Convertibles winding down, but Alliant Techsystems trades actively; Terex dips; Quantum gains

By Rebecca Melvin

New York, July 1 - The convertible bond market was said to be winding down Wednesday even though there's another trading day left ahead of the upcoming July 4 holiday weekend.

Most trades were done earlier in the session, and action was described as sporadic. There were a few notable trades, however.

Alliant Techsystems Inc.'s longer dated 3% convertibles due 2024 remained active and extended Tuesday's move upward, as its shares, which have been moving down as of late, were steady.

Independent research firm CreditSights named Alliant as one of its "picks" among high-yield names, citing still strong prospects in the aerospace and defense sector and attractive risk compensation.

Terex Corp. convertibles slipped below par to trade at 98.5 versus a share price of $12.06, compared to 100 versus a share price of $12.40 on Monday and 108.5 versus a share price of $14.40 on June 11.

Terex is a Westport, Conn.-based maker of industrial equipment.

With very little left outstanding of the issue, Quantum Corp.'s 4.375% convertibles due July 2010 have strengthened recently as the San Jose, Calif., provider of storage, backup, recovery and archive services managed through refinancing.

June returns

For June, convertibles were seen to have returned between 1% to 2%, according to market sources.

One sellside source said that convertibles in general returned 2%, with a year-to-date return of 21%; while an outright buysider said he thought outright returns were more like 1%, which compared to his fund's roughly flat performance for June and the fund's 17% return for the year to date.

Many hedge fund returns are not expected to be known until mid-July, according to one New York-based hedge fund.

In a research note, Barclays Capital noted that convertibles continued to outperform the S&P 500 for June.

Barclays said that the convertibles market posted a healthy 1.95% return, driven primarily by credit, with support from positive equity returns.

Barclays' high-yield index posted a positive 2.86% return for June, and its investment-grade index was plus 2.43%. Meanwhile, the S&P 500 was plus 0.20%; the Nasdaq was plus 3.47%, and the Russell was plus 1.48%.

Year to date, the Barclays convertibles composite index has returned 21.6%, second only to the Barclays high-yield index, which returned 30.4%, and has outperformed the S&P 500 index, which is up just 3.2%.

Most recently, high-yield credit has seen spreads push out on the back of weaker equity markets and concerns about the strength of the economic outlook.

On Wednesday, an ADP Employer Services report showed that the United States lost a more-than-expected 473,000 jobs in June, which was down from May and the lowest since October, but still not viewed as supportive of economic recovery.

Equities gained despite the report. On Thursday, the government's monthly nonfarm payrolls report will be released.

Alliant Techsystems in trade

Alliant's 3% convertibles due 2024 were in trade again Wednesday after being active Tuesday, last recorded on NASD Trace at 117, which was up 1.375 points from Tuesday.

Alliant's 2.75% convertibles due 2024, which are callable and putable in August, were at 107, which was up 0.897 point on the day, but a touch weaker compared to a recent trade versus its share price.

Shares of the Minneapolis-based defense company ended fractionally higher at $82.91 Wednesday, but they are down from a recent high of more than $90 in June.

Since closing at $90.67 on June 12, the equity has slipped pretty consistently. But a continuation of that trend will work quite nicely for all of their convertibles, a sellsider said recently.

In the aerospace and defense sector, Alliant Techsystems was favored by CreditSights in a research note Wednesday as a high-yield credit liked for its attractive risk compensation.

CreditSights said that Alliant stands to continue to benefit from a Department of Defense budget that remains robust. While it may not be the significant year-over-year growth in defense spending of the recent past, president Barack Obama's $550 billion base budget request for 2010 puts Alliant in a good position to benefit from spending on defense programs ranging from propulsion capabilities to ammunition, as well as spending on NASA programs, CreditSights said.

The company reported $291 million in short-term debt as of March 31, which included the $280 million in 2.75% convertible notes that may be put in August.

"The company maintains solid liquidity, however, with $337 million in cash and $346 million available under its revolver and it has the flexibility to refinance the converts in the capital markets or pay them down in cash," CreditSights said.

"Barring any aggressive M&A activity, we expect the company to maintain a solid credit risk profile," CreditSights wrote.

Quantum looks stronger

Quantum's 4.375% convertibles due 2010 last traded at 95, but weren't seen in trade Wednesday, according to a West Coast-based convertibles player.

There are only $22.1 million of the 4.375% convertibles outstanding, after a private transaction with a noteholder to purchase $50.7 million of the notes on June 26, according to a regulatory filing.

The company also reported that it entered into a term loan agreement with EMC International Co. for up to $49.6 million to fund refinancing.

Borrowings under the second EMC loan agreement have similar terms to borrowings under a first EMC loan agreement, including quarterly interest payments at a 12% fixed interest rate.

The second EMC loan agreement provides for two tranches of borrowings, with the first tranche having a scheduled maturity date of Sept. 30, 2014 and the second tranche having a scheduled maturity date of Dec. 31, 2011.

The first tranche allows borrowings of up to $24.6 million, and the second tranche allows borrowings of up to $25.0 million. Borrowings under the two tranches must be made concurrent with each other.

"I like the company, and the transaction made sense" and since the last tender at 85 earlier this year, the convertibles have gained, the convertibles player said.

Mentioned in this article

Alliant Techsystems Inc. NYSE: ATK

Quantum Corp. NYSE: QTM

Terex Corp. NYSE: TEX

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