Annaly gains after Fed stands pat on bond purchases; Tower drops; Volcano extends gains

By Rebecca Melvin

New York, Sept. 18 - The convertible bond market responded similarly to the broader markets, which jumped after the Federal Reserve's surprise move to stand pat on its $85 billion a month in asset purchases for the time being.

The decision was contrary to the expectations of many that the Fed would begin cutting back the program this month. Ahead of the latest policy announcement, the convertible market was very quiet.

"Stocks went up huge. Anything rate related was better," a New York-based trader said at the market close.

The trader cited Annaly Capital Management Inc.'s 5% convertibles, which traded up to 102 from a recent previous level of 101.25 bid, 101.5 offered.

Elsewhere, Tower Group International Ltd.'s 5% convertibles due 2014 dropped sharply after a ratings downgrade followed on the heels of an update by the property/casualty insurer on its delayed second-quarter results.

The Tower results are expected to be released during the week of Oct. 7. But because the update didn't affirm previous guidance, FBR surmised that a reserve charge in question and earnings per share will be worse than expected.

But Volcano Corp.'s 1.75% convertibles due 2017 extended outright and dollar-neutral, or hedged, gains for a second straight day after shares were upgraded by BMO Capital Markets and the price target increased.

Ahead of the market close, the U.S. primary market was quiet. But after the close, BPZ Resources Inc. launched a $110 million offering of four-year convertible senior notes, which will be priced at 90, and with an 8% to 8.5% coupon and a 75% initial conversion premium, according to market sources.

Internationally, Netherlands-based fertilizer producer OCI NV launched an offering of €300 million of five-year senior convertible bonds that was talked yield 3.375% to 3.875% with an initial conversion premium of 27.5% to 32.5%.

The Federal Open Market Committee said it will stand pat on its accommodative policies, awaiting further evidence of sustainability of economic growth before adjusting its pace.

It will also keep its benchmark, short-term rate at near zero. These policies are expected to help maintain downward pressure on longer-term interest rates, support mortgage markets and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery, the Fed said.

The broader markets reacted dramatically to the news, with equities spiking higher after early weakness, and bond yields heading lower.

The S&P 500 stock index jumped 20.76 points, or 1.2%, to a record 1,725.52; the Dow Jones industrial average gained 147.21 points, or 0.95%, to 15,676.94; and the Nasdaq stock market added 37.94 points, or 1%, to 3,783.64.

Before the announcement the Dow had been down about 40 points.

The announcement came following a two-day policy-setting meeting of the FOMC and settles a question - at least for the time being - that has been a central market focus for months.

Tower Group drops sharply

Tower Group's 5% convertibles due 2014 were offered at 95 around midsession with the underlying shares down $3.70, or 27%, to $10.16.

Shares tanked on the downgrade that followed on the heels of the company's update about the timing of its delayed second-quarter results. Shares ended down $3.88, or 28%, to $9.98.

In response to the press release, FBR analysts Randy Binner and Jason Oetting published a note, downgrading shares to "market perform" from "outperform," highlighting the uncertainty surrounding further delay and concluding that because the company didn't affirm its previous earnings per share guidance, there is the probability that the reserve charge could be higher than initially estimated.

Previous EPS guidance for the second quarter was for a loss of 85 cents per share to a 15 cent per share gain. The reserve charge had been estimated at $60 million to $110 million pretax.

"Net reserves are about $1.5 billion, so a charge that could be greater than 7% of reserves, combined with a charge of about 5% of reserves in 2012, puts the company in a weaker capital position," Binner and Oetting wrote in their note.

The analysts said that when they are able to see second-quarter results, they will reevaluate their call.

FBR lowered its price target to $17.00 from $22.00, based on estimated second-quarter book value of $17.52.

The Hamilton, Bermuda-based insurance company first said it was expecting to report "adverse development" of $60 million to $110 million pre-tax in early August. At that time, the company said at least 60% of that was attributable to losses at U.S.-taxed businesses. However, it said it would see any tax benefit related to that in the second quarter.

Volcano adds again on hedge

Volcano's 1.75% convertibles due 2017 were quoted in trade at 102.75 bid, 103.25 offered versus a share price of $23.50 on Wednesday, which compared to similar pricing versus an underlying share price of $24.00 at the close Tuesday.

That was up another 0.5 point on a dollar-neutral basis.

BMO raised its rating on the shares of the San Diego-based medical device company to "outperform" from "market perform" and increased the price target to $28.00 from $23.00, citing increased understanding and acceptance of its foreign-exchange-related issues and the benefits of its acquisition last month of Pioneer Plus.

BPZ Resources on tap

The Houston-based oil and natural gas exploration company launched a registered offering of $110 million of four-year convertibles via bookrunner Raymond James & Associates Inc. that was seen pricing early Thursday.

The notes are pricing at 90% of par. There is a $16.5 million greenshoe.

The notes are non-callable and have dividend and takeover protection.

Proceeds will be used to repurchase some of the company's outstanding 6.5% convertibles due 2015 and for general corporate purposes.

Mentioned in this article:

Annaly Capital Management Inc. NYSE: NLY

BPZ Resources Inc. NYSE: BPZ

OCI NV Amsterdam: OCI

Tower Group International Ltd. Nasdaq: TWGP

Volcano Corp. Nasdaq: VOLC

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