Convertibles revert to 'quiet'; Alcoa firm to better ahead of earnings; Amgen steady

By Rebecca Melvin

New York, Jan. 9 - The convertibles market, which charged out of the gate last week to start 2012, reverted to a quiet mode on Monday.

Traders cited uncertainty related to the upcoming earnings season and U.S. politics as well as the ongoing headwinds of the European debt situation for the lull.

Traders also mentioned that Mondays are typically slower in the market than the rest of the week and that the Giants-Falcons playoff game may have played a role in slowing things down.

"We were joking this morning that it might have been a mild football hangover," a New York-based convertibles analyst said, referring to the New York Giants' 24-2 victory over the Atlanta Falcons on Sunday.

Alcoa Inc.'s convertibles were up a point or two in line with the underlying shares ahead of the largest U.S. aluminum producer's earnings release, which showed the company swung to a loss but was in line with expectations.

Also trading in volume was Amgen Inc.'s convertible, which was firm despite lower shares during the session.

Vertex Pharmaceuticals Inc., a maker of Incvek, the hepatitis C pill, continued to edge higher, but Dendreon Corp.'s 2.875% convertibles were mostly quiet despite shares of the Seattle-based biotech, which continued to claw higher following last week's announcement of better-than-expected fourth-quarter sales of its Provenge prostate cancer drug.

But Dendreon's 4.75% convertibles due 2014 were seen in trade, a New York-based trader said.

"Obviously, there's value there, and the drug sales prove it," the trader said of Dendreon.

The trader blamed Monday's lack of activity on the earnings season coming up and political overhang. "Why would you do anything right now when you don't know what's going on?"

The day's activity was dominated by larger, liquid investment-grade names.

"The big, chunky investment-grade names kind of stuff takes on a life of its own given the diminishing investment-grade convert market," a New York-based analyst said.

Technical factors tend to push that market higher and "it's tough to look at valuations," he said.

Another investment-grade name that traded was Medtronic Inc.'s 1.875% convertibles due 2013, which traded at 101.1, which was flat.

Last week, the market got off to a good start as market players were looking to put some risk on at the start of a new month and the start of a new year.

At the beginning of the month it gives them time to make it up if they lose anything," the trader said.

Alcoa edges up in line

Alcoa's 5.25% convertibles due 2014 traded up about 2 points to 161.5, which was flat to up very slightly on a dollar-neutral, or hedged, basis.

Shares of the Pittsburgh-based aluminum company closed 27 cents, or 3%, higher at $9.43.

The in-the-money bonds were "up a teeny maybe; nothing crazy," a New York-based analyst said.

After the earnings release, the common stock was little changed in after-hours trading, which suggested that the release was in line with expectations and would do little to move the securities.

For the quarter's loss, the aluminum producer - the prospects of which are tied to the global economy - cited costs associated with the closure and curtailment of production capacity during the most recent quarter as well as lower global aluminum prices and continued market weakness.

Excluding one-time items, the loss was $34 million, or 3 cents per share, which compared to income of $258 million, or 24 cents a share, in the year-earlier quarter.

The Alcoa convertibles trade on a delta hedge of about 79%.

The conversion price is $6.43, so the "in the money" paper, wasn't seen as terribly interesting. People involved in the name would be asking "how may points over premium is it and how many coupons do I have left," an analyst said.

Analysts were expecting on average a loss of a penny a share on revenue of $5.75 billion. The unofficial earnings season kickoff comes as several bellwether companies have tried to tamp down expectations in recent weeks.

Amgen steady, shares lower

Amgen's 0.875% convertibles due 2013 traded at 100.5, which was steady on Friday's level, despite shares that were lower during the session.

"Amgen was a big name today. It was a good 20% of the market, and it was trading unchanged even with the stock lower," a New York-based trader said.

The stock came back toward the end of the day but had dropped early on. Shares of the Thousand Oaks, Calif.-based biotechnology giant closed down 56 cents, or less than a percentage point, at $64.20.

The company's chief operating officer, Robert Bradway, who is set to become the next chief executive when Kevin Dharer steps down in May, said Monday at a presentation at the J.P. Morgan health care conference that Amgen revenues should grow in 2012 as sales pick up from recently launched products.

Vertex adds a point

Vertex's 3.35% convertibles due 2015 added a point to 107.5, from 106.25 bid, 106.5 offered on Friday.

Shares of the Cambridge, Mass.-based biopharmaceutical company gained $1.63, or 5%, to $35.68, after gaining 3% on Friday.

"There's a lot of premium on it," a sellsider said, saying the premium was 47%. "Looks like funds should be lightening up on them right here."

The bonds had slumped during October and reached a low point in November. Since the end of November, they have been creeping back up.

Piper Jaffray said the company remains a top pick for 2012 given its Incivek cash flows and Kalydeco Cystic Fibrosis franchise. Earlier this week, Piper Jaffray reiterated an "overweight" rating on the stock with a $56.00 price target.

Dendreon's 2.875% convertibles due 2016 were pretty quiet even though the underlying shares added another 8% on Monday to $13.31. On Friday, the Dendreon 2.875% bonds had traded up more than a point to 75.625 after jumping 4 points on Thursday.

The Dendreon shares had been much higher though previously at the $45.00 mark, an analyst pointed out.

The Dendreon 4.75% convertibles, which don't trade as actively as the 2.875% paper, traded at 153.31 right around the market close, a trader said.

Mentioned in this article:

Alcoa Inc. NYSE: AA

Amgen Inc. Nasdaq: AMGN

Dendreon Corp. Nasdaq: DNDN

Vertex Pharmaceuticals Inc. Nasdaq: VRTX

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