Central European surges on Russian investment; Electronic Arts, Cemex add after earnings

By Rebecca Melvin

New York, Feb. 2 - Central European Distribution Corp. was a big mover Thursday in the convertible bond market - which aside from a couple of earnings stories and a couple of deals, was otherwise "slow," market sources said.

Central European zoomed up 12 points to 13 points after Reuters reported that Russian Standard Group has offered to take a 33% stake in the company, an investment that is likely to include help to make good on the upcoming maturity of Central European's 2013 convertibles.

A pair of corporate earnings reports sparked action in the convertibles of those companies. Electronic Arts Inc. rose a day after the video game publisher released a quarterly report and outlook that initially caused underlying shares to fall, but ultimately, shares snapped back for a solid gain. The bonds were called better on a dollar-neutral, or hedged, basis by about 0.5 point at the end of Thursday, traders said.

"They had pretty good earnings," a convertibles trader said.

The convertibles of Cemex SAB de CV expanded even more on a dollar-neutral basis, or by about a point dollar neutral, a New York-based sellsider said, after the Mexican cement producer reported a smaller-than-expected loss.

Elsewhere, Novagold Resources Inc. was also called better on a dollar-neutral basis by about 0.5 point with the underlying shares lower after the Vancouver, B.C.-based mining company brought a secondary common stock offering.

"...The bonds were strong on that," a trader said, calling the Novagold paper at 121 versus an underlying share price of $9.50.

Meanwhile, SandRidge Energy Inc. shares fell 9% after the oil and natural gas company said it would acquire Dynamic Offshore Resources LLC in a stock and cash deal valued at $1.28 billion.

In the primary arena, MannKind Corp.'s planned $161 million of convertibles didn't price as expected ahead of the market open, but it was seen coming after the market close, according to a syndicate source.

Offshore, SM Investments Corp. said it planned to issue $250 million of five-year convertible bonds via bookrunners Citigroup Global Markets Ltd. and J.P. Morgan Securities Ltd. Further details on the deal by the Philippines-based commercial property developer weren't available by Prospect News' deadline.

The session overall was called "slow" again, but a couple of traders acknowledged that volume totals tallied by Trace data weren't that weak. Instead, it was the fact that the bulk of trading was conducted by bulge bracket banks that made it seem slow. Nevertheless, lack of action in the new issuance arena and also tepid news flow with equity markets left little changed contributed to lighter action, a New York-based trader said.

The Dow Jones industrial average slipped slightly, ending the session lower by 9 points, or 0.07%, at 12,707.08; but the S&P 500 stock index ended higher by 1.45 points, or 0.11%, at 1,325.54 and the Nasdaq Stock Market ended up by 11 points, or 0.4%, to 2,859.68.

Central European surges up

Central European's 3% convertibles due 2013 traded up to 92 on Thursday, which was higher by 12 or 13 points from previous levels and up by nearly 100% from about the mid 40s from two-plus months ago.

On Nov. 14, the CEDC 3% convertibles ended the day at 46.50 to 46.70.

Shares of the Polish vodka maker surged 82 cents, or 18%, to $5.48 in strong volume.

Central European's move was attributed to news that Russian Standard Group plans to raise its stake in the vodka maker and spirits distributor to 33% from 9.9%. The Russian company will also get control of the company's management in Russia.

The $310 million of 3% convertibles, which priced in 2008 via bookrunner J.P. Morgan Securities LLC and mature in March 2013, has an initial conversion price is $67.97, so they are still way out-of-the-money, but the backing of Russian Standard bodes well that the bonds will be repaid at the end of the term.

Electronic Arts adds on hedge

Electronic Arts' 0.75% convertibles due 2016 traded up to 97 versus an underlying share price of $19.95 during the session. Using a 50% delta, the paper looked like it was trading in line, but traders said at the end of the session the paper expanded on a dollar-neutral basis by about 0.5 point.

Shares of the Redwood City, Calif.-based video game maker jumped $1.12, or 6%, to $19.57 in very heavy volume.

The company reported better-than-expected earnings on revenue that was up for the third quarter but provided an outlook for its current quarter that wasn't very rosy.

For the quarter ended Dec. 31, Electronic Arts reported a loss of $205 million, or 62 cents a share, compared to the year-earlier loss of $322 million, or 97 cents a share. Revenue was up 17% to $1.65 billion.

For the current quarter, however, the company estimates profit of 10 cents to 20 cents a share, missing analysts' estimates of 29 cents a share. Revenue is expected to be $925 million to $975 million, which is lower than estimates of $983 million.

During a call with analysts, Electronic Arts said some of the outlook was the result of more sales of "Star Wars: The Old Republic" games in the December quarter than the company had originally planned. Also, the company decided to shift the release of an unnamed social game out of the March quarter to improve the game quality.

SandRidge bid

SandRidge's 8.5% convertible perpetual preferred was bid at 110 Thursday versus an underlying share price of $7.00, according to a market source.

Shares of the Oklahoma City-based oil and gas company slid 67 cents, or 9%, to $7.16 following some ratings downgrades that followed on the heels of the company's agreement to acquire closely held Dynamic Offshore Resources LLC, with its Gulf of Mexico oilfields, for $1.28 billion in cash and stock.

Tutor Pickering downgraded SandRidge to "hold" from "accumulate."

SandRidge will pay about $680 million in cash and about 74 million of its shares at $8.02 a piece for the company that is oriented toward offshore drilling.

The purchase represents a switch for SandRidge which has focused on onshore drilling.

The deal, expected to close in the second quarter, is the largest for Gulf of Mexico oil and gas fields since the Deepwater Horizon rig explosion on April 20, 2010. Eleven workers died in the accident that touched off the worst marine oil spill in U.S. history.

SandRidge is making the contrarian move due to higher production costs and high demand for U.S. onshore fields, and because offshore properties like Dynamic's have become cheap in the aftermath of the Deepwater tragedy.

Mentioned in this article:

Central European Distribution Corp. Nasdaq: CEDC

Electronic Arts Inc. NYSE: EA

MannKind Corp. Nasdaq: MNKD

Novagold Resources Inc. NYSE: NG

SandRidge Energy Inc. NYSE: SD

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