Convertibles weaken; School Specialty contracts, International Game, Salesforce.com lower

By Rebecca Melvin

New York, Feb. 4 - Convertibles were weaker Thursday as market players mostly sat back and watched the broader markets dive after data showed weekly jobless claims rose more than expected, sources said.

"Certain merchandise is down a point or two. The market is heavy, and people are getting defensive," a Connecticut-based sellside trader said.

Educational product supplier School Specialty Inc. saw its convertibles contract about 0.75 point with its shares down 3.6%. The company is expected to post earnings on Feb. 18.

International Game Technology was also lower, with the Reno, Nev.-based gaming company's convertibles trading at 119.25 versus a share price of $18.40, compared to 121 versus a share price of $18.85 earlier in the week.

The recently issued Salesforce.com Inc. 0.75% convertibles were also weaker by about 0.25 point from earlier in the week.

A pair of homebuilder names was in trade amid continuing earnings news in the sector. D.R. Horton Inc., which posted an encouraging quarterly profit on Tuesday, saw its convertibles continue to strengthen.

Beazer Homes USA Inc., which will report its fiscal first-quarter earnings on Friday, saw its $25 par mandatories trade at $23.70 versus a share price of $4.25.

Commodity names have been hard hit in the recent market stumble, and aluminum producer Alcoa Inc. convertibles continue to fall with their underlying shares, dropping toward the double par mark after stretching close to almost triple par in early January.

But Navistar International Corp. convertibles expanded Thursday by 0.5 point to 0.75 point, according to a New York-based sellside trader.

The broader market began to stumble in mid-January after China attempted to curb its overheated growth.

On Thursday, "investors were nervous about the economy and what's going on with unemployment," a sellsider said. "They are wondering if things are going to improve. The jobs numbers are pretty startling. This truly has people concerned about earnings going forward, the general climate, are we going to get better, especially if stimulus from the government stops," he said.

Claims for unemployment benefits rose unexpectedly by 8,000 to 480,000 for the week ended Jan. 31, the Labor Department reported, the fourth increase in the past five weeks.

Eyes will be on the government's January jobs report on Friday to see if employers added workers in the first month of the year.

U.S. trading also was affected by European markets, which dropped on concerns about onerous debt levels in countries including Greece, Spain and Portugal.

Investors in wait-and-see mode

Market sources agreed that investors are nervous and for the most part are "sitting on their hands," uncertain of what the next move should be.

"From what I am seeing, convertibles are falling in sync with their underlying common," a New York-based sellside analyst said. "In other words, converts are not coming in on swap as the market falls. They are not getting cheaper. The buyside is not selling, which would either imply they don't believe the fall-off is real and the markets will snap back, or they don't know what to think so they aren't doing anything."

Another sellsider said investors were getting defensive and hesitant to do much trading. "Any buyers out there are lowering their bids," another sellsider said.

Another sellsider said redemptions may be part of the equation. Hedge fund Highbridge was said to be another seller in response to redemptions in addition to Citadel and Vicis last week.

On Thursday, the Dow Jones Industrial Average fell 268.4 points, or 2.6%, to 10,002.18; the S&P 500 index fell 34.2 points, or 3.1%, at 1,063.11; and the Nasdaq Stock Market fell 65.48 points, or 3%, to 1,063.11.

TMK prices new issue

There were no new issues in the U.S. market, but in Europe, TMK Bonds SA, a special purpose vehicle of OAO TMK, launched and priced an upsized $412 million of five-year convertible bonds at the midpoint of talk to yield 5.25%.

Contraction seen

School Specialty's 3.75% convertibles due 2026 traded down 0.75 point to 94.50 versus a share price of $21.30 on Thursday, compared to a trade at 95.25 on Wednesday.

Shares of the Greenville, Wis.-based school supply company fell 79 cents, or 3.6%, to $21.14.

School Specialty is among certain names in the convertibles universe that were down 1 or 2 points on Thursday, according to a sellside trader.

Alcoa weakens with shares

Alcoa's 5.25% convertibles due March 2014 traded at 213.8 versus a share price of $13.05 and was seen lower at 211 later in the session. That compared to 215 versus a share price of $13.15 on Monday.

Shares of the Pittsburgh-based aluminum company fell 58 cents, or 4.3%, at $12.91.

Hedge accounts in particular have been drawn to these deep in the money names, putting them on a heavy delta, in the event that if the companies' shares "crack," or come down, then there will be premium to cash in on, according to a sellsider.

D.R. Horton, Navistar look better

D.R. Horton's 2% convertible senior notes due 2014 traded at 121.25 versus a share price of $13.25 on Thursday, compared to Tuesday trades at 120.125 versus a share price of $13.10 and also at 120.75 versus a share price of $13.20.

Shares of the Fort Worth-based homebuilder edged lower by 4 cents to $13.21, which is where the shares closed on Tuesday.

Shares of D.R. Horton and Beazer finished only slightly lower in contrast to others in the sector like California-based Standard Pacific Corp., which reported earnings late Wednesday and saw its shares slump 13% on Thursday.

Navistar's 3% convertibles, which look attractive with the shares at this level, traded at 104 versus a share price of $39.40 on Thursday.

Shares of the Warrenville, Ill.-based truck and chassis maker were down $2.52, or 6.2%, at $38.41.

TMK prices upsized deal

TMK priced 5.25% convertibles with an initial conversion premium of 30%. TMK also placed 3.5 million Global Depositary Receipts at $17.75 each in connection with the bond offering.

The senior unsecured convertibles will be convertible into about 17.8 million of GDRs, which are listed on the London Stock Exchange.

Proceeds will be used to refinance TMK's existing short-term debt.

Morgan Stanley, UBS Investment Bank and VTB Capital were joint bookrunners of the offering.

The bonds will be non-callable for three years, and there is a put in year three.

Moscow-based TMK makes steel pipes for the oil and gas industry. Its ordinary shares are listed on the RTS and Micex Stock Exchanges in Russia, and its GDRs trade on the London Stock Exchange.

Barclays Capital convertible analyst Luke Olsen said the TMK convertible was just fairly priced using a credit assumption of 850 bps over dollar swaps and a volatility of 30%.

"Our valuation indicates it would be attractive on best terms, and unappealing on worst," he said. "If it comes on mids, it would be just OK."

He noted that TMK's credit spread was very wide, but said it seemed to be quite accurate.

"The credit spread is a key unknown," he said. "Given the ratings, financial profile and operations, we'd be surprised if many people use a substantially tighter spread."

In a research note, Barclays said the convertible would be worth 101.8 if it priced at the rich end of talk and 104.9 if it came at the cheaps. The deal was indicated at 100.6 in the gray market shortly after launch.

Although the offering's coupon premium to its dividend protection was favorable, investors are more exposed to credit risk and may not be able to capture all of the volatility in the stock, the note stated.

"We acknowledge, however, that the stock borrow market in the name is not illiquid and a high hedge ratio, in excess of the theoretical 57%, could offset some degree of the credit concern," Barclays wrote in the note.

Kenneth Lim contributed to this report

Mentioned in this article:

Alcoa Inc. NYSE: AA

Beazer Homes USA Inc. NYSE: BZH

D.R. Horton Inc. NYSE: DHI

International Game Technology NYSE: IGT

Navistar International Corp. NYSE: NAV

Salesforce.com Inc. NYSE: CRM

School Specialty Inc. Nasdaq: SCHS

© 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.