Convertibles better bid; Hertz, other in-the-money names improve; IG names dominate volume

By Rebecca Melvin

New York, May 26 - The convertible bond market bounced back some Wednesday as equities rallied early, with buyers "across the board" for in-the-money names that had sold off heavily in the last week or so.

The "tone seems much better today," said a New York-based sellside trader, who put the market up 1 point of 2 points overall.

The equity markets reversed course late in the day, however, and went out lower on the day.

Technically in-the-money convertibles are those for which the underlying stock price is above the convertible's initial conversion price. But the term is used more loosely to refer to issues trading well above par with underlying shares that have run up since issue.

Among in-the-money issues in trade was Hertz Global Holdings Inc.

Also doing better were real estate investment trusts such as ProLogis, BRE Properties Inc. and Annaly Capital Management Inc.

Annaly substantially outperformed ProLogis, said a New York-based sellsider, who was focused on the names.

Still, investment-grade names, to which investors have flown for safety in the face of market uncertainty recently, were still dominating volume, market sources said. And one said that outside of the investment-grade space, trading was "pretty spotty" and "still depressed."

Transocean Ltd. and Medtronic Inc. were among investment-grade names that improved in trade Wednesday.

Another source said that there was skepticism as to whether "it was safe to go back in."

"Some, not all the trading was inter-dealer stuff," the trader said. "Some accounts tried to time the dealer and European dealer unloading. But not too many standard accounts have been selling during the sell-off. They just tried not to get too miserable with the mark downs."

Busted and balanced names were also better, the trader said. "Indirectly, the equities [rally] mean better credit tone, and bids were generally firmer," the trader said.

Europe bounces too

European markets had "a bit of a bounce" on Wednesday as equity markets recovered, a London-based trader said.

"I think it was more of a tightening up of positions than anything else," the trader said. "There was a bit of money being put to work, but not too much. It's been a pretty ugly week so far."

Better-quality names like Germany's KfW are seeing the bulk of what little interest is out there, while resources names were better bid on Wednesday.

"But I wouldn't get too excited," the trader said. "Those are more tactical than anything else."

Bids were seen coming from smaller investors.

"There's very little fresh money coming into the strategy, and what we are seeing is typically smaller retail pieces of money coming in," the trader said. "They're attracted by the yields. But traditional convertible bond investors have been far and few."

In the meantime, some convertible investors are bracing to end the month on a negative note.

"Anecdotally we feel that quite a few funds are going to turn negative as a result of the hit [in the past few weeks]," the trader said. "Valuations have definitely weakened. I wouldn't say hedges are necessarily working at the moment."

Hertz jumps in active trade

Hertz's 5.25% convertibles due 2014 traded last at 147.289, which was up 6 points outright compared to Tuesday levels.

Shares of the Park Ridge, N.J.-based car rental company jumped 50 cents, or 4.9%, to $10.79 on Wednesday.

Hertz and competitor Avis Budget Group Inc. are dueling over the potential acquisition of Dollar Thrifty Automotive Group. There are significant antitrust issues related to uniting Thrifty, the nation's fourth largest car rental group, with either of its two suitors.

A month ago when Hertz reported earnings it said it planned to buy Dollar Thrifty for $1.17 billion in cash and stock, and it also beat on earnings.

A trader said that Hertz was trading up mostly in line with other issues of its ilk, and there was no driver of Hertz in particular as a name of the day.

REITs improve

Annaly's 4% convertibles due 2015, which priced initially in February and did a $100 million add on in March, for a total $600 million issue, significantly "outperformed" ProLogis, with its convertibles up outright on a lower share price, a source said.

Shares of the New York-based REIT focused on investment securities settled lower by 17 cents, or 1%, at $16.23 on Wednesday.

The REITs were trading on players eyeing upcoming refinancing activity in the face of looming maturities, a New York-based convertibles sellside trading desk head said.

"Activity was strong. I think that crossover buyers continued to be involved in the marketplace, along with traditional convert arb players, People were deploying money after some slow days," the desk head said.

ProLogis' 2.25% convertible senior notes traded last at 93.875, which was down outright by 0.125 point but up on a dollar-neutral basis.

Shares of the Denver-based industrial property REIT traded down 44 cents, or 3.8%, to $11.04 in heavy volume on Wednesday.

There were a lot of round-lot trades in the ProLogis 2.25% convertibles. "It was definitely firmer on a dollar-neutral basis," the trader said, adding that "Annaly firmed up dramatically."

"On a dollar-neutral basis it was solid across the board," the sellsider said.

Transocean regains

Transocean was much better in trade on Wednesday, a sellsider said.

Transocean's 1.625% series A convertibles due 2037, which are putable at the end of 2010, tightened by 100 basis points, a trader said. The paper traded last at 98, which was up 0.75 point on the day, according to Trace data.

Transocean's 1.5% series C convertibles due 2037, which have lost the most of three sister issues since the well explosion, slipped into the 80s Monday, seen last at 89.125 down from 90.7, according to Trace data.

Transocean's 1.5% series B convertibles due 2037 traded at 93, which was up from 92.375 on Monday.

The Bs were also better by about 100 bps and the C paper was better by 50 bps, a New York-based trader said.

Shares of the Vernier, Switzerland-based company ended higher by $1.42, or 2.5%, at $58.58 on heavy selling on Wednesday.

"I heard it was very firm early on with some names 1 or 2 points better. In the afternoon it was slower and more stable," a New York-based sellside desk analyst said.

Another trader said that he didn't know if it came off commensurately with equities at the end of the day but that bids in general were firmer.

Mentioned in this article:

Annaly Capital Management Inc. NYSE: NLY

BRE Properties Inc. NYSE: BRE

Hertz Global Holdings Inc. NYSE: HTZ

Medtronic Inc. NYSE: MDT

ProLogis NYSE: PLD

Transocean Ltd. NYSE: RIG

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