Intel, Xilinx active, weaker as broader market reacts to FOMC minutes; Theravance better

By Rebecca Melvin

New York, April 3 - Investment-grade names continued to dominate what has been persistently light convertible bond trade of late as a lack of supply and a bout of selling in the broader markets weighed on the space on Tuesday.

Intel Inc. was active, as was Xilinx Inc., and both were weaker on a dollar-neutral, or hedged, basis as weaker underlying shares closed near their lows of the session.

"There's been a good amount of give and take, but today I thought we gave back a good chunk," a New York-based convertibles trader said, noting that he thought Monday's action saw both in-the-money and credit names expand some.

"On Tuesday, valuation, in-the-money names were a touch weaker and credit names held, but not enough to make a difference," the trader said.

Light volume has persisted in the convertible market for several weeks, but this week seems to be quieter still, perhaps due to the fact that it's a holiday-shortened week in which markets will be closed Friday in observance of Good Friday.

"Stuff didn't feel great," a second New York-based convertibles trader said Tuesday. "The FOMC comments put a weight on the broader market."

The minutes of the Federal Open Market Committee were released Tuesday afternoon as usual three weeks following the meeting, which was March 13.

The minutes revealed that the central bankers debated the economic outlook, but agreed the U.S. economic recovery had strengthened moderately, and they were not likely to embark on additional quantitative easing, or QE3, any time soon.

The Fed officials also looked prepared to keep short-term interest rates at very low levels until late 2014, as they had previously indicated.

"I was surprised by the reaction to the FOMC. There is so much liquidity already sloshing around in the system," a trader said, referring to the leg lower the broader markets took.

Nevertheless perhaps the larger tone of the convertibles market is "everyone is just kind of quiet. People are sitting on their hands, with not much to do. Bonds are leaving the market and there's none coming in. So people are not going after paper; they are waiting for it to come to them," a trader said.

There were some positive notes in the space, however, with a few health care names in particular to the upside.

Theravance Inc.'s convertibles "seem to have improved on hedge" since British drugmaker GlaxoSmithKline plc agreed to boost its stake in the San Francisco-based biopharma to about 26.8% from its previous investment of 18.3%. It has agreed to buy 10 million newly issued shares of common stock at $21.29, which was a 9% premium over the previous closing stock price.

Volcano Corp., a San Diego-based maker of vascular and heart disease diagnostic and medical devices, was another name that improved, contrary to the general trend Tuesday.

Arb players appeared to be taking a look at the Volcano bonds, which had been owned heavily outright. But bond supply there is an issue, one trader said.

Coal names continue to be reactive. On Tuesday, Alpha Natural Resources Inc.'s 2.375% convertibles due 2015 were a touch weaker on swap by about 0.125 point, a New York-based trader said.

Last week, coal names including Alpha Natural and others traded down after the U.S. Environmental Protection Agency released new proposed carbon dioxide rules.

Under the new rules, no new coal plants could be developed without carbon-capture technology - something industry critics have deemed cost ineffective.

Meanwhile, the convertibles of Molson Coors Brewing Co. traded mostly in line after the Denver-based beer and beverage maker said it signed a definitive agreement to buy StarBev, an Eastern European brewer for $3.5 billion, financing the deal in part with a $500 million issue of convertible bonds to be sold directly to the seller.

Theravance gains

The Theravance 3% convertibles due 2015 traded at about 113 on Tuesday, which was up from about 110.

Theravance shares were active and higher by about 13 cents, or 0.6%, to $23.42, after jumping 19% on Monday.

"The Theravance bonds are interesting, and they seem to have gotten better on hedge since Glaxo's additional investment," a New York-based convertibles strategist said.

The bonds have lifetime provisional call protection around $33 per share, and the shares are around $24, the strategist said.

"They are getting close to being an implied credit of Glaxo, so the bond floor is more secure," he said.

"I liked them better when they were below 110, where the risk-reward was better. With the bonds around 113 now, it's about a 50-50 shot," he said.

Glaxo has been working with Theravance to develop Relovair, an inhaled therapy combining two ingredients as a potential successor to its top selling Advair drug.

Volcano improves

Volcano's 2.875% convertibles due 2015 traded Tuesday at 121.5 with the stock at $28.85.

Volcano shares added 15 cents, or 0.5%, to $28.85.

The bonds trade on about a 65% to 70% delta and have expanded about 2 points in the last two weeks.

The improvement was attributed to an outright buyer in the name.

"They are not especially cheap. But they will act pretty well on the downside," a convertibles strategist said.

But this company is a takeout candidate, so arb players should not be too heavy on the upside, he said.

Mentioned in this article:

Alpha Natural Resources Inc. NYSE: ANR

Intel Inc. Nasdaq: INTC

Molson Coors Brewing Co. NYSE: TAP

Theravance Inc. Nasdaq: THRX

Volcano Corp. Nasdaq: VOLC

Xilinx Inc. Nasdaq: XLNX

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