Transocean, Microsoft continue gains as equities rally; Playboy holds steady; Annaly up

By Kenneth Lim

Boston, July 13 - Transocean Ltd. remained heavily traded on Tuesday, improving with the rest of the market as earnings season began on a positive note.

The oil drilling contractor's convertibles continued to gain as crews reported progress in the Gulf of Mexico oil leak.

Microsoft Corp. rose with its stock on expectations of strong earnings for the software maker, catalyzed by an optimistic research report. Elsewhere in the technology sector, Micron Technology, Inc. also added slightly in line with its stock.

Playboy Enterprises, Inc. continued to gain following a bid to take the company private, which would trigger takeover protection for the convertibles.

Annaly Capital Management Inc. also improved on a dollar-neutral basis after the company said it would sell 60 million common shares.

The convertibles market in general ended the day in positive territory, a sellside trader said.

"With the market up, everything continues to trade better," the trader said. "Everything's better to buy."

The strong equity rally, which entered into its sixth day on Tuesday, has given investors greater confidence to trade.

"Buyers are less afraid with the stocks not coming down on their faces," the trader said.

The size of the convertible universe has also shrank in terms of supply, the trader noted.

"Last week Seagate [Technology] called their notes [...] this morning Qwest [Communications International Inc.] said they're tendering for about $1 billion, so a lot of issuance is leaving the market," the trader said, "which is leaving everything better to buy. That's like $2 billion of convertible paper tendered or called in the last two weeks. And there's no issuance."

The higher stock prices have not been enough to attract issuers back to the convertible market, the trader said.

"I think issuers feel the straight-debt markets and stock markets are more friendly than the convertible market," the trader said.

Transocean inches higher

Transocean's 1.5% series A convertibles due 2037 gained a quarter point to trade at 88.5, while its 1.5% series C convertibles due 2037 also added a quarter point outright at 93.125.

The Vernier, Switzerland-registered offshore drilling contractor saw its stock dip 3.83% or $2.07 to close at $51.99.

The convertibles benefited outright from news that crews working to contain the leaking well in the Gulf would begin to test a new well cap, raising hopes that the leak could finally be under control.

"Transocean alone is like a quarter of what people are trading nowadays," one sellsider quipped. "They do well if the leak is going well."

But part of the interest in Transocean on Tuesday also came from hedge funds, which saw an opportunity to short the stock, the sellsider said.

"There's definitely some shorting going on," the sellsider said. "It's a very volatile name right now."

A new six-month moratorium on drilling disappointed investors who were hoping for the ban to be relaxed after the previous one failed to appease the courts, the sellsider added.

The market is also concerned about the company's exposure to any potential liabilities from the Gulf leak as well as the current White House's aggressive stance toward the industry.

"There's a lot of things that could go wrong for Transocean," the sellsider added.

Microsoft up with report

Microsoft's zero-coupon convertible due 2013 gained a touch to trade at 101.5 versus a common stock price of $25.

The Redmon, Wash.-based software giant saw its common stock close at $25.12 per share, up by 1.17% or $0.29.

"The stock's been doing pretty well," the sellsider said. "It's a popular name. Strong, stable credit."

The stock has benefited from expectations that the company will report a strong set of results for its fiscal fourth quarter, the sellsider said.

Janney Montgomery Scott equity analyst Sasa Zorovic on Monday raised his recommendation on the stock to "buy" from "neutral," citing expectations of strong sales in Microsoft's new Windows Vista and Office programs.

"Longer-term concerns (particularly in mobile, online) keep us from taking a more aggressive stance, but getting to $30 per share does not require 'heroic assumptions' in our view," the analyst wrote in the note.

Most tech names were up in sympathy with the broader market. Micron's 1.875% convertibles due 2014 added 0.5 point outright to trade at 90.75 versus a common stock price of $8.70 per share.

Common shares of the Boise, Idaho-based memory chip maker rose 2.11%, or $0.18, to close at $8.73 apiece on Tuesday.

Playboy holds firm

Playboy's 3% convertible due 2025 held at about 97 on Tuesday, unchanged from Monday but still about 4 points better than before a takeover bid was announced.

Common shares of Chicago-based Playboy, a publishing company, slipped 3.24%, or $0.18, to close at $5.37 per share on Tuesday.

Playboy founder Hugh Hefner on Monday offered $5.50 per common share to take the company private. The bid was a 40% premium over Friday's close.

Rival publisher FriendFinder Networks Inc., which owns the Penthouse adult magazine, said Monday it would submit a competing bid.

Holders of the Playboy convertibles will get to put their notes back to the company at par if the company is taken private, the sellsider said, which has explained the convertibles' rally. But the opportunity will not be widely enjoyed.

"It was a small deal," the sellsider said. "Not many people had it."

Annaly to sell stock

Annaly's 4% convertible due 2015 gained a point to trade at 107.125 versus a common stock price of $18.30 per share on Tuesday as the company prepared to raise equity capital.

The common stock closed at $18.26 apiece, up by 0.44% or $0.08.

Annaly is a New York-based real estate investment company.

"Annaly traded a little in," a trader said. "They just announced an offering."

The company said on Tuesday that it would sell 60 million shares of common stock through a public offering, with an over-allotment option for an additional 9 million shares.

Proceeds will be used to buy mortgage-backed securities for its investment portfolio and for general corporate purposes.

Credit Suisse Securities is the lead bookrunner for the offering.

Mentioned in this article:

Transocean Ltd. NYSE: RIG

Microsoft Corp. Nasdaq: MSFT

Micron Technology, Inc. Nasdaq: MU

Playboy Enterprises, Inc. NYSE: PLA

Annaly Capital Management Inc. NYSE: NLY

Seagate Technology Nasdaq: STX

Qwest Communications International Inc. NYSE: Q

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