New PPL gains outright, dollar neutral; Alcoa moves lower; BorgWarner steady on hedge

By Rebecca Melvin

New York, April 12 - PPL Corp.'s newly priced 8.75% mandatory convertibles Tuesday traded higher on both an outright and hedged basis in active trade after the upsized deal came to market late Monday at the rich end of talked terms.

The $850 million of PPL mandatories ended the session at about 52.5 versus a closing common share price of $26.88.

Given that the 2.5-point move was on a 50 par, the convertible's outright move was essentially greater, and on a hedged basis the new convertibles added 0.5 point, a syndicate source said.

A second new issue in the market Tuesday was Hercules Technology Growth Capital Inc.'s much smaller $75 million offering of 6% convertibles, which wasn't heard in trade after the deal priced at the cheap end of terms.

Elsewhere, the broader markets were led down by a pull back in commodities, and although there was no strong focus in this area in convertibles, there were a few commodity-related convertible names that were lower.

The deep in-the-money Alcoa Inc. convertibles moved lower with their underlying shares after the Pittsburgh-based aluminum maker kicked off the earnings season with a disappointing report that showed higher sales that were weaker than expected.

Borg Warner Inc. was active and traded lower outright, but was steady on a hedged basis. The outright move was on the back of ongoing weakness in the auto supply chain. But the convertibles of the Auburn Hills, Mich.-based parts supplier were steady at 1.5 points over parity on a hedged basis, where they have stood for about a week, a New York-based sellside analyst said.

"There is talk in the Street about oil, and the fact that it may pull back with current levels being unsustainable," the sellside analyst said. "But I don't see a lot of offers to sell energy names in the market, so I can't say there was a focus on that today."

Trading action remained curtailed as it was on Monday, a New York-bases sellside trader said.

"It was noisier," the trader said of Tuesday's action. "But there wasn't more trading."

PPL adds on hedge

PPL's newly priced 8.75% mandatory convertibles opened up at 51 and then slipped back to 50.25, before moving up decisively along with the underlying shares.

Late in the session, the new PPL traded at 52 versus a share price of $22.55, and at the close they were marked at 52.5, according to a syndicate source, who said, "they were up half a point on a hedged basis."

Shares of the Allentown, Pa.-based electricity company ended higher by $1.19, or 4.6%, at $26.88 in extremely high volume that was 20 times average volume.

Although the new paper is a mandatory, a structure that has typically been overlooked in favor of bonds, that trend has lessened as more and more players have participated in mandatories amid the generally tight supply of convertible paper.

"Most people still play the bonds," a New York-based sellside analyst said, citing the bonds' more limited downside with a bond floor.

The new PPL is a mandatory equity unit, not a mandatory preferred share, but the difference in those two structures is practically nil given that in both cases at the end of the three-year mandatory term, holders are forced to convert into stock.

"Mandatories are considered one group; valuation is the same. There's a difference, but it's very tiny," the analyst said of mandatory preferred and mandatory equity units.

The mandatory deal was upsized from an initially talked $750 million in size.

The issue also came at the rich end of talk that was 8.75% to 9.25% for the annual distribution rate and 17.5% to 22.5% for the premium.

PPL also priced $2.024 billion of common stock, or 80 million shares at $25.30 per share. Both deals priced after the close on Monday.

Joint bookrunners for the mandatories were Credit Suisse Securities (USA) LLC, Merrill Lynch, Citigroup Global Markets Inc., J.P. Morgan Securities LLC and UBS Securities LLC.

Proceeds of the offerings will be used primarily to repay a portion of the £3.6 billion bridge term loan facility that funded PPL's £4.1 billion acquisition of Central Networks electricity distribution businesses in the United Kingdom.

The company will apply to list the units on the New York Stock Exchange under the symbol "PPL PR W."

Alcoa drops outright

Alcoa's 5.25% convertibles due 2014 traded at about 264.5 at the close, which was versus a closing share price of $16.70. That compared to a level of 289 versus a share price of $18.15 on April 7, according to a market source.

The convertibles are so deep in the money that the valuation doesn't change, the paper just moves with the underlying shares, a New York-based sellside trader said.

"I can't believe they didn't get rid of these things," a trader said regarding the issuer's decision to keep the paper outstanding.

The Alcoa bonds have gained in price along with the ballooning stock market like much of the convertible market. But its double par plus price is even greater that the elevated average price of convertibles of 150 to 200.

The convertibles prices are moving with the stock market, a trader said. "Prices move on a natural delta."

Until the last couple of sessions that natural move has been upward, but now market players are considering the potential for a correction. "It hasn't happened yet," he said.

Alcoa shares dropped Tuesday by $1.07, or 6%, to $16.70 after the company reported that its first-quarter sales increased to $5.96 billion but was below the $6.06 billion estimated by analysts.

Net income was $308 million, or 27 cents a share, compared with a loss of $201 million, or 20 cents, in the same period a year earlier.

Excluding restructuring costs and other one-time items, profit was 28 cents a share, which beat the consensus estimate by a penny.

The company said that earnings were curbed by a weaker U.S. dollar and higher energy and raw materials costs.

Meanwhile aluminum prices have jumped 10% in the last year in London because of improving demand.

BorgWarner flat on hedge

BorgWarner's 3.5% convertibles due 2012 traded at 222.135 during the session, which was down 5.27 points, according to Trace data.

BorgWarner shares fell $2.25, or 3%, to $72.06 on Tuesday.

On a hedged basis, the BorgWarner convertibles were flat at 1.5 points over parity.

"It's a low-premium name, and with the stock down 3%, it's pretty much nothing," a sellside analyst said.

The convertibles moved with the stock on a delta of probably about 95% to 96%.

"Most of the auto makers were OK; GM was flat to higher, but parts and dealers are down probably to do with the supply chain, which is probably related to de-risking activity in the market," the analyst said.

Mentioned in this article

Alcoa Inc. NYSE: AA

BorgWarner Inc. NYSE: BWA

Hercules Technology Growth Capital Inc. Nasdaq: HTGC

PPL Corp. NYSE: PPL

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