Suntech Power gaps lower; Hanwha SolarOne trades; Ciena steady on hedge after earnings

By Rebecca Melvin

New York, June 8 - The convertible bond market continued its recent weakening trend Wednesday as the hit or miss set of softer names spread to a broader portion of the convert universe.

"It's across the spectrum, hitting both big and small cap names now," a West Coast-based sellsider said, noting also that he thinks the selling is "unwarranted" and based on technical factors rather than fundamental conditions as funds attempt to position for whatever the requirements of jittery investors will be, including redemptions.

The convertibles of China's Suntech Power Holdings Co. Ltd. gapped lower amid a plethora of solar headlines Wednesday and as market players continued to shun names attached to international and Chinese companies.

"They are all significantly lower," a New York-based energy trader said of solar power convertibles. "Trading has been kind of thin, but they are all kind of gapping lower; any Chinese company keeps going lower after Sino-Forest."

Sino-Forest Corp. raised the alert on Chinese, solar and illiquid names, sources said, after the Toronto-listed but China-based company became the target of allegations of fraud late last week.

Hanwha SolarOne Co. Ltd. was another convertible name trading actively this week, and the underlying shares of the China-based maker of solar cells and modules fell 13% on Wednesday.

SunPower Corp. convertibles, on the other hand, weren't overly active, and the underlying shares of the San Jose, Calif.-based solar company actually moved to the upside after the company posted disappointing earnings guidance Tuesday and was met by multiple analysts' downgrades on Wednesday.

Cowen & Co., however, expects SunPower to outperform based on its valuation tied to a deal with French energy major Total SA, which has offered to buy a majority stake in SunPower.

Holding too much in small, illiquid names, including solar names, which are primarily Chinese companies, has fallen into disfavor, sellsiders said. And on Wednesday, the next concentric circle extending out from those names started to get hit.

But Ciena Corp. convertibles were active and steady on a hedged basis with the premium to parity expanding on its four convertible issues as shares fell following the optical networking gear maker's disappointing earnings.

Molycorp shares drop

On the primary side, shares of Molycorp Inc. were slammed after the rare earths company launched an offering of $200 million of five-year convertible senior notes and concurrent secondary offering that were seen pricing Thursday.

"The stock got taken out to the woodshed, and I'm not sure what to make of that. It's unfortunate, but investors didn't seem to like that they are bringing a convert in, and issuing stock," a sellsider said.

Molycorp has an existing mandatory that is held by a lot of convertible arbitrage players, the sellsider said. "So my guess is that they may be marketing the bond to the convert arb people, and they are shorting the stock."

Conversely, Brookdale Senior Living Inc. shares held up well ahead of pricing expected on a $275 million offering of seven-year convertibles.

"That's the greater equity story that the outrights would like. It's registered, so the market already knew that it was coming, and there was not that pressure on the stock," the sellsider said.

Technicals, not fundamentals

Because the last round of quarterly earnings was fairly decent, and because companies are running very lean, pointing to continued top line growth, "I feel that credit should remain strong and the selling is unwarranted on a fundamental basis," a West Coast-based sellsider said Wednesday.

The current selling seems to be driven by expectations of future investor behavior, he said.

"It's not that funds don't like the ideas; it's that they have to manage the expectations of investors, and investors are jittery and scared and asking for their money back," the sellsider said, referring to redemptions and potential redemptions.

"People want a quick and easy exit from stuff," he said.

Up until the last couple of days, convertibles have shown considerable resilience to lower markets. A high yield player said that high yield has been coming in for a week or two or maybe three.

But there is a greater sense of urgency now, the West Coast-based sellsider said.

"Panic is not the right word. But rather than waiting, people are now hitting a bid and will worry about the position after the fact," he said.

The New York-based high-yield player said, "It's been drifting and feels heavy. But it's going to have to come in a lot more before people come in as buyers."

Suntech lower, SunPower quiet

Suntech Power's 3% convertibles due 2013 went out at 88 bid, 90 offered on Tuesday and opened out at 89 early Wednesday.

During Wednesday's session the paper slipped to 88.25, and late in the afternoon, the market was called 85 bid, 88 offered, with one trader calling the market 86 bid, 87 offered after the market close.

Shares of the Wuxi, China-based solar power company closed the day lower by 18 cents, or 2.3%, at $7.45.

Meanwhile, SunPower's 4.5% convertibles due 2015 were seen at 107.5 bid, 109.5 offered after the market close Wednesday, which was little changed on previous levels.

Shares of the solar panel maker ended up 38 cents, or 1.8%, at $21.33.

SunPower trimmed its 2011 earnings outlook Tuesday on solar-power policy changes in Italy. The company is now expecting adjusted earnings of $1.20 a share to $1.70 a share, which is lower compared to February's $2.00 a share to $2.20 a share profit outlook.

On the heels of SunPower's disappointing profit guidance came several analysts' downgrades on Wednesday, including from Jefferies and Raymond James.

The solar products company raised its second-quarter revenue forecast to $550 million to $600 million, up from previous guidance of $500 million to $550 million, but said that due to changes in policy in Italy, it has shifted product allocation away from power plants and toward the European residential and commercial market, which is a lower margin business.

Jefferies analyst Jesse Pichel cut his rating on the stock to "hold" from "buy" and set a new price target of $19.00, down from $26.00.

Hanwha SolarOne's 3.5% convertibles due 2018 were in the 75 context Tuesday and Wednesday. That paper is putable in 2015.

Ciena holds in

Ciena's 0.875% convertibles due 2017 traded actively at 87.5, which was down 5 points outright, but the premium on this issue expanded to 33 points Wednesday from about 30 points on Tuesday, according to a New York-based sellside desk analyst.

"That's ideally what you want when the stock comes in," a West Coast based sellsider said.

Shares of the Linthicum, Md.-based communications networking equipment and software company fell $3.92, or 16%, to $20.29 in heavy volume on Wednesday after the company reported a bigger loss and lower revenue than analysts had expected for its second quarter.

The company was hurt by integration costs from its purchase of the Ethernet business from bankrupt Nortel Networks Corp. last year.

"We still like the equity; we like the story," a sellsider said. "We view this is as a blip in the screen."

Mentioned in this article:

Brookdale Senior Living Inc. NYSE: BKD

China Medical Technologies Inc. Nasdaq: CMED

Ciena Corp. Nasdaq: CIEN

Forestar Group Inc. NYSE: FOR

Hanwha SolarOne Ltd. Nasdaq: HSOL

Molycorp Inc. NYSE: MCP

Sino-Forest Corp. Toronto: TRE

SunPower Corp. Nasdaq: SPWRA

Suntech Power Holdings Co. Ltd. NYSE: STP

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