Convertibles fall on worst day of recent downdraft; stronger, shorter credits hold value

By Rebecca Melvin

New York, Aug. 8 - Convertible bonds remained on the same path Monday that they have been on since last week with most names lower as equities tumbled again-- this time in reaction to Standard & Poor's ratings downgrade of U.S. debt to AA+ from AAA.

Shorter-dated and better-quality credits held up pretty well, while, in general, longer-dated and weaker credits gapped lower, sources said.

"Yeah, it's not a mystery. There was a lot of selling, but guys were not selling at any price," a New York-based sellside desk analyst said about Monday's convertibles session. "It was generally down, but not frenzied."

Among stronger credits was one of the strongest. Microsoft Corp. is one of a handful of AAA-rated U.S. corporate credits, and Microsoft's convertibles are "a trade that maybe is going to become more crowded," the analyst said.

New York-based brand management company Iconix Brand Group Inc. was another name that performed well in the face of the steep downdraft in equities.

But the equities sell-off was so strong that even Quicksilver Resources Inc. saw its common stock tank despite the fact that the Fort Worth, Texas-based oil and natural gas producer posted earnings Monday that beat estimates. Quicksilver's convertibles were mentioned among those that held up on a delta basis, however.

Investors appeared to still be looking to park in places of safety rather than withdraw funds from the strategy, the analyst said.

Newmont Mining Corp. was a notable trader, with all three of the Newmont convertibles seeing action and two of the three issues higher as market players sought the safety of gold. Gold notched a fresh record high, with forecasts only for it to move higher.

Longer-dated paper, including the seven-year MF Global Holdings Ltd. convertibles that just priced July 28, declined further and hit 90 even before shares reached their worst levels of the day. That paper priced at par less than two weeks ago.

Eastman Kodak Co. and Clearwire Corp. gapped lower, with those underlying shares down 18% and 16%, respectively, on the day. Kodak's 7% convertibles due 2017 were heard at 52 from 60 on Friday.

Weaker credits have gotten pretty banged up, starting last week, a trader noted.

Pretty much all markets stumbled, except for gold and U.S. Treasuries, traders noted. The S&P 500 stock index fell 80 points, or 6.6%, to 1,119.46; the Dow Jones Industrial Average cascaded 635 points, or 5.6%, to 10,809.85, well exceeding the 513-point drop suffered last Thursday; and the Nasdaq Stock Market fell 175, or 7%, to 2,357.69.

Traders left their desks last week actually half expecting that this week's market action would be better. "We were hoping for the best," a market participant said. But those hopes were dashed even before the day was out when late Friday S&P issued its downgrade. From that moment, a downdraft was expected, but the magnitude of what it would be was unclear.

"A lot of people are wondering what they are supposed to be doing," the sellside desk analyst said.

Early Monday was pretty quiet. "It was difficult to find markets," a New York-based trader said.

Although the downgrade specifically affected U.S. sovereign debt, U.S. Treasuries moved higher in heavy buying on Monday.

"I'm not surprised to see people buying Treasuries. Once you start looking around [debt markets], you can't buy enough of these other things, but you can buy enough Treasuries; and it's about liquidity," the trader said.

President Barack Obama spoke during the session, but the markets only sunk lower during and after he spoke, calling for Washington to put aside politics and forge compromise. He said those who could afford it should expect to shoulder more of the debt burden in the form of higher taxes.

Meanwhile the European Central Bank began its intervention in various sovereign debt markets under its Securities Markets Program, which allows the ECB to buy Spanish and Italian debt following reform commitments from those two nations.

The S&P 500 is down 18% from its high on April 29.

Newmont Mining active, higher

Newmont Mining's 3% convertibles due 2012 traded up to 124, which was up 1.75 points on Monday. Those convertibles trade on a delta of about 80%.

Shares of the Denver-based copper and gold miner were higher for most of the session but got sucked lower into the close in a forceful wave of selling. The stock ended down 28 cents, or 0.5%, at $54.13.

Newmont Mining's 1.625% convertibles due 2017 traded up a little and Newmont Mining's 1.25% convertibles due 2014 were seen down marginally.

All three issues trade above par.

"People were looking for gold names," a sellsider said.

Gold surged more than 3% on Monday, surpassing $1,700 an ounce for the first time, as investors sought safety after S&P downgraded the U.S. credit rating.

Spot gold hit a record $1,719.99 during the session.

Iconix does well

Iconix's 1.875% convertibles due 2012 traded at about 100.125 on Monday, with the common stock down 8% to 9%. Shares of the apparel branding company ended the session down $2.19, or 11%, at $18.14.

In May, the older Iconix 1.875% convertibles traded at 105 bid, 105.625 offered versus a share price of $23.93.

"The ICON 1.875% is doing great. It's hard to tell exactly how great since we had outright bids this morning. But they are probably 0.5 point to 0.75 point better today," a New York-based sellside trader said.

The paper started out the day trading at a 20% to 25% delta.

Quicksilver holds on hedge

Quicksilver's 1.875% convertibles due 2024 traded at 99.5 on Monday, with the shares steeply lower. The stock closed off its lows, down $2.65, or 23%, at $9.10.

"KWK reported this morning, and the stock got destroyed, down 25%, when they actually had a good number. They beat estimates," a sellsider said.

Quicksilver's better-than-expected earnings were helped by higher natural gas production and lower costs. The company also said that it expects quarterly production for the current quarter to be higher than that in the previous quarter.

Quicksilver expects third-quarter production volumes to rise 3% sequentially to 425 million cubic feet equivalent per day to 435 million cubic feet equivalent per day.

Natural gas companies have benefited from higher natural gas prices, which were up 3% during April and June.

Shares were gaining in after-hours trade.

Mentioned in this article

Eastman Kodak Co. NYSE: EK

Clearwire Corp. Nasdaq: CLWR

Iconix Brand Group Inc. Nasdaq: ICON

MF Global Holdings Ltd. NYSE: MF

Microsoft Corp. Nasdaq: MSFT

Newmont Mining Corp. NYSE: NEM

Quicksilver Resources Inc. NYSE: KWK

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