Intel flat to lower outright, up on hedge; Knight firm; Stillwater, WellPoint doing well

By Rebecca Melvin

New York, Oct. 17 - About half of the trading volume in convertible bonds by midsession Wednesday was concentrated in a handful of names, including Intel Corp., Gilead Sciences Inc. and EMC Corp. Outside of those dominant, investment-grade names, there were also a few names trading on the plethora of earning news as well as a few recent new issues in trade, but otherwise the market was quiet, market players said.

Intel's sister convertibles were both actively traded and flat to lower on an outright basis, but better on a dollar-neutral, or hedged, basis, after the California chip giant reported results that beat lowered guidance and guided expectations for fourth-quarter revenue and margins lower.

Knight Capital Group Inc.'s convertibles were firm to little changed, trading on the offer side of Tuesday's tight market, after the Jersey City, N.J.-based electronic trading firm swung to a third-quarter net loss due to the Aug. 1 trading glitch that caused an avalanche of trades that cost the company $457.6 million and forced it to take on additional investors to avert bankruptcy.

Among recent new issues, Stillwater Mining Co.'s $396.75 million of convertibles - after the greenhoe was exercised - was up slightly at 106.125 bid, 106.25 offered versus an underlying share price of $10.80 and "continues to trade well," a New York-based trader said.

WellPoint Inc., which priced $1.5 billion, including the greenshoe, early this month, "is settling in" and stood at 104.4 bid, 104.625 offered versus an underlying share price of $61.90 on Wednesday, sources said.

Overall, flows were balanced and yield paper was performing "very well," a New York-based trader said of Wednesday's secondary market.

In the primary arena, ZaZa Energy Corp. priced $40 million of five-year convertible senior notes to yield 9% with an initial conversion premium of 32%.

Also in the primary, Walter Investment Management Corp. was expected to price $265 million of new convertible subordinated notes after the market close.

Intel adds on hedge

Intel's 3.25% convertibles due 2039 were down 0.6% outright to 121.5 versus an underlying share price of $21.72, but they added 1.3 points on a dollar-neutral basis, using a 70% delta, a New York-based analyst said.

The Intel 3.25% convertibles have a higher delta and are the more equity sensitive of the two Intel convertible issues, so the 3.25% was down more than the other ones on an outright basis, he said.

The Intel 2.95% convertibles due 2035 were flat on the day at 108.625 versus an underlying share price of $21.72, but they were up a point on a dollar-neutral basis, using a 40% delta, the analyst said.

Intel shares were down, settling at $21.79, which was off 56 cents, or 2.5%, on the day in heavy volume.

The 3.25% convertibles, which are more of a hedged issue, were more active, but both convertibles traded pretty actively.

As for why the convertibles improved, or expanded, on a hedged basis, the analyst said, "The credit remains strong even if the stock moves sharply."

Intel said its third-quarter net income was $2.97 billion, or 58 cents per share, down from $3.47 billion, or 65 cents per share, in the year-earlier period.

Excluding one-time items, Intel earned 60 cents per share, which beat the average estimate of analysts, which was 50 cents per share.

Revenue fell 5.5% to $13.5 billion, which was better than the $13.22 billion that analysts were expecting and in line with the midpoint of Intel's forecast.

Intel said it expects about $13.6 billion in fourth-quarter revenue, which is below the analyst forecast of $13.7 billion. It also said it expects gross margin of 57%, which is well below the average 64% of the last three years.

The reduction is attributed to lower utilization at its factories and a shift toward a new processor technology, which will idle some factories for retooling.

Knight Capital firm

The Knight Capital 3.5% convertibles due 2015, of which $375 million were priced in March 2010, traded at 91.5 to 91.75, which was the offer side of Tuesday's market, a New York-based trader said.

He said Tuesday's market was very tight and there was "not much movement at all."

The bonds trade outright, and they have recovered from a drop to as low as 75 after the Aug. 1 trading glitch that sparked an avalanche of orders in about a 45-minute period and almost pushed the company into bankruptcy.

Knight Capital shares on Wednesday were $2.64, up 6 cents, or 2.3%, on the day.

The company reported a third-quarter loss of $389.9 million, or $6.30 a share, compared to earnings of $26.9 million, or 29 cents a share, for the same period a year earlier.

The loss associated with the computer software malfunction in August was $457.6 million, which was greater than the $440 million previously reported.

Excluding one-time items, Knight said it earned 1 cent a share, hurt by shaken confidence in the firm and by soft market conditions.

ZaZa prices

ZaZa priced $40 million of five-year convertible senior notes to yield 9% with an initial conversion premium of 32%, according to a company news release.

The notes are convertible at a share price of $2.50 and came beyond the rich end of talk for the premium, which was 15% to 20%.

The notes are non-callable until Aug. 1, 2015 and then provisionally callable if shares are 150% or more of the conversion price.

In certain circumstances, ZaZa will increase the conversion rates for holders who convert their convertible notes in connection with a make-whole fundamental change.

Proceeds of the private placement, sold under section 4(a)(2), are earmarked to fund drilling capital expenditures and leasehold transactions and for general corporate purposes.

Houston-based ZaZa is an onshore oil and gas exploration and development company that was formed through the merger of Paris-based Toreador Resources Corp., a former convertible bond issuer, and ZaZa, an oil and gas exploration and production company in Houston.

Mentioned in this article:

Intel Corp. Nasdaq: INTC

Knight Capital Group Inc. NYSE: KCG

Stillwater Mining Co. NYSE: SWC

Walter Investment Management Corp. NYSE: WAC

WellPoint Inc. NYSE: WLP

ZaZa Energy Corp. Nasdaq: ZAZA

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