Convertibles better bid: Brookdale gains dollar neutral; U.S. Steel rises in line; Newmont up

By Rebecca Melvin

New York, Sept. 7 - The convertible bond market was better bid on Wednesday as something of a relief rally was underway in U.S. stocks and other markets amid soothed concerns about the European sovereign debt situation.

Many of the bids in the convert market didn't result in trades, however, market sources said.

One trader surmised that the inactivity was due to a dearth of product and lack of new issuance, which discouraged convertible holders from selling their paper.

The primary market remained moribund, having not had a single new deal since the end of July.

Back in the secondary market, Brookdale Senior Living Inc. was better bid and was improved on a dollar neutral, or hedged, basis by about 0.5 to 1 point, market sources said. The Brookdale issue was a hard hit name during the stock and convertible meltdown in August and has improved in the last week or so.

United States Steel Corp. was also trading and higher outright, but in line on a dollar-neutral basis, as the underlying shares of the Pittsburgh-based steel company surged amid the broad-based rally in stocks.

Gold producer Newmont Mining Corp. held on to recent gains and even gained 0.5 point on a dollar-neutral basis despite a slip in the underlying shares as stock investors abandoned some "risk on" trades.

Equities rallied on Wednesday, reversing three days of losses on optimism about Europe's debt problems after Germany's top court smoothed the way for that nation to lead bailout packages for Greece and other nations. The decision rejected lawsuits aimed at blocking the country from participating in such aid programs.

"The macro picture is up: the euro is up, U.S. stocks are up," a New York-based sellside analyst said of markets, in general.

As far as convertibles go, the analyst said, "I think everything is just rallying and even some of the high-yield stuff has snapped back pretty aggressively."

"I think it's a relief rally right now and everything is well bid, and it's pretty broad based," the analyst said.

One trader said that anecdotally he thought hedge players were lowering their delta hedges on a number of convertible names, indicating that there was some optimism in the market.

During the summer, "stocks came way down, but because credit was a concern and people were scared, nobody covered any stock despite what their models said deltas should be," the trader said.

He said the move to lower deltas was unusual and he hadn't heard it done before in recent memory.

"I think some feel better enough that they have taken deltas down closer to theoreticals," he said.

First Reserve to sell Glencore

Private equity firm First Reserve said it is offering to sell its $800 million of Glencore Finance (Europe) SA 5% convertible bonds due 2014.

Final terms were expected to be set on Thursday.

The Regulation S deal was being sold via Credit Suisse Securities (Europe) Ltd. and Morgan Stanley & Co. International plc, acting as joint lead managers and joint bookrunners.

The convertibles will be priced versus a Glencore reference price of $6.78, or £4.25, which represented a 4.7% premium over the closing price of Glencore shares on the London Stock Exchange Wednesday.

Baar, Switzerland-based Glencore, a commodities trader, originally priced more than $2 billion of the convertibles in December 2009.

Brookdale firms delta neutral

Brookdale Senior's 2.75% convertibles due 2018 traded at 82.140, according to Trace data intraday, which was up 1.9 points outright on the day. They were also seen a little higher.

Shares of the Brentwood, Tenn.-based operator of assisted-living homes for seniors gained $1.44, or 10%, to $16.09.

The convertibles were better by 0.5 point using a 70% delta, according to a New York-based trader.

A second trader said the issue trades on different deltas, including some closer to 60%. "They are maybe a point better over the past week," the trader said.

At current levels, it is near a 6% yield with a 53% premium on paper with a longish 2018 horizon, a trader said.

The Brookdale convertibles, which initially priced in June, were hit hard during the summer meltdown in light of uncertainty in the health care sector and the issue's longer 2018 tenor. It dropped into the mid-70s in early to mid August.

The paper was priced initially by bookrunners Bank of America and JPMorgan.

U.S. Steel up in line

U.S. Steel's 4% convertibles due 2014 were trading at 119.375 versus an underlying share price of $29.70 on Wednesday, which was up from 114.625 versus an underlying share price of $29.39 on Tuesday, according to a Connecticut-based trader.

U.S. Steel shares surged 10% in early trading and ended the day up 9.2% at $29.92, which was up $2.53. The name was not only buoyed by a general tide upward in stocks, but it outpaced the broader market's gains.

But U.S. Steel shares are still down 49% for the year due to questions surrounding demand and lower steel prices in light of slowing economic trends.

Newmont Mining adds

The Newmont 1.625% convertibles due 2017, or the B notes, traded at 148.9 versus an underlying share price of $63.00, which compared to 153.875 versus an underlying share price of $65.20 on Tuesday.

Even though the outright price of the bonds was lower, hedged on an 80% delta, that paper has "richened 0.5 point since yesterday," a Chicago-based trader said.

Shares of the Denver-based gold and copper mining company were down 2% in early trading, but ended lower by only 1%, at $63.81, which was down $0.70.

"Those are holding up okay," a New York-based analyst said. "They are largely outright driven with not a lot of price action dollar neutral."

In addition, mining stocks have generally outperformed gold. "The stock is down a little bit, but it's outperforming gold," the analyst said.

Mentioned in this article:

Brookdale Senior Living Inc. NYSE: BKD

Newmont Mining Corp. NYSE: NEM

United States Steel Corp. NYSE: X

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