New A123 slightly higher outright; Ramco slips below par; Meritor lower after cutting outlook

By Rebecca Melvin

New York, April 1 - A123 Systems Inc.'s $125 million of 3.75% convertible subordinated notes and Ramco-Gershenson Properties Trust's $80 million of 7.25% perpetual preferred shares added bulk Friday to the week's $1.37 billion tally of new issuance in six deals.

The total included Goodyear Tire & Rubber Co.'s greenshoe, but not the other five new issues' greenshoes.

A123's 3.75% convertible notes traded mostly outright at 100 bid, 101 offered.

The new Ramco-Gershenson's 7.25% convertible preferreds slipped below par to trade at 49 bid, 49.25 offered, also on an outright basis.

Of the week's new issues, Greenbrier Cos. Inc.'s $215 million of 3.5% convertibles was viewed as a star performer, expanding 2.5 points on a hedged basis on their first day of trading in the secondary market on Thursday, and trading actively and a point higher outright on Friday.

Elsewhere, Meritor Inc., formerly known as ArvinMeritor, traded down outright by 6.5 points to 7.5 points, but was lower only 1 point to 1.5 points on a dollar-neutral basis after the Troy, Mich.-based auto components maker lowered its second-quarter earnings outlook.

Two convertible names that gained outright, but lost on a hedged basis after takeover bids this past week highlighted the idea of avoiding negative make-whole grid names, a New York-based sellside analyst said.

GSI Commerce Inc. shed 3 to 6 points to as many as 10 points on dollar-neutral basis after news Monday that eBay Inc. agreed to acquire the e-commerce company for $2.4 billion in cash and debt.

Cephalon Inc. convertibles came in on a hedged basis Wednesday after Valeant Pharmaceuticals International Inc. launched a hostile takeover bid for the Frazer, Pa.-based biotechnology company for $73 per share.

Avoiding likely takeover candidates was not a new idea, he analyst said, but "this week's deals enhanced that kind of thought."

A123 edges up, Ramco slips

A123's 3.75% convertibles due 2016 closed out at 100.25 bid. 100.75 offered on their debut Friday, according to a syndicate source.

The deal seemed to trade primarily outright and therefore wasn't compared to shares of the Watertown, Mass.-based developer and maker of lithium ion batteries and systems, which closed down 23 cents, or 3.6%, at $6.12.

The registered, off-the-shelf notes priced at the cheap end of talk, which was for a coupon of 3.25% to 3.75% and an initial conversion premium of 20% to 25%.

A123 Systems also priced $108 million of common stock at $6 per share in a concurrent offering.

Ramco's 7.25% convertible preferreds traded down to 49 bid, 49.25 offered on their debut Friday, which was off from their $50 par.

Farmington Hills, Mich.-based Ramco, a community shopping center REIT, saw its common stock slip 11 cents, or less than 1%, to $12.42.

The registered, off-the-shelf, deal came at the cheap end of talk, which was for a yield of 6.75% to 7.25% and a 15% to 20% initial conversion premium.

Greenbrier higher

Greenbrier's 3.5% convertibles due 2018 traded at 104.5 versus a share price of $28.45 during the session Friday, compared to a close of 104 on their debut Thursday.

"Greenbrier did pretty well and trading volume was good. It performed well compared to [the week's] other deals," a New York-based sellside analyst said.

The premium at 37.5% was high, but the higher volatility on the name supports this kind of premium, the analyst said.

The coupon was pretty good at 3.5% and the company's sector in railcars was "a big push to the performance," the analyst said.

"Given the bottleneck in the rail and transportation industry, they will have pricing power. They have strong fundamental momentum," the analyst said.

Meritor eases on hedge

Meritor's 4% convertible notes due 2027 traded at 99.5 bid, 100 offered versus a share price of $17.00 on Friday.

Meritor's 4.625% convertibles due 2026 weren't heard in trade, but were seen at 112.5.

The Meritor 4s fell 6.5 points outright, but only 1.4 points on a hedged basis. The Meritor 4.625% convertibles were down 7.5 points on an outright basis compared to a 1.5 point decline on a hedged basis, according to a New York-based sellside desk analyst.

A second sellside source said the Meritor 4% convertibles expanded about 0.25 point on an 85% delta.

Shares fell 14% Thursday after news that the company cut its outlook.

Meritor now expects adjusted earnings from continuing operations to range between $2 million and $10 million, down from the $5 million to $15 million it forecast in early February. Nevertheless, the company forecast slightly higher revenue.

It now sees quarterly revenue of $1.18 billion to $1.21 billion, up from an earlier prediction of $1.13 billion to $1.18 billion. On average, analysts are looking for $1.11 billion in revenue, according to FactSet.

Meritor is closing its axle business in Europe due to a slower-than-expected recovery in commercial vehicle trailers following years of decline.

"After an extensive review process, we have concluded that we will be unable to achieve acceptable financial returns on a sustainable basis and that future investment would be better deployed to other businesses," Meritor said in a release Thursday.

The company, which changed its name from ArvinMeritor Inc., expects to book charges of $17 million to $23 million over the next year as a result of the closure.

Meritor is tied to industrial activity and not linked to light vehicle production and sales, an analyst noted.

GSI, Cephalon lose on hedge

A strong run up in stock prices for the better part of two years has created a pool of convertibles that are likely losers for hedged investors if they get taken over despite the bonds' takeover protection provisions.

"The universe is poorly priced for takeovers, especially considering how far stocks have run," a New York-based sellside trader said.

"A year ago a deal premium would have been higher because stocks were lower. Deal premiums are mid-20% for the most part, and won't cover the conversion premium even factoring the matrix. The solution is to sell and wait for pricing sanity, but customers are loath to do that because they will be quite under invested," he said.

"So I guess the result will be slow, incremental weakening of prices as the most egregiously priced (as to takeover) issues will come in and then the next tier and so on. It will take awhile," the sellsider said.

This past week, the GSI 2.5% convertibles due 2027 lost on a hedged basis even as the King of Prussia-based e-commerce company's shares soared on news that eBay plans to acquire the company.

Cephalon's 2% convertibles lost about 2 points, while the Cephalon 2.5% convertibles came in about 6 points after a hostile takeover bid from Valeant.

An analyst said hedge players weren't taken off guard by these deals, and most had either gotten out or put the paper on a very light hedge.

"This is not new. Ever since this year, a lot of convert investors especially hedge investors were concerned about negative takeout candidates, or those names in which the takeout premiums are not adequate," a sellside analyst said.

Deeply in the money names, which are trading at a tighter premium, are not susceptible to coming in on a cash takeout event, he said.

Mentioned in this article:

A123 Systems Inc. Nasdaq: AONE

Cephalon Inc. Nasdaq: CEPH

Goodyear Tire & Rubber Co.'s NYSE: GT

Greenbrier Cos. Inc. NYSE: GBX

GSI Commerce Inc. Nasdaq: GSIC

Meritor Inc. Nasdaq: MTOR

Ramco-Gershenson Properties Trust NYSE: RPT

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