Carnival crushed on call; AMD mixed, quiet; convertibles generally better with equity rally

By Rebecca Melvin

New York, Sept. 24 - Carnival Corp.'s convertibles got crushed on Friday, hurting convert players, after the Miami-based cruise company announced a call of its 2% convertibles due 2021 that were trading well over par and over parity.

The call was unexpected, a New York-based sellside analyst said.

Advanced Micro Devices Inc. was mixed but mostly quiet as AMD shares rose amid chatter of a potential takeout and despite the Sunnyvale, Calif.-based chip maker's warning late Thursday that third-quarter revenue will be less than expected.

Vertex Pharmaceuticals Inc.'s new 3.35% convertibles extended gains from their debut Thursday, having gained about 1.75 points dollar-neutral from issue, according to a New York-based sellside analyst, who didn't thank the new paper was that cheap.

Verenium Corp.'s 5.5% convertibles were another big winner for the week, with the paper up nearly 10 points outright to 88.5 since Monday, as its underlying shares also climbed.

Overall, the convertible market was better on Friday than it had been earlier in the week, buoyed by a rally in equities. Convertible valuations had come under some pressure given new issuance had caused some softening around the margins of the existing universe.

There was a sense that investors were looking to free up some capital for new paper, sources said.

But one market analyst said, "To be honest, I didn't see that much weakness." Friday was definitely better, but there wasn't that much action, he added.

"It's still a Friday, and it feels pretty quiet," the sellsider said.

Equities rose following reports that were viewed positively on new home sales and durable goods orders. In addition, "you had David Temper (sic) saying he likes stocks no matter what, so everyone is feeling good," the sellsider said.

The sellsider was referring to hedge fund manager David Tepper of Appaloosa Management, who made comments early Friday on CNBC that stocks were likely to be on the rise if the economy gets better and even if it doesn't because then the Fed will embark on easing, which will not be good for bonds.

New home sales for August were unchanged from July at an annualized rate of 288,000 units, which is in line with the rate of 291,000 units that had been expected.

August durable goods orders fell 1.3% for the worst monthly drop in a year, but the drop was less severe than the 1.4% decline that had been expected. Excluding transportation, orders were up 2.0%, compared with expectations for a climb of only 0.6%.

"Definitely economic data for the last month has been better than expected, and we're having the best September in I don't know how long," a sellsider said.

Carnival crushed

Carnival's 2% convertibles due 2021 dropped to 101.5 on Friday in heavy volume, compared to a previous level of 108.

Shares of the Miami-based cruise company were actually better by $1.04, or 2.8%, to $37.79 in decent volume, buoyed by strength in the general market.

The downdraft in the convertibles resulted after the company issued a notice of redemption to holders of the 2% convertible senior debentures.

The company announced that all of the outstanding notes will be redeemed by the company on Oct. 25 for cash at a price equal to the redemption date.

It was generally unexpected since the company hadn't done anything for so long, one sellsider said.

It was painful, he said, and more painful than a similar situation with Alliant Techsystems two weeks ago.

The Carnival notes were trading at 11 points over parity, so most investors are likely to convert since even though they'll lose, the amount lost will be less than that, he said.

"They're calling them because parity is 96," a New York-based sellside trader said.

He compared it the to the Alliant Techsystems redemption two weeks ago. "What's similar is that the companies aren't permitting dilutions; they don't want to issue stock," the sellsider said.

On Sept. 13, Alliant announced it would redeem all $279,763,000 of its outstanding 2.75% convertibles due 2024.

The Alliant notes will be redeemed for cash at par plus any accrued interest up to, but not including, the redemption date. The conversion rate of the notes as of Monday is 12.5843 shares of Alliant common stock for each $1,000 principal amount of notes.

Alliant is a Minneapolis-based aerospace and defense company.

There aren't too many other convertible issues outstanding that aren't called and could fall into the same category, he said.

Advanced Micro mixed, muted

Advanced Micro's 5.75% convertibles due 2012 traded at 102.125 on Friday, which was down 1.375 points on the day, according to Trace data.

Advanced Micro's 6% convertibles due 2015 traded at 98.5, which was up 0.25 point.

But shares of the Sunnyvale, Calif.-based chip maker climbed.

"Sometimes we don't follow through in our world," a sellsider said regarding the convert action, which didn't mirror the equities.

There were rumors following comments Oracle chief executive Larry Ellison made about possibly buying up other companies, a sellsider said. "People are speculating whether it could be AMD."

After the close of markets Thursday, AMD said its revenue should fall sequentially by about 1% to 4% from the second quarter's $1.65 billion.

That translates to a range of about $1.58 billion to $1.63 billion, compared to $1.71 billion on average that analysts expected.

Weaker-than-expected demand in consumer laptops in Western Europe and North America were blamed for the expected shortfall.

AMD is set to report full results on Oct. 14.

Mentioned in this article:

Advanced Micro Devices Inc. NYSE: AMD

Carnival Corp. NYSE: CCL

Verenium Corp. Nasdaq: VRNM

Vertex Pharmaceuticals Inc. Nasdaq: VRTX

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