Upsized MGM moves higher on debut; convertibles mostly quiet amid Goldman Sachs lawsuit

By Rebecca Melvin

New York, April 16 - MGM Mirage's newly priced 4.25% convertibles jumped on their debut in the secondary market Friday, with the paper coming off a bit later in the session with underlying shares, as the broader market sank on news that Goldman Sachs was charged with fraud by the Securities and Exchange Commission over collateralized debt obligations tied to subprime mortgages.

The SEC lawsuit alleges that Goldman knew the CDOs were designed to fail and didn't properly disclose aspects of the investment.

Goldman said the suit was completely unfounded and vowed to fight it.

That development, which was a surprise to the markets, eclipsed other news of the day and took equities steeply lower while lifting the CBOE Volatility Index.

The VIX spiked up above 19 and was seen at 18.47, up 2.58%, at the close of markets, compared to 15.64 at the close on Monday.

The markets were "mesmerized" by the story, sources said, and trading volume in the convertibles market was light.

Amylin Pharmaceuticals Inc. was quiet, too, but the San Diego, Calif.-based biotechnology company, which reports earnings on Monday, was a name to evaluate, a New York-based sellsider said.

"I'm surprised the Amylin 2.5% convertibles are as high as 102 or 103," the sellsider said.

Possible market shift

Sources said that while there were still a lot of unknowns surrounding the Goldman Sachs lawsuit, one thing was certain: it was bound to have an impact, but its impact on convertibles would be minimal or actually positive.

Convertibles have been illiquid lately with the markets heading up and investors loathe to buy or sell as paper is in short supply.

"We're going to find out now if everything is going to roll over or not. It's a surprise hit, and this is the kind of thing that can roll over a market and provide an excuse to sell. You've got guys saying, 'I'm not buying now, and then all of a sudden you get a down market," a New York-based sellside trader said.

Outrights are mostly likely the ones who are going to be the sellers, however, the trader said.

In the broader scheme of things, the problem facing Goldman could spread to other firms, and at the very least, it will make it more difficult for the banks to fight against increased regulation, which is currently being debate by lawmakers.

"The conventional wisdom on Wall Street is that more regulation is bad, and less is good, and this suit probably leads to more regulation," one sellsider said.

"But I think today is an example of people looking for an excuse to sell," the sellsider said, referring to equities.

Line of demarcation

It may also cause a shift in the type of activity that dominates the market. For awhile, high delta, low premium names of the likes of Alcoa Inc., Teradyne Inc. and Terex Corp. have been out of favor, and haven't worked. But they are in fact the traditional fodder of convertible arbitrage trading.

Meanwhile yield oriented trades have been the trades that have worked and have been predominant.

"To me the real question with the market is what kind of trades are going to work. We've had a bifurcated market in which yield oriented plays have worked and vol. oriented trades have not worked. Is this Goldman Sachs story the line of demarcation that changes that?" a New York-based sellside trader said.

MGM trades well, active

MGM Mirage's newly priced 4.25% convertibles moved up to about 103.5 in active, early trade, when the stock was about $14.70.

Later, the deal came back to about 101.75 with the shares lower.

"It came down on about a 45% delta, and actually expanded a little. Although it's more about supply and demand on the first day than tied to its shares," a New York-based sellside trader said.

Another sellsider said MGM was very active, but then Goldman Sachs took everyone's attention. "It was kind of like watching a train wreck," the sellsider said.

An outright buysider said, "The MGM deal was large, liquid and attractively priced....and came after a lull in issuance, so there must be pent up demand."

The MGM deal was upsized to $1 billion of five-year convertible senior notes from $750 million talked on launch.

It also came at the rich end of talk, which was for a yield of 4.25% to 4.75% with an initial conversion premium of 22.5% to 27.5%.

While the issue ended up being attractively priced, initially it looked "extraordinarily cheap." But stock borrow was expensive and became more expensive as the deal was marketed.

MGM is a highly leveraged company and as far as that goes "a dodgy credit," and that's why some players passed on it, another sellsider said.

The Rule 144A deal was sold via joint bookrunners Bank of America Merrill Lynch, Barclays Capital Inc., J.P. Morgan Securities Inc. and Deutsche Bank Securities Inc.

The bonds are non-callable for life, with no puts.

Proceeds are expected to be used to repay part of the company's senior credit facility.

In connection with the offering, MGM entered into capped call transactions, which raised the effective conversion price from the company's perspective to $21.86, a 50% premium to the $14.57 closing stock price on April 15.

Las Vegas-based MGM is a casino resort owner and operator.

Amylin quiet ahead of earnings

Amylin's two convertible issues were quiet ahead of earnings but at the top of their ranges.

Amylin's 2.5% convertibles due 2011 stood up a 102.75, which although it has a relatively short direction, was still curiously high, according to one sellsider.

It has a 62% premium and lots of vol. because of its space. "If you put these on a light 25% to 20% delta and if the stock cracks, then these will do well on the way down," a sellsider said.

Amylin's 3% convertibles due 2014 were unchanged at 89.

Shares of the San Diego-based biotechnology company - which makes diabetes and obesity treatments among other things - saw its shares slip 62 cents, or nearly 3%, to $21.75 on Friday in thin volume. Shares are up 64% for the year to date.

Looking ahead to Monday, analysts' consensus estimate is for the company to produce a net loss of 29 cents a share on revenue of $188.82 million. Investors are looking at pending FDA approval of Bydureon. The FDA issued a complete response letter for Bydureon on March 15, requesting Amylin complete negotiations with the agency on the drug's label and a risk-management plan. The outcome of this is probably more important that first-quarter results and sales of Byetta.

Mentioned in this article:

Amylin Pharmaceuticals Inc. Nasdaq: AMLN

MGM Mirage NYSE: MGM

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