Convertibles activity improves: financials gain, but AIG weak; JA Solar adds; Mylan stronger

By Rebecca Melvin

New York, Feb. 24 - Activity in the convertibles market picked up Tuesday, but pricing remained mixed, although financials were notably higher as their underlying equities rallied.

Whether buyers outpaced sellers was debatable.

Sellers were still out there, a West Coast-based sellside trader said. "But that's not to suggest that the market's for sale. In general, trading is fairly gap-y. Things can come in a point or two, and then they open up a point or two," the sellsider said.

Overall, convertibles have been resilient so far this year after dropping steeply during the market meltdown last fall. Convertibles are down just 3.3%, compared with major equity benchmarks, which are down double digits and as much as 20%, according to convertible market commentary published by Bank of America and Merrill Lynch Tuesday.

"It's a technical factor resulting from more buyers with more money chasing an ever shrinking product," the West Coast-based sellside trader said of the strength.

Financials, which led the markets lower in recent sessions, were on the upside. KeyCorp convertible preferreds ended markedly stronger at 62, up from intraday trades at 57.

Bank of America Corp. and Wells Fargo & Co. were also higher.

But American International Group Inc. was pulled into trade at weak levels after reports warned that the New York-based insurer will likely need more government funding to continue operations

JA Solar Holdings Co. Ltd.'s convertibles edged higher in trade in tandem with its equities, while Mylan Inc.'s 1.25% convertibles were firm in strong volume as their underlying shares were volatile.

Equities rallied amid comments from Federal Reserve chairman Ben Bernanke that the economic recession could end as early as this year. He also reiterated that the government has no intention of nationalizing U.S. banks.

"Bernanke's comments had a positive effect on the market, which is funny since comments from the Fed yesterday had a negative effect," a sellsider said.

Bernanke gave his semiannual report to the Senate Banking Committee on Tuesday.

The S&P 500 index rose 29.81 points, or 4%, to 773.14. On Monday, the S&P fell to its lowest finish since April 11, 1997.

The Dow Jones Industrial Average jumped 236.16 points, or 3.3%, to 7,350.94 on Tuesday.

KeyCorp jumps

KeyCorp's 7.75% perpetual convertible preferred, series A, ended the session at about 62.1 versus a share price of $7.20. Earlier in the session, the paper had traded at 57 versus a share price of $6.30. The ending level compared to 52 versus a share price of $6.07 on Friday and was virtually unchanged from 62 versus a share of $7.00 on Feb. 10.

Shares of the Cleveland-based bank holding company closed up $1.06, or 17%, to $7.20.

KeyCorp is viewed as one of the healthier banks, according to sources.

CIT Group Inc.'s high yielding 8.75% perpetual convertible preferred shares ended the session at 13.8, which was actually lower compared to a trade at 14 versus a stock price of $1.90 intraday.

Shares of the New York-based commercial bank holding company jumped 32 cents, or 18%, to $2.06.

AIG's 8.5% mandatory equity units due May 2011 traded at 4.5 versus a stock price of $0.40. On Jan. 26, the AIG paper was heard in trade at 8.85 versus a share price of $1.27.

Shares of the insurance giant plunged 12 cents, or 23%, to $0.41 after investors were shaken once again by the company's prospects. According to reports, the company is expected to have to ask the government for another loan before it reports fourth-quarter results on Monday.

The U.S. government has already committed $150 billion to AIG.

"That's like having the autos come back for more funds. From a public relations standpoint, things like that don't bode well. It's a negative catalyst," a sellsider said.

A second source said, "First, I can't see the government allowing another cash dividend ever on this issue. Second, if they wipe the stock out on this name, they could wipe the preferred too. If any one company is going to be in Congress' crosshairs, these are the guys."

JA Solar, Mylan in trade

JA Solar's 4.5% convertibles due 2013 traded at 41.5 outright on Tuesday and were seen going out at 41.5 bid, 42.5 offered, according to a New York-based sellsider.

Shares of the Shanghai-based solar company gained 14 cents, or nearly 7%, to $2.22.

Mylan's 1.25% convertibles due March 2012 were heard in trade in good volume.

The paper traded at 85.75 and at 87 during the day, both versus a share price of $13.00, according to two sources.

Mylan 3.75% convertibles and Mylan convertible preferred stock weren't heard in trade.

The Canonsburg, Pa.-based generic drug maker saw its underlying shares settle higher subsequent to mid session weakness. Shares had jumped Friday after the company reported fourth-quarter results that beat estimates late Thursday. It also reaffirmed 2009 profit outlook.

Mentioned in this article:

American International Group Inc. NYSE: AIG

Bank of America Corp. NYSE: BAC

CIT Group Inc. NYSE: CIT

JA Solar Holdings Co. Ltd. Nasdaq: JASO

KeyCorp NYSE: KEY

Mylan Inc. NYSE: MYL

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