Profit taking trims recent gains but flow light ahead of holiday

By Ronda Fears

Nashville, Nov. 26 - Profit taking bit into the convertibles market's advances from a day before, but traders said the impact was mitigated by light volume ahead of the holiday.

Energy was a particularly weak area, as El Paso Corp. led the group southerly on a cut by Moody's Investors Service to junk. Traders said the market was not entirely shocked by the news, but it caused players who are restricted from holding high-yield securities to unwind their position.

"It's very quiet," said Rao Aisola, head of convertible research at Bear Stearns & Co.

"El Paso got downgraded and traded several points lower. Otherwise, everything else is trading sideways. People are positioning a little bit, but it's very quiet."

New deals that had been on fire were cooled by the downturn in stocks, particularly Advanced Micro Devices Inc., and Xcel Energy Inc. was somewhat impacted by the El Paso headlines.

El Paso dropped sharply on the Moody's downgrade, which the rating agency attributed to concerns about weak cash flows, high debt and reliance on asset sales to reduce debt.

"It's not like this was a big surprise, it's been anticipated to some degree. El Paso has been trading on the high yield desks for a while now," said a dealer.

"But when it actually happened, then those people who can't hold junk-rated paper had to unload it."

Moody's also noted that there could be potential calls on El Paso debt due to ratings triggers and other demands on liquidity that may result from the downgrade.

A conference call by El Paso was mostly unsuccessful at averting the sell-off, the dealer said, because of the limitations of some investors when it comes to junk-rated paper.

"I think probably there will be more high-yield buyers step up to El Paso now because it also opens the door wider to the high yield community of investors," the dealer said.

El Paso's 0% convertible due 2021 fell 4 points to 30.75 bid, 31.5 asked. The 9% mandatory dropped 4.5 points to 28.375 bid, 28.875 asked and the 4.75% convertible preferred lost 3.25 points to 19.25 bid, 19.5 asked.

El Paso shares closed down $2.05 to $8.63

"Through implementation of the balance sheet enhancement and strategic repositioning plans, El Paso's credit posture is significantly stronger today than it was at the beginning of the year," said CEO William Wise in a statement.

"We have issued approximately $2.5 billion of equity securities, we expect to complete $4 billion of asset sales this year, we have improved our corporate liquidity, and we recently announced a plan to exit the energy trading business in a manner that we believe will maximize value for all stakeholders.

"El Paso has the assets, cash flow, and liquidity necessary to continue to operate and grow its businesses. It is regrettable that Moody's has largely ignored this progress and has acted based upon the uncertainties associated with the Federal Energy Regulatory Commission process, rather than waiting for the actual results.

"We continue to believe that our position will be vindicated."

El Paso said the downgrade will require it to post additional cash or other collateral on some arrangements, but said its liquidity position is more than adequate to meet cash needs. In order to meet anticipated requirements, the company plans to draw $1.5 billion from its $3 billion revolving credit facility that expires in May.

The company said it has $4.2 billion in available liquidity through bank lines and cash.

The headlines pressured most of the energy group, also, as well as Xcel Energy Inc.'s new issue.

Xcel's 7.5% convertible due 2007 dropped 3 points to 115 bid, 116 asked while the stock ended down 45c to $10.55.

Mirant Inc., Calpine Corp. and Duke Energy Corp. were all lower.

TXU Corp., however, gained ground as the company raked in $516 million from a drive-by stock sale.

The new TXU 8.125% mandatory closed up 0.4 to 24.95 and the 8.75% mandatory added 0.14 point to close at 24.58..

TXU shares ended up 18c to $15.14.

Chubb Corp.'s drive-by $525 million mandatory priced at the tight end of terms with a 7% dividend and 22% initial conversion premium, and headed slightly north in the immediate aftermarket.

The new Chubb issue was quoted closing at 25.103 bid, 25.353 asked as the stock ended up 36c to $57.

"It was a good sized deal that seemed to be well-received, but they just squeezed all the juice out of it," said a convertible trader at a hedge fund in New York.

Guidance on the Chubb deal was tightened once before pricing after the close Monday, and final terms came in at the tight end of that talk.

The deal was originally talked to price at a yield of 7.25% to 7.75%, which was tightened to between 7.0% and 7.25%. The premium was first expected at 18% to 22%, then 20% to 22%.

Final terms put the deal at about 3.5% cheap, whereas original price talk put it about 4.25% cheap.

AMD's new 4.5% convertible due 2007 lost 1 point to 130.75 bid, 131.75 asked as the stock closed up 1c to $7.96.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.