New NextEra mandatories slip from discounted price, edge up on hedge; AK Steel drops

By Rebecca Melvin

New York, Sept. 20 - NextEra Energy Inc.'s newly priced mandatory convertibles dipped below their discounted issue price on their debut in the secondary market on Friday amid lower shares.

The Juno Beach, Fla.-based utility priced $500 million of the three-year equity units in a registered, overnight deal at $48.75, which was 98% of their $50.00 par.

The mandatories expanded about 0.25 point on a hedged basis, according to a syndicate source.

Outside of the new deal, the convertible bond market was very quiet, sources said.

Elsewhere, Alcoa Inc.'s 5.25% convertibles were somewhat active and bumped around mostly between 130 and 131, ending the session with a 131.479 print versus a closing share price of $8.29, according to Trace data.

Earlier the paper was quoted at 131.086 versus a share price of $8.28. Shares of the New York-based aluminum producer shed 1.8%.

AK Steel Holding Corp.'s 5% exchangeable due 2019 traded down several points on an outright basis, with a late print at 98.746, after the West Chester, Ohio-based steel manufacturer released weaker third-quarter guidance.

The broader markets swooned Friday, although Treasuries ended a bit higher. It wasn't immediately obvious what caused the overall weakness, sources said. But a measure passed in the House of Representatives to keep the government financed but also eliminate funding for the health-care law may have spurred concerns over the possibility of another impasse like the one that surrounded the debt ceiling in 2011, which led to a U.S. credit rating downgrade.

The S&P 500 stock index slipped 12.43 points, or 0.7%, to 1,709.91; the Dow Jones industrial average stumbled 185.46, or 1.2%, to 15,451.09, and the Nasdaq stock market lost 14.66 points, or 0.4%, to 3,774.73.

New NextEra slips

NextEra's mandatory equity units traded at $48.50 bid, $48.65 offered versus an underlying price of $81.35 during the session, which was down slightly from the discounted $48.75 issue price. But it was better on a dollar-neutral, or hedged, basis by about 0.25 point, on a 42-cent per share basis, a syndicate source said.

Shares of the Juno Beach, Fla., power generation and transmission company dropped $2.01, or 2.4%, to $80.69.

The mandatories "did OK relative to the equity," a New York-based sellsider said, adding it wasn't great for the holders but OK for hedged players. He said the delta was probably at about 80%.

The NextEra mandatories priced at $48.75 compared to their $50.00 par.

They slipped in initially active trade but quieted by late morning, a New York-based trader said.

A second New York-based trader said that the new mandatory was the focus of the session and the rest of the market was quiet.

NextEra sold $500 million of three-year mandatory convertible equity units at a discount to their $50 par in a registered, overnight deal that has a distribution rate of 5.799% and an initial conversion premium of 20%, according to a syndicate source.

The units were bought t by bookrunners Citigroup Global Markets Inc., Morgan Stanley & Co. LLC and Credit Suisse Securities (USA) LLC.

Proceeds from the sale will be added to the general funds of NextEra Energy Capital Holdings.

The equity units consist of a contract to purchase NextEra Energy common stock and a 5% beneficial ownership interest in series G debentures due Sept. 1, 2018 issued in a $1,000 principal amount of NextEra Energy Capital Holdings Inc. The purchase contract obligates holders to purchase from NextEra a certain number of shares no later than Sept. 1, 2016.

AK Steel drops

AK Steel's 5% exchangeable due 2019 traded down several points on an outright basis, with a late print at 98.746 versus an underlying share price of $4.09.

Earlier, the exchangeables had been 99.5 offered in the Street, a trader said. And previously the paper had traded above par by as many as several points.

AK Steel shares fell $0.355, or 8%, to $4.085 in heavy volume on Friday. The convertibles weren't actively traded, but they did change hands eventually.

In its weaker guidance release, AK Steel said it expects to incur a loss of $0.22 to $0.27 per share in the third quarter, which includes nine cents per share attributable to an unplanned outage of its Middletown, Ohio, furnace and five cents per share related to income taxes. The outage was responsible for an estimated 5% to 6% reduction in shipments for the quarter compared with the year-ago quarter.

Analysts had been expecting the steel producer to report a loss of 7 cents per share for its third quarter.

AK Steel is scheduled to report third-quarter results on Oct. 22.

In recent weeks, the stock has been on a tear, and shares gained 10% on Thursday.

Mentioned in this article:

AK Steel Holding Corp. NYSE: AKS

Alcoa Inc. NYSE: AA

NextEra Energy Inc. NYSE: NEE

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