Convertibles cheapen; Navistar weakens; Suntech loses points; Chesapeake ends week mixed

By Rebecca Melvin

New York, May 18 - Convertibles were broadly weaker on Friday although volumes were lighter than they had been Wednesday and Thursday when selling took many names "in" on a dollar-neutral, or hedged, basis.

Navistar International Corp.'s convertibles slipped another 0.5 point on a dollar-neutral basis Friday, on top of a 0.625-point decrease Thursday, for a more than 1-point move lower dollar neutral as the underlying shares of the Lisle, Ill.-based truck maker hit a 52-week low.

Navistar is a balanced name, meaning that it has both credit and optionality aspects that many convertibles players like.

"Convertibles had a tough week," a New York-based trader said.

Friday's focus was mostly investment-grade and intermediate-grade securities and shorter-duration issues, which are considered the safest investments. "But if investment-grade and high-yield spreads continue to widen, you're going to have to start watching valuations because they will start to come in," the trader said.

At the same time, the trader noted, as paper cheapens, "stuff is starting to get interesting again."

Solar convertibles were mostly lower after the United States' decision Thursday to impose a 31% antidumping tariff on Chinese solar-panel makers, but the reaction was not as pronounced as might be expected given the relatively high number of convertible issuers in the space.

The U.S. Commerce Department's ruling was preliminary, but likely to hold up even if it is challenged later this year, a New York-based analyst said.

Of solar convert issuers, Suntech Power Holdings Co. Ltd., the world's largest solar-panel maker, saw its 3% bond trade down 3 or 4 points to 64 bid, 65 offered, and down from pricing in the low 70s a couple of weeks ago.

But Trina Solar Ltd., the fifth-largest solar panel supplier, based in Changzhou, China, "hasn't traded," the analyst said.

Meanwhile, Salesforce.com Inc.'s convertibles were trading actively and higher outright, but slightly lower, assuming an 88% delta coming into the day, after the San Francisco-based cloud computing company posted better-than-expected results and raised its outlook for 2012.

A late market in the Salesforce 0.75% convertibles due 2015 was seen at 174.75 versus an underlying share price of $142.5. A sellsider said that the convertibles were down "three teenies" on a dollar-neutral basis.

Chesapeake Energy Corp.'s convertibles ended the week mixed, having lost ground earlier in the week on both an outright and a dollar-neutral basis as both financial and management troubles continued to weigh on the Oklahoma City-based natural gas producer. But Friday brought a little relief as the securities lifted some on higher natural gas prices.

The new issue market this past week was quiet.

Navistar comes in a point

Navistar's 3% convertibles due 2014 ended Friday at about 97.75 bid, 98.25 offered versus the closing share price of $26.31, a New York-based trader said.

Shares were down 2.2% on the day.

The Navistar 3% convertible was down 0.5 point on swap on Friday and more than a point on swap over the past two days.

"Unfortunately, I still don't think it's attractive at the current levels," the trader said. "Although it did cheapen, I'm not a buyer at this level. I still think it's a point to 1.5 points rich."

Navistar shares hit a 52-week low Friday, and the credit has widened in the name.

The convertible has a nice, balanced profile, but given what is happening with credit spreads, this is one among many that have to be watched in terms of valuations, the trader said.

The trader also mentioned SanDisk Corp.'s 1.5% convertibles, which were weaker in line, pulled down by the underlying shares; and Goodrich Petroleum Corp.'s 5% convertibles, which were trading Friday at 94, down from north of 97.

Suntech Power down

Suntech Power's 3% convertibles due 2013 traded at 64 bid, 65 offered during the session.

Suntech shares ended the day down 13 cents, or 6%, at $2.00.

The decision to impose a 31% anti-dumping tariff on Suntech Power and other Chinese solar exporters could be reduced, but is likely to remain around 20%.

The level of tariff may be cut some, but it's likely to remain "something north of 20%," the analyst said.

Nevertheless, the lack of response by solar convertibles, both U.S. and Chinese, might be explained by the fact that "there's been a lot of different problems" in the sector, and "the U.S. market wasn't going to solve them," the analyst said.

The ruling came in response to complaints by solar-energy companies that their Chinese rivals were selling solar panels in the U.S. at below-market prices. The antidumping penalties come on top of U.S. anti-subsidiary tariffs ranging from about 3% to 5% levied in March on Chinese solar companies.

As for retaliation from China for the anti-dumping tariffs, it's likely there will be retaliation "in some way, shape or form," the analyst said. But there are multiple avenues by which that could be pursued. "They have some other investigation underway that U.S. companies are dumping in their market," the analyst said.

Mentioned in this article:

Chesapeake Energy Corp. NYSE: CHK

Goodrich Petroleum Corp. NYSE: GDP

Navistar International Corp. NYSE: NAV

Salesforce.com NYSE: CRM

SanDisk Corp. Nasdaq: SNDK

Suntech Power Holdings Co. Ltd. NYSE: STP

Trina Solar Holdings Co. Ltd. Nasdaq: TSL

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