Sino-Forest jumps on debut; Alcoa gains on stock upgrade; Continental, UAL up with sector

By Kenneth Lim

Boston, Dec. 11 - Sino-Forest Corp. shot off to a strong start on Friday in an otherwise lackluster session for the convertible market.

Alcoa Inc. jumped with its stock after a JPMorgan equity analyst raised his profit estimates and price target based on expectations that metal prices will rise in 2010.

Airlines recovered from slight midweek turbulence to continue climbing as their common stocks gained on falling oil prices.

The market in general was extremely quiet, market sources said.

"It's dead, man," one trader said near midday. "There's absolutely nothing going on. Just looking at domestic volume, the volume is about $344 million. Honestly it feels like just a fifth of that."

A sellsider said: "The deal floor has been remarkably quiet."

The thin volumes were a function of recently rising valuations and a lack of sellers, the sellsider said.

"Just a gradual lifting of valuations, and I think it's obviously just due to a lack of supply and just a natural flow of bonds out of the market as they're redeemed and called," the sellsider said. "And we're having a hard time finding people who are willing to sell. Everybody seems to think there's going to be a January effect."

Investors are hoping for prices to improve once the market turns the corner into 2010 - returns in January are historically about 15 to 20 basis points higher, the sellsider said. And the way investors appear to be hoarding their holdings at the moment, the January effect could happen again, the sellsider said.

"There's no supply at all," the sellsider said.

Sino-Forest shoots up

Sino-Forest's new $400 million of 4.25% convertibles due 2016 got off to a quick start on Friday in its first day of secondary trading.

The convertible, which was sold at par, quickly rose to 104 right off the bat. The common stock gained 4.4% or C$0.74 to close at C$17.54.

"The stock had a decent rebound from the recent selloff," a buysider said. "Of course, they announced the convertible a while ago, about a month ago, so that's usually good for a bounce for the stock."

The offering priced with an initial conversion premium of 32.5%. Price talk was at a coupon of 3.75% to 4.25% and an initial conversion premium of 30% to 35%.

The bonds were issued by way of Rule 144A in the United States, a short form prospectus offering in Canada, and internationally via a syndicate of initial purchasers with Credit Suisse Securities Canada and TD Securities as joint bookrunners.

There is a greenshoe of 15%.

Sino-Forest also plans to price C$319.2 million of common stock at C$16.80 per share with a greenshoe for an additional C$47.88 million.

Proceeds will be used to repay term loan debt of about $150 million, for commercial plantation timber under its Guizhou master agreement of about $250 million and for forestry investments in cooperation with state-owned plantation entities in the People's Republic of China totaling about $200 million.

Remaining funds are earmarked for payments required in connection with its Mandra Forestry transaction and for general corporate purposes.

Sino-Forest is a commercial forest plantation operator in China. Its common shares trade on the Toronto Stock Exchange under the symbol TRE.

"The Sino-Forest deal was kind of exciting because it was a big deal and an interesting stock," said the buysider, whose firm received some of the notes.

The buysider acknowledged that because the company is based in China and listed in Canada, some investors in the United States might not be interested even though the offering is dollar-denominated. But Sino-Forest has existing "blue chip" investors and has a fundamental equity stock that raises confidence in the name and could also improve liquidity, the buysider said.

"It's kind of an interesting little company," the buysider said. "It's a forestry plantation in China growing very fast, and they made an acquisition, which the convertible was funding."

Just the fact that the deal existed was a positive for the market, the buysider added.

"It's not a huge company, but to get a $400 million deal, it's refreshing, and it's BB rated, so it's actually a real company," the buysider said. "It was encouraging to me because I was a little disappointed by the quantity and the quality of deals recently...It's more interesting than [Energy XXI (Bermuda) Ltd.]. We like things that are going to have a bit more liquidity, hopefully."

Alcoa forges higher

Alcoa's 5.25% convertible due 2014 rose by about 16.5 points with its stock on Friday after an analyst raised his target for the shares.

The notes traded at 237 versus a stock price of $14.42, a sellside trader said. Alcoa common stock gained $1.11 or 8.22% to close at $14.61 on Friday.

The convertibles were probably in line on a dollar-neutral basis because they are already so far in the money, the trader said.

"It's so high-dollar...it's probably a parity trade," the trader said.

Alcoa is a Pittsburgh-based aluminum maker.

JPMorgan equity analyst Michael Gambardella raised his profit estimate for Alcoa to $1.45 per share in 2010, up from $1.15 per share. His price target for the common stock is now $25 from $22, and he rates the stock "overweight."

He based the rosier outlook on expectations that a stronger Chinese economy will drive metal prices up significantly in 2010.

Continental, airlines climb

Airlines gained more ground as oil prices continued to fall, raising hopes that the carriers would find some relief from a major cost component.

"Airlines were very strong," a buysider said. "The airlines up 8% to 9% each on the back of oil prices and recent demand trends...I think the noteworthy thing is the strength of airlines. They're up 30% this week."

Continental Airlines, Inc.'s new 4.5% convertibles due 2015 were seen trading at 109, while the common stock added 9.54% or $1.55 for a $17.79 close.

Continental is a Houston-based air carrier.

UAL Corp., the Chicago-based parent of United Airlines, also saw its 4.5% convertible due 2021 add about 2 points to trade at 82.75 versus a common stock price of $11. The stock ended the day at $10.99, up by 8.06% or $0.82.

Mentioned in this article:

Alcoa Inc. NYSE: AA

Continental Airlines, Inc. NYSE: CAL

Energy XXI (Bermuda) Ltd. Nasdaq: EXXI

Sino-Forest Corp. TSX: TRE

UAL Corp. Nasdaq: UAUA

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