Central European leaps on offer; China Medical holds; Smithfield steady on hedge after results

By Rebecca Melvin

New York, Dec. 8 - Central European Distribution Corp. was the name of the day in the convertible bond market on Thursday, with that paper leaping 24% in early trading to 84 on Russian Standard's proposal to take a further stake in the debt-laden Polish vodka maker. Part of the deal may involve helping CEDC restructure its debt.

The CEDC 3% convertibles were on the top of the volume charts in the convert space, and were said to have accounted for fully 10% of trading volume by midsession.

Elsewhere, China Medical Technologies Inc. was little changed at 49 and still trading actively in the aftermath of a research firm's allegations of investor fraud and mismanagement and the Beijing-based medical device maker's public response countering the criticisms.

A pair of earnings reports out on Thursday didn't spur as much trading in those names as would normally be the case given that the countdown to year end has already begun.

"It's hard to get people to do anything. There's no motivation at this point," a New York-based trader said about convert trading.

Nevertheless, Smithfield Foods Inc., which reported good revenue numbers, was trading and looked about unchanged on a hedged basis, a New York-based trading desk said.

The four convertible bonds of Ciena Corp. were more or less mum, however, after the networking gear maker reported a narrower loss on higher revenue, but offered weaker guidance.

The 1.875% convertible bonds of bankrupt MF Global Holdings Ltd. were seen at 31.5 bid, 33.5 offered as traders watched televised testimony of its former chief executive Jon S. Corzine before the House Agricultural Committee, which subpoenaed the recently departed MF leader last week.

Corzine, a former senator himself, said that he had no knowledge of the possible whereabouts of as much as $1.2 billion of missing funds that should have been in customer accounts.

He said he relied on ratings for taking positions on European sovereign debt and also blamed rating downgrades for creating the hole that eventually sunk the company.

Central European surges

Central European's 3% convertibles due 2013 surged 25% to a level of 84 on Thursday, having also traded lower at 81.25 many times and also at a higher rate of 85.

Previously the CEDC bonds had been trading at 67 bid, 68 offered, and that was up from the period in early November when the bonds sunk into the mid to upper 40s.

From about Nov. 9 to Nov. 16, the bonds traded at 46 and 47 before returning to the mid-50s and then most recently to the upper 60s.

On Thursday, $26 million in the 3% bonds that changed hands by shortly after midsession, which was considered a very large amount for that name.

At a price tag in the mid 80s, the bond has a 17.5% yield to maturity, a New York-based trader said.

"If you think they are going to get paid off, then they are pretty cheap," he said of the convertibles. "If you're worried about the word 'restructuring' in the press release, then maybe they're where they should be."

A second sellsider said the wording of the announcement was "kind of vague."

"They are still cheap if money good, and you could then argue that they should never have traded down to the 60s. The company does have a decent cash position, I think, and they have taken steps to enhance liquidity," he said.

Shares of the Polish vodka maker ran up 93 cents, or 18%, to $6.04. Last week they were at $4.75.

Spurring Thursday's surge was news that rival vodka producer Russian Standard Vodka has offered to buy another 19.9% stake in Central European. Russian Standard, on top of the 9.9% stake taken in the company that was revealed in November.

Central European said Thursday it has been in talks with Russian Standard and that it is evaluating the Russian entity's proposal. It noted that no agreement has been reached regarding valuation.

Russian Standard's proposal is to buy the additional shares in exchange for assets of Roust, its Russian spirits importer, and to help CEDC restructure its debt, possibly including a new credit line from Russian Standard.

CEDC has been in tough straits of late. Its last earnings report missed estimates and it lowered its outlook twice this year.

Smithfield unchanged on hedge

Smithfield's 4% convertibles due 2013 traded at 121.875 versus an underlying share price of $24.23 on Thursday, which was called unchanged on a hedged basis.

Shares of the Smithfield, Va.-based pork producer ended down by 92 cents, or 3.7%, at $24.01.

The company's fiscal second quarter net income was $120.7 million, or 74 cents per share, in the three months ended Oct. 30, compared to $143.7 million, or 86 cents per share, in the year earlier period.

One sellsider said that the earnings, although lower because of higher feed and other costs, were good enough, and the stock was lower, so he would have thought the bonds would strengthen.

With a 3.3% current yield and a 14% premium, they model 2% cheap, using a credit spread of 475 basis points over Libor and 40% volatility, he said.

"The bonds look pretty good, especially if you are looking for the stock to crack. Outright holders would probably be sellers here. Only one of the two customer buys today was on swap, though," he said.

Mentioned in this article:

Central European Distribution Corp. Nasdaq: CEDC

China Medical Technologies Inc. NYSE: CMED

Ciena Corp. Nasdaq: CIEN

MF Global Holdings Ltd. Pink Sheets: MFGLQ

Smithfield Foods Inc. NYSE: SFD

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