neutral; Clearwire steady

By Rebecca Melvin

New York, Oct. 14 -Investment-grade convertibles were trading better on Friday as that paper made moves to catch up with distressed and high-yield names that outperformed on Wednesday.

"Super-high-grade credits took a good leg up today," a Chicago-based trader said Friday.

Medtronic Inc. moved up 0.25 point to as high as 100.35 from around par on Thursday.

Archer-Daniels-Midland Co. traded above par, from 98.5 late last week, as that more equity-sensitive bond added with a solid move in the underlying shares.

While investment-grade names are typically atop the volume charts, Friday's moves were seen as a little stronger than normal, sources said.

The moves compensate for pretty strong losses in recent weeks. "They got beaten up for no reason. People were selling the Amgens, the RIGs, Medtronics because they could. Those are the most liquid names that you can sell without hurting your P&L," a New York-based trader said.

Elsewhere, some news on the tape fired up trading in certain names. Microchip Technology Inc. was down outright Friday along with losses in the underlying shares, but unchanged dollar neutral, after the Chandler, Ariz.-based semiconductor maker cut its guidance for earnings for the just completed quarter, citing weaker-than-expected demand.

Clearwire Corp. was steady on Friday although its underlying shares weakened on a Moody's downgrade. That move reversed a spike Thursday when that company unveiled better-than-expected third-quarter numbers in a preannouncement.

"At this point, the rate doesn't matter; it's what you think the recovery value is going to be in a bankruptcy situation," a New York-based convertibles analyst said.

Navistar International Corp. was getting a look and moved up about a point on a dollar-neutral basis as shares of the Warrenville, Ill., truck and engine maker were boosted by billionaire investor Carl Icahn's announcement that he has taken a 9.8% stake in the company. That news spurred concomitant takeout speculation for Navistar.

IG comeback continues

A number of investment-grade names, of which there isn't a ton left in the market, moved up smartly on Friday.

Medronic's 1.625% convertibles due 2013 traded up about 0.25 point, which is "significant for a high credit like that," a trader said.

Shares of the Minneapolis-based medical device maker also eked out a solid gain after dipping during the session, ending up 44 cents, or 1.4%, to $33.10.

"Investment-grade stuff was definitely better to buy today," a New York-based trader said.

ADM's 0.875% convertible notes due 2014 traded at 100.15 versus an underlying share price of $27.60 on Friday, which was up from 98.5 outright late last week.

"That's its bond floor," a trader said, referring to the 98.5 price level. "Since that time, the stock is trading in the area of $25.75 and with the stock move up, these bonds have caught some delta. That's one to keep an eye on."

Shares of the Decatur, Ill., based agricultural products company added 64 cents, or 2.4%, to $27.75 on Friday and were up 9% since a week ago Friday.

"Trace volume is still weakish. There is no uptick in volume," a trader said. "But aside from the highest volume day of the week on Wednesday, it looks like we're back to the new normal."

High-yield names were also trading better, but they made the lion's share of their gains on Wednesday, which was a significant "risk on day for global asset classes," the trader said.

Microchip trades unchanged

Microchip's 2.125% convertibles due 2037 closed out the day at about 122.5 bid, 123.5 offered, versus the closing share price of $33.45.

Earlier in the session the Microchip convertibles traded at 125.5 versus a share price of $34.15.

The shares bounced off their lows for the day, ending down $1.86, or 5.4%, to the $33.45 for the day.

The company preannounced to the downside, but the convertible paper didn't trade that actively.

The company said that it expects second-quarter adjusted net income of 45 to 47 cents per share, down from 50 to 54 cents per share, which it forecast in August. Analysts polled were expecting adjusted net income of 52 cents per share when the company is set to release results on Nov. 3.

Microchip said its chip sales were seen falling to $340.6 million from a previous forecast of $352 million to $370.8 million. Analysts had expected $359.6 million in revenue.

Navistar up dollar neutral

Navistar's 3% convertibles due 2014 were seen settling out at 110.5 bid, 111.5 offered versus the closing share price of $41.51. That price was seen better by about a point dollar neutral, an analyst said.

A previous level was quoted at 106.375 versus an underlying share price of $38.56 for the Navistar 3% converts.

Using a 49% delta, that price would climb to about 116.16 if it moved dollar neutral with a $47.50 takeout price, according to Stu Novick, Citigroup convertibles analyst, who put out a note on the impact of the Icahn stake.

Takeover parity would be about 112.78, and adding 1.75 points of carry makes the price 114.527. So that would represent a small loss to holders, Novick said.

The breakeven price given Citigroup's hedge and a close in one year would be about $52.70 per share.

Icahn Capital's announcement Thursday through a filing with the Securities and Exchange Commission that it had accumulated 7.1 million Navistar shares, representing a 9.8% stake in the truck maker, has given rise to takeout chatter.

"Icahn has had success in the past boosting value through takeovers (obviously, not all of his investments have resulted in takeovers): Genzyme was purchased by Sanofi this past spring after Icahn accumulated a 10.5 million shares position, or 4.9%, and four board seats in the drug maker," Novick wrote in a note published Friday.

"The company had been rumored to be a takeover candidate for a while, so some merger speculation has probably been built into the share price. Still the stock added over 30% from the time of Icahn's initial filing."

Noting that Motorola Mobility is in the process of being purchased by Google, and Icahn had accumulated a 9% stake in that company, with the shares shooting up on the Google announcement, Citigroup said that if the Navistar situation plays out in a similar fashion, a takeout price in the $47.50 to $60 per share range is possible.

Assuming a deal close date in one year by Oct. 15, 2012, at a $55 takeout price, the bonds would move on a dollar-neutral basis to about 124.36. Takeover parity would be about 123.35 and add 1.75 points of carry for a 125.1 price, resulting in a small win for bondholders, Novick said.

At a $60 takeout price, the bonds would move dollar neutral to about 129.83. Takeover parity would be 131.346 and adding 1.75 points of carry, that's a big win for bondholders with a 133.096 price tag, he said

Clearwire steady

Clearwire's 8.25% exchangeable notes due 2040 were seen trading steady at around 35 on Friday, having moved a little lower to 34ish, but also at 35. That level was unchanged from Thursday.

The Clearwire convertibles were trading around 25 on Oct. 10.

Clearwire shares, meanwhile, weakened first on a Sprint downgrade by Moody's Investors Service, and then on a downgrade by Moody's on itself.

Moody's lowered Clearwire's corporate family rating to Caa2 and probability of default rating to Caa2 and Caa3.

The downgrade reflects a view that Clearwire's relationship with Sprint appears unlikely to improve to the point where Sprint would extend their existing wholesale agreement beyond 2013, Moody's said.

Thus, Clearwire will need to find alternative wholesale partners or sell spectrum to make interest payments after 2012, the agency said.

Clearwire's speculative-grade liquidity rating of SGL-4 reflects the company's cash burn rate, lack of a revolving credit facility and its inevitable need for new capital, Moody's added.

Mentioned in this article:

Archer-Daniels-Midland Co. NYSE: ADM

Clearwire Corp. Nasdaq: CLWR

Medtronic Inc. NYSE: MDT

Microchip Technology Inc. Nasdaq: MCHP

Navistar International Corp. NYSE: NAV

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