Convertibles quiet; Petrominerales jumps on takeout news; Tower paper comes off the bottom

By Rebecca Melvin

New York, Sept. 30 - Convertible bonds were little changed on a dollar-neutral, or hedged, basis in quiet trade on Monday, which marked the end of the month and the quarter.

Petrominerales Ltd. was a bright spot for the session, with the 3.25% convertibles skyrocketing about 15 points to 98 bid, 99 offered and the 2.625% convertibles also adding a point or more to just under par after word that the Canadian oil and gas company inked a deal to be taken over by Colombia's Pacific Rubiales Energy Corp.

The deal for C$11.00 per share, or C$1.6 billion including debt, represented a premium of about 50% to the previous closing share price of Petrominerales on the Toronto Stock Exchange.

Elsewhere, Tower Group International Ltd.'s convertibles remained in focus and traded off their lows after a tumble Friday on a report that made investors guess that the ailing Bermuda-based reinsurance company may be forced into a reorganization in the face of a reserve crisis.

The Tower bonds ended Monday in the mid 80s after changing hands early in the session at 82 and 83 and after tumbling from 95 on Friday, a New York-based trader said.

There was not a lot else going on, traders said. The Qihoo 360 Technology Co. Ltd. convertible was quoted at 110.625 bid, 111.25 offered versus a share price of $83.71 in early action. Qihoo shares ended the day a little less than that at $83.20, which was down 0.9%.

It was very quiet, sources said, especially for the end of September, a New York-based trader said, suggesting that the mute tone was due to tight supply and demand as the convertibles market continues to see relatively tepid new issuance amid an equal or greater amount of redemptions, calls and maturities.

New issuance

"There had been a decent pace of issuance for much of the year and even for part of September, which was enough to supplement paper coming out, but that pace has slowed, and I think the line has been crossed," the trader said.

"I think people feel like: if they sell, what are they going to replace it with," he added.

The market dynamic is understandable given "the huge technical" that is in market place, but nevertheless, "it makes people a little nervous when it's this slow," he said.

For September there was about $2.6 billion in new issuance from 11 deals, which on an annualized basis amounts to $30.7 billion, a New York-based syndicate source said.

That amount was "in line to slightly higher than the 2013 run rate of $27.4 billion year to date from 86 financings," he said.

Transaction flows are from multiple sectors.

Another dampening effect on Monday's action was the weaker broader markets. Equities sank amid worries about a potential U.S. government shutdown. The stalemate among lawmakers continued Monday with the U.S. Senate rejecting a House plan that would have authorized 10 weeks of spending but only if much of the Affordable Health Act is delayed for a year. The measure would delay a requirement for people to purchase coverage of face a penalty and postpone the creation of marketplaces that are due to begin this week.

Worries about the U.S. federal budget and more importantly, a debt ceiling decision that is coming up, have weighed on the markets in recent sessions.

The S&P 500 stock index lost another 10.2 points, or 0.6%, to 1,681.55, which was on top of a 6.92 point slip on Friday; the Dow Jones industrial average fell 128.57 points, or 0.8%, to 15,129.67, which was on top of a 70 point decline on Friday; and the Nasdaq stock market lost 10 points, or 0.3%, to 3,771.48.

This past month markets were surprised by the Federal Reserve's decision to maintain its accommodative policies at full steam rather than begin a taper mode that has been in discussion since May.

This "decidedly dovish stance should keep short-term equity volatility low, according to convertibles research published by Barclays' London-based analysts Angus Allison, Luke Olsen and Kim Berg.

"At the same time, investors appear to be much more uncertain about the Fed's reaction function, which should provide a floor for longer-dated volatility. Note that after a brief period of indigestion, rightly or wrongly, equity markets appear to have concluded that the taper is not a major source of concern, and realized volatility has been remarkably low. However, the possibility of another fiscal stand-off (a key reason cited by chairman Bernanke for not tapering) over the next few weeks is a potential cause for concern," the Barclays analysts wrote in their weekly report regarding international convertibles and published Monday.

Petrominerales skyrockets

Petrominerales' 3.25% convertibles due 2017 jumped up to 98 bid, 99 offered from 83 on Friday.

Petrominerales' 2.625% convertibles 2016, which had a put extended to early 2014, traded up to 99.16 bid, 99.5 offered, which was up from 97.5 bid, 98 offered previously.

Petrominerales shares surged C$3.96, or 51%, to C$11.70.

Convertible investors were rewarded handsomely with this deal, a trader said.

Given that the longer-dated bonds traded all the way to near par, one trader thought that the investor base would turn over to risk arb hands from the outright community.

In March when the company extended the put, "people were a tad nervous," the trader said, noting that the paper has a February put and yet had a more than 10% yield to maturity.

And while some type of deal was expected, this particular deal was not.

"But they got the deal, and it seems to be fairly priced and helps out a lot," a trader said.

Ebullience from the deal didn't seem to cause any spillover into the mining space on Monday, which was notably quiet.

Petrominerales announced over the weekend that it entered into an agreement with Colombia's Pacific Rubiales under which the Colombian company will acquire all the outstanding shares of Petrominerales for C$11.00 per share and one share of a new Brazil-focused exploration and production company. Based in Calgary, Alta., the ExploreCo will be capitalized with C$100 million in cash and will hold all of Petrominerales' Brazil assets. Concurrently, Petrominerales has inked a deal with its partner in Brazil to acquire its 25% interest in some of Petrominerales' Brazilian properties.

The total cash transaction value is about C$1.6 billion, including debt, but excluding ExploreCo's asset value and C$100 million in cash. The deal is expected to close in the fourth quarter.

Petrominerales' financial adviser is TD Securities Inc.

Tower off its lows

Bottom fishers stepped into Tower Group's 5% convertible notes on Monday and took the notes due September 2014 up a few points from their lows at 82 to 83. The paper ended at about 85, a trader said.

"It's trading in the mid 80s after bidding in the low 80s," a trader said.

Tower shares also regrouped after early weakness to end 9 cents, or 1.3%, higher at $7.00.

The bonds tumbled about 10 points on Friday with the underlying shares falling 15%.

Late Thursday a report by the Insurance Insider said that the company has hired three banks to seek solutions for its reserving crisis.

Mentioned in this article:

Petrominerales Ltd. Toronto: PMG

Qihoo 360 Technology Co. Ltd. NYSE: QIHU

Tower Group International Ltd. Nasdaq: TWGP

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