Convertibles 'heavy' amid equity sell-off; Brookdale collapses to mid-70s; Hertz lower

By Rebecca Melvin

New York, Aug. 10 - Some convertible bonds were able to continue to hold in in the face of another equities free fall Wednesday - which, given the moves of the last week, amounts to a crash - while others suffered bigger moves to the downside than in recent sessions.

Irrespective of individual trades, one thing was certain: market players had to be strapped in pretty tightly as market turbulence continued unabated.

"It was another busy day today," a New York-based sellside desk analyst said.

Pockets of convertibles that have taken it on the chin are longer-dated, lesser credits including Brookdale Senior Living Inc., which in light of uncertainty in the health care sector and its longer 2018 tenor, dropped to the mid-70s Wednesday from about 90 on Monday and 100 in early June, when it initially priced.

The Brookdale convertibles dropped below par immediately upon pricing; and a sellsider said the Wednesday pricing was possibly a little better on a hedged basis compared to Tuesday.

Short-dated, yield names also suffered on Wednesday, "playing catch up" after holding in pretty well in previous sessions, a Chicago-based convertibles sellsider said.

"They had been holding in well relative to high yield, leveraged loans and other non-investment-grade securities, but today they played catch up and took a bigger move down," the sellsider said.

The reason, he said, was "people needing to sell; Europeans needed to sell after news of a possible French downgrade and the quality of debt there," the sellsider said.

To address fresh concerns about France's AAA credit rating, which contributed to a sharp sell-off of shares of French banks on Wednesday, French president Nicolas Sarkozy interrupted his vacation to meet with cabinet members. After the meeting, Sarkozy reiterated his commitment to reduce France's budget deficit even if that means raising taxes or implementing spending cuts.

Nevertheless, some convertibles continued to hedge holders against gut-wrenching moves that left the Dow Jones Industrial Average down another 520 points, or 4.6%, at 10,719.94 on Wednesday. That drop came on the heels of a 4% rally on Tuesday and a 630- point, or 5.6%, loss on Monday. The Dow also fell by more than 500 points on Thursday.

The S&P 500 stock index fell 52 points, or 4.4%, to 1,120.76 on Wednesday, and on average shares of convertible names were down 4% to 7% on the day. Since a week ago, the S&P has lost 9%.

"The market is heavy; the equity market is getting killed, but converts are doing what they are supposed to be doing, which is holding in," a New York-based sellside trader said.

Depending on credit, duration and premium, or "the equity in relation to the strike, things opened up on the way down," a New York-based trader said, meaning that those names improved. But with things in flux, it was difficult to know where things go from here.

Hertz Global Holdings Inc.'s 5.25% convertibles due 2014 traded actively at 144 versus a share price of $10.40, but shares closed below that level, and Trace recorded a late print of the Hertz 5.25% convertibles at 141, which was down more than 3 points on the day outright. The paper was above double par in July.

"HTZ is - was - a high delta name," an analyst said. "Hedge guys were short a lot of stock, which is now down about 30% this month."

Salesforce.com Inc.'s shares were down just 3% on Wednesday, and the Salesforce 0.75% convertibles traded down about 0.5 point outright to 162, having traded earlier at 160 to 161, according to market players and Trace data.

Mylan Inc.'s two convertible issues were very active on Wednesday, but sources queried didn't know the reason behind buying in that name.

Brookdale down to 74.75

Brookdale's 2.75% convertibles due 2018 briefly, if ever, traded north of par. On their debut in June, they closed out at 99.25 bid, 99.5 offered versus an underlying share price $23.00. On Wednesday, they traded at 74.75 versus an underlying share price of $13.25. A few days ago, they were 92 versus a share price of $19.97.

Shares of the Brentwood, Tenn.-based assisted-living homes for seniors closed Wednesday at $13.75, which was down 68 cents, or 4.7%, on the day.

On Tuesday, the Brookdale convertible was very active and traded down 11 points to 77.625.

Holders of the Brookdale convertibles "moved down heavier because of the longer duration and the terrible spot it is to be in if they are going to start cutting Medicare reimbursements," a New York-based trader said.

The deltas Tuesday were in the 65% to 70% range, down from a few days ago when they were on a 75%, the trader said.

On Tuesday, Brookdale lowered its forecast for 2011 revenue growth to about 3% from an earlier outlook of as much as 5.5%.

"It's a relatively new deal that just came and has gotten hit pretty hard. A lot has to do with the heath care overhang and the fact that it is long-dated paper," a second sellsider said.

Salesforce eyed

Salesforce's 0.75% convertibles due 2015 traded at 160.25 versus an underlying share price of $129.30 on Wednesday, according to a pricing source. That compared to several prints Tuesday around 156 versus an underlying share price of $124.93. There was a later Tuesday sale at 155.625 versus the $124.93 share reference, according to a separate source.

Shares of the San Francisco, Calif.-based cloud computing company closed Wednesday at $128.23, which was down $4.28, or 3.2% on the day.

The delta range looked to be 85% to 87% for the Tuesday trades.

"So long as rates stay low, these should stay OK," a New York-based trader said. "If the premium starts to spread out, I don't know what's going to happen."

Parity on the bonds is 150. "They have a couple of years left; their premium will shrink. If the common keeps going down to where parity is 50, then you will see what the credit is worth on a yield basis," the trader said.

Mentioned in this article:

Brookdale Senior Living Inc. NYSE: BKD

Hertz Global Holdings Inc. NYSE: HTZ

Mylan Inc. NYSE: MYL

Salesforce.com Inc. NYSE: CRM

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