ArcelorMittal's upsized $2.25 billion mandatories eyed; Alcoa slips; Volcano adds on hedge

By Rebecca Melvin

New York, Jan. 9 - ArcelorMittal SA's planned $2.25 billion of mandatory convertible subordinated notes was a main focus in the convertibles market on Wednesday as players considered how cheap the deal was even with talked terms tightened during the session. The deal was also upsized from $1.75 billion.

The new ArcelorMittal mandatory, which was coming concurrently with an equity offering, was expected to price after the market close.

Although the outsized issue represents badly needed paper in the convertibles space, and many were looking it over, not everyone was doing so as mandatories are a challenging structure for convert arb players to set up given their three-year, fixed conversion.

About 13% of new issuance was in the mandatory structure in the convertible market last year.

ArcelorMittal's existing 5% convertible was pulled into trade and looked flat to a little better at 106 ish.

Elsewhere, Alcoa Inc.'s 5.25% convertibles traded a good deal after the Pittsburgh-based aluminum maker kicked off the earnings season with better-than-expected results. The in-the-money paper was seen lower by about 0.5 point to a point on an outright basis, a New York-based sellsider said.

Volcano Corp., which priced $460 million of convertibles Dec. 4, saw the newish 1.75% convertibles due 2017 trade better on an outright and hedged basis after the San Diego-based therapeutics company issued positive guidance.

The older Volcano convertible issue, of which there is less left outstanding, was not heard in trade.

Meanwhile, Clearwire Corp. wasn't heard in trade despite news of a new suitor for the broadband services provider in Dish Network, which made a higher counter bid to the one on the table from Sprint Nextel. Clearwire shares jumped 7%. But Clearwire's convertibles, which were last seen at around 111, may not have moved because there is no more room for improvement.

ArcelorMittal deal eyed

ArcelorMittal launched dual offerings of convertible mandatory notes and equity early Wednesday for a combined $3.5 billion in proceeds, according to a news release.

The convertible piece was upsized during marketing to $2.25 billion and was viewed as cheap even after talked terms were tightened to a 6% coupon and 25% premium. Initially the deal was talked at a coupon of 5.875% to 6.375% and an initial conversion price of 20% to 25%.

One analyst said the paper was about 3.5% cheap using a credit spread that was somewhat tighter than the 425 basis points over Libor that he was seeing bandied around in valuations.

A buysider said the new deal was cheap.

ArcelorMittal's existing 5% convertible due 2014 traded flat to higher and was quoted at 105.75 bid, 106..75 offered at the end of the session.

One trader said that as an arb fund he "personally didn't like mandatories" and hadn't looked at it. It's a given stock at a specific price at a specific time, so there is limited upside and no floor with the mandatory structure, he said.

ArcelorMittal is a Luxembourg-based steel producer.

ArcelorMittal shares fell 78 cents, or 4.4%, to $16.75 in heavy action on the New York Stock Exchange.

Bookrunners of the registered, off-the-shelf offerings are Goldman Sachs & Co., Bank of America Merrill Lynch, Credit Agricole Corporate and Investment Bank, and Deutsche Bank AG, London branch.

The mandatory convertibles have a three-year maturity and will be referenced to the price of the concurrent equity offering placement.

Proceeds from the combined offering will be used to reduce existing debt.

Alcoa slips

Alcoa's 5.25% convertibles due 2014 were seen last at 148 versus the closing share price of $9.08, which compared to a mark at 148.25 on Tuesday, according to a New York-based sellsider.

The convertibles were down about 0.5 point to a point, the sellsider said.

Shares of the Pittsburgh-based aluminum maker ended the session down 2 cents after spending much of the session in positive territory.

The company posted better-than-expected earnings. But Gimme Credit pointed out that sales fell 2% as did the average realized price for aluminum.

"About the best thing you can say about Alcoa's fourth-quarter results, reported late yesterday, is that it made money," a Gimme Credit note, written by analyst Carol Levenson, said.

Cost reductions and strong results in the downstream segments accounted for all of the profit improvement, Levenson pointed out. Asset sales and free cash flow meant that net debt was reduced, but a drop in full-year EBITDA offset the debt reduction and created higher leverage.

Gimme Credit has a negative view on the Alcoa credit.

Volcano up on positive view

Volcano's 1.75% convertibles due 2017 traded late in the day at 105.14 versus an underlying share price of $25.44.

Using a 60% delta, the bonds improved about 0.5 point on a dollar-neutral, or hedged, basis. On an outright basis, the bonds were up about 3 points, according to Trace data.

Volcano's older 2.875% convertibles due 2015 were not heard in trade.

Volcano shares were up $1.03, or 4.2%, at $25.37 on Wednesday.

One trader said he liked the older Volcano bonds better than the new issue but that the older ones were a "liquidity trap."

Volcano, which develops intravascular ultrasound and functional measurement products for vascular and structural heart disease, said Wednesday that it expects total fourth-quarter revenue will be about $102.5 million, bringing expected full-year 2012 revenues to $381.9 million.

Medical segment revenues in the fourth quarter rose about 10% on a reported basis and 12% on a constant currency basis versus the year-earlier quarter, driven by an increase in Fractional Flow Reserve disposable revenue of about 42% year over year on a reported basis and 45% on a constant currency basis.

Expected revenue for all of 2012 reflects an increase of about 11% on a reported basis and 12% on a constant currency basis versus revenues of $343.5 million in 2011.

Mentioned in this article:

Alcoa Inc. NYSE: AA

ArcelorMittal SA NYSE: ADR: MT

Clearwire Corp. Nasdaq: CLWR

Volcano Corp. Nasdaq:VOLC

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