Alcoa drops outright, slips on hedge after earnings; Home Inns a little better; YRC eyed

By Rebecca Melvin

New York, Jan. 10 - U.S. convertibles felt a touch weaker on Friday compared to earlier in the week as market players were looking to begin lightening up on some in-the-money names to make room for new paper anticipated in the form of upcoming new issuance, a New York-based trader said.

But the primary market had still not yet restarted after seven sessions into 2014. Nevertheless, the expectation was that deal flow will begin soon, and when it does it will be significant, sources said.

In-the-money name Alcoa Inc. saw its convertibles drop outright and slip on a dollar-neutral, or hedged, basis after the New York-based aluminum producer reported weaker-than-expected earnings for its most recent quarter.

The disappointing earnings report put a damper on optionality for this short-dated paper, a trader said. "There were some sellers."

Elsewhere, Home Inns & Hotels Management Inc., the Shanghai-based hotel chain, saw its 2% convertibles due 2015 firm up on an outright basis, and they were better by about 0.25 point on a hedged basis as well, using a delta of 55% to 60%, according to a New York-based trader.

The Home Inns convertible was quoted at 100.125 bid, 101 offered with the underlying shares at $40.20 on Friday.

"They don't trade every day, but they did trade today and they got a little bit better," the trader said of Home Inns.

YRC Worldwide Inc.'s convertibles were in focus Friday but were not heard to have traded as shares of the Overland Park, Kan.-based trucking company plunged on news that its union employees voted down a proposed extension of their contract, thereby putting the company's much needed refinancing agreement in jeopardy. Creditors had made the financing contingent on contract approval.

Traders were somewhat ambivalent about how 2014 has gone so far. One trader said, "not so good." While a second trader said, "The year has been pretty decent so far, all things considered."

Looking ahead, one trader pointed to biotechnology and in some cases the broader health care sector as a focus of convertibles players. There are plenty of catalysts in this space, the trader said. He mentioned Hologic Inc. as one of those names that hedged players are looking at, noting there are "plenty of events for this name."

Earlier this week, Sequenom Inc.'s 5% convertibles jumped on an outright basis and were better on a hedged basis on news that the San Diego-based provider of genetic analysis products was granted patent protection in Europe for its fetal aneuploidy analytical methods. Also this week, InterMune Inc.'s 2.5% convertibles due 2018 traded actively and moved up in line with the underlying shares after the Brisbane, Calif.-based biotechnology company guided fourth quarter revenues above estimates and said it sees full-year 2014 revenue in line with consensus.

The December jobs report on Friday turned out to be a downside surprise, lending confusion to the financial markets, a convertibles analyst said.

The Bureau of Labor Statistics said that U.S. private-sector employers hired only 74,000 workers in December, which is the lowest level since July 2011 and not even within striking distance of the roughly 200,000 jobs that many economists and others were expecting.

The unemployment rate fell to 6.7%, however, due to a drop of 347,000 in the U.S. labor force.

The government's report was at odds with that of Automated Data Processing and Moody's Analytics on Wednesday, which reported a better-than-expected gain of 238,000 private-sector jobs for December.

Stocks fluctuated on Friday but ended the week little changed.

Alcoa 'comes in' slightly

Alcoa's short-dated, 5.25% convertibles due in March were quoted at 157.25 versus a stock price of $10.11 at the end of the day. The convertibles were down from 166 outright prior to the company's earnings release late Thursday.

"They traded right around parity plus 5 cents," a New York-based trader said, adding that they contracted some as hedged players were lightening up on the name, and hedged players dominated the action in this issue this past week.

Earlier Friday the paper was seen at parity plus 0.05 point to parity plus 0.75 point. They contracted by about 0.125 point to 0.3 point, the trader said.

Shares fell 58 cents, or 5.4%, to $10.11.

The bond was "better for sale" as optionality in the short term dimmed, a trader said. The aluminum producer reported a larger-than-expected quarterly loss on lower sales after recent declines in aluminum prices.

The net loss for the fourth quarter was $2.3 billion, compared to a profit of $242 million in the year-earlier fourth quarter. The loss was primarily due to special items worth $2.4 billion that included a $1.7 billion impairment of goodwill, a $361 million non-cash charge related to potential tax benefits and $384 million the company has agreed to pay to settle criminal and civil charges. Excluding items, the company earned $40 million.

Revenue was down 7% to $5.6 billion from $5.9 billion in the year-earlier fourth quarter.

YRC deal 'off the table'

YRC's 10% series A convertibles due in 2015 didn't trade on Friday and were previously seen at 98.

The YRC 10% series B convertibles due 2015 hadn't been seen in trade for some time, market sources said.

YRC's bank debt was heard trading down 4 or 5 points.

By the end of the session, the paper still hadn't traded, a trader said, and shares had pared nearly half their early losses.

YRC shares were down $3.59, or 23%, at $12.08 in late-morning trade. But they ended down $2.09, or 13%, to $13.58.

"The deal is off the table because it was contingent on the contract being approved by the union," a New York-based trader said. "Now people don't know what is going to happen next, and anything can happen."

As previously reported, YRC reached an agreement on Dec. 23 with some holders of its series A convertible notes and series B convertible notes and other institutional investors to allow it to reduce debt by about $300 million. That would have allowed the company to retire at least 90% of the convertible notes.

Mentioned in this article:

Alcoa Inc. NYSE: AA

Hologic Inc. Nasdaq: HOLX

Home Inns & Hotels Management Inc. Nasdaq: HMIN

InterMune Inc. Nasdaq: ITMN

Sequenom Inc. Nasdaq: SQNM

YRC Worldwide Inc. Nasdaq: YRCW

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