MolyCorp trades weakly on second day in the market; Medtronic active ahead of earnings

By Rebecca Melvin

New York, Aug. 20 - Convertible bond players were counting the days until the summer lull is over on Monday, but even though the market is likely to remain quiet until then, there was some action in the new MolyCorp Inc. convertibles that debuted in the market Friday, as well as in several of the universe's larger issues of investment-grade companies.

MolyCorp's new 6% convertibles due 2017 traded mostly unchanged on an outright basis at slightly below par, but were seen contracting on a dollar-neutral, or hedged, basis, with the underlying shares higher, a New York-based trader said.

Medtronic Inc. was also one of Monday's big traders, with that paper, a short-dated convertible with a 1.625% coupon, trading little changed to slightly lower with shares better by 1%. The activity came ahead of the medical-device company's earnings expected Tuesday ahead of the market open and as health care stocks received a boost in general after health insurer Aetna Inc. agreed to buy Coventry Health Care Inc. for $5.7 billion in cash and stock.

Gilead Sciences Inc.'s sister convertibles were in trade as well as a pair of Intel Inc. convertibles, and that paper was mixed to little changed amid underlying stock pricing that was similar.

MGM Resorts International was better again, seen printing at 102.739 during the session as outright players continue to bid this name higher, attracted to the improving credit and contracting duration. The MGM convertibles and shares have been on the rise in August.

BPZ Resources Inc.'s 6.5% convertibles due 2015 traded in size on Friday at a lower-than-expected 75, a New York-based trader said; and shares of the Houston-based oil and gas company were dropping Monday, ending the day down close to 7%; but, there was no further activity in size in the BPZ convertibles on Monday.

"It was pretty quiet; we weren't particularly involved," a New York-based trader said, citing Medtronic, Gilead and MolyCorp as the day's major movers.

A second trader underscored the sentiment. "There's not much going on today that I see." The trader cited summer vacations as the reason behind thin trade.

MolyCorp lower on hedge

MolyCorp's 6% convertibles due 2017 traded at 99.875 or slightly lower, which was in line on an outright basis versus Friday. But shares of the Greenwood Village, Colo.-based rare earth metals exploration company gained 18 cents, or 1.8%, to $10.02.

"The MolyCorp stock moved up, but the bonds spent most of their time below par as they did on Friday, so I think they leaked on Monday," a New York-based trader said.

"With its big conversion ratio, it moves about a teeny for every penny in the common," the trader said. "A nickel would be a 0.25 point move or should have been."

The new bonds have a pretty large 6% coupon, but the borrow was challenging for a while - although the company ended up issuing $120 million in stock along with the convertibles, creating a borrow for the deal, a trader noted. With that the delta on the paper on a hedged basis is probably about 75%, he said.

The weakness in the new convertible despite it coming cheap is likely to have something to do with the fundamentals of the company. The company cut guidance severely and said it didn't have enough cash to continue with some of its project plans at its last earnings report.

Nevertheless, there is some thinking among market players that with most production of rare earths in China and with U.S. demand for rare earths in the technology and automobile industries, there is motivation in the U.S. to prevent China having a strangle hold on supply.

"A lot of people believe that this is a company that the U.S. needs; I don't necessarily buy that excuse," a trader said.

The new paper was valued at fair value at 103 using a 1,450 basis points credit spread and a mid 40s vol., but nevertheless, it opened and has remained in the 99ish range.

"Friday they were probably a little better, but today they leaked," a trader said.

Medtronic active

Medtronic's 1.625% convertibles due 2013 traded last at about 100.6, which was down 0.1 point on the day, according to Trace data.

Medtronic shares gained 61 cents, or 1.5%, to $41.45, setting a 52-week high on strong volume. The previous 52-week high was $40.91.

Medtronic is due to report earnings on Tuesday.

The short-dated 1.625% convertibles have eight months left until maturity, and they "are not terribly compelling, but there is some optionality left in the bond," a trader said.

The bonds are for the most part out of the money on a low vol. stock, but if the stock rises to say $45 it could get interesting, a trader said.

Gilead's convertibles were also trading on Monday. The Gilead D convertibles are interesting at their current level with the Gilead 1% paper less so.

Also prompting investors focus in this sector on Monday was Aetna's deal to buy Coventry for $42.08 per share in cash and stock, or about a 20% premium to Coventry's previous stock close.

The deal will expand Aetna's Medicare prescription drug, Medicare Advantage and Medicaid businesses.

Hartford, Conn.-based Aetna is the nation's third-biggest insurer based on enrollment.

MGM active, better

MGM's 4.25% convertibles due 2015 traded at 102.739 around midsession, according to Trace data, with the stock around $10.55 to $10.60. That compared to the MGM convertibles trading at 100.8 versus an underlying share price of $9.565, a few weeks ago.

The bonds are held pretty much outright. But the stock has also been creeping up and on Monday, shares of the Las Vegas-based casino operator closed up 8 cents, or nearly a percentage point, to $10.60.

"I just think the credit on MGM is improving. It was one of those wide credits, but getting close to two years now, and outrights like this paper," a trader said.

Mentioned in this article:

BPZ Resources Inc. NYSE: BPZ

Gilead Sciences Inc. Nasdaq: GILD

Medtronic Inc. NYSE: MDT

MGM Resorts International NYSE: MGM

MolyCorp. Inc. NYSW: MCP

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.