Convertibles mixed; Bank of America, Citi gain; Ford higher; Suntech Power brings deal, existings slump

By Rebecca Melvin

New York, March 11 - Financial paper in the convertible bond market was boosted Tuesday by the Federal Reserve's promise to loan up to $200 billion to the ailing financial markets in exchange for debt; but the market's overall response was muted, market participants said.

Early in the session most bonds were still being pressured downward, they said. But financials started to revive, with considerable gains for the convertibles of Bank of America Corp., Washington Mutual Inc. and Citigroup Inc.

The convertible preferred shares and common shares of Ford Motor Co. also gained in heavy volume.

Meanwhile, players sized up a new issue from Suntech Power Holdings Co. Ltd., which priced after the close. The deal was considered cheap by several analysts, and a bid in the gray market was seen at about 100.50.

Suntech Power's sister convertible, on the other hand, fell about 3 to 5 points as the older paper wasn't seen as attractive as the new issue.

And a new issue was launched after the close for $75 million of five-year convertibles from Provo, Utah-based Raser Technologies Inc.

Players were actually surprised that more new issuance didn't surface after the bell on a day when the Dow Jones Industrial Average surged more than 400 points and the S&P 500 index gained 3.7%.

The jump came after the Fed announced a plan to resuscitate the credit markets by lending $200 billion to financial firms in exchange for debt- or mortgage-backed securities.

If demand is sufficient enough from weekly auctions beginning March 27, the amount could surpass $200 billion.

"I would have thought people would have taken more advantage, given how the market has been the last week," a New York-based buysider said of potential convertibles issuers.

Like the stock markets, liquidity in the convertibles market improved. "They're not selling like there's an ax over their shoulder," a Connecticut-based sellside head trader said of convertibles investors.

Another sellside trader, this one in New York, said, "It was much better - much, much better."

BofA, WaMu charge higher

The 7.75% convertible preferreds of Bank of America gained handily on heavy volume as financials led the convertibles market higher. The convertible preferreds of Citigroup was a notable gainer, as was Washington Mutual Inc.

Bank of America priced a mega issue of nearly $7 billion in January. Those preferreds rose 3.5% on Tuesday to close at 1026, versus a stock price of $47.72, compared to 991, versus a stock price of $35.31 on Monday.

Shares of the Charlotte, N.C. lender (NYSE: BAC) closed up 6.8%.

Washington Mutual's 7.75% series R perpetual convertible preferreds gained 11.3% as its shares (NYSE: WM) surged 18.3% after reports that either Goldman Sachs or Warren Buffett might provide a cash infusion to the beleaguered bank, according to a convertibles sellside trader.

The Washington Mutual preferreds on Tuesday closed at 787.8 versus a closing stock price of $11.88, compared to 707.5 versus a share price of $10.04 on Monday.

Washington Mutual is based in Seattle, Washington.

Citigroup's 6.5% preferred closed up Tuesday at 44.9599 versus a stock price of $21.49, compared with a close of 43.75, versus a stock price of $19.69 on Monday. Shares of New York-based Citigroup (NYSE: C) closed up 9.1%.

Ford Motor gains

The 6.5% convertible preferred shares of Ford gained 2.5% to $30.75 in heavy volume, as its common shares added 5.36%.

Headlines from Michigan on Tuesday were more unfavorable for General Motors Corp., which saw its convertible bonds mostly flat in thin trade.

A labor dispute at parts supplier American Axle and Manufacturing Holdings Corp. didn't look closer to being resolved. United Auto Workers walked off the job from American Axle on Feb. 26, and the strike has forced GM to close plants.

Suntech looks cheap

The new 3% convertibles of Suntech Power - the bonds priced after the close - were seen cheap by analysts on Tuesday. One analyst said the bonds looked about 3% cheap at the midpoint of price talk, using a credit spread of 750 basis points over Libor and a volatility of 50%. In fact, the bonds priced at the cheap end of talk for the coupon and at the rich end of talk for the initial conversion premium.

Price talk for the upsized $500 million of five-year convertibles was for a coupon of 2.5% to 3%, with an initial conversion premium of 31% to 36%. The issue was initially talked to be $425 million.

The Rule 144A deal was sold via Goldman Sachs (Asia), UBS Investment Bank and ABN Amro Rothschild. There is an over-allotment option for up to an additional $75 million of notes.

"It's a volatile name and a good space to be in," a New York-based sellside analyst said, referring to Suntech's industry sector in alternative energy.

The supply of silicon wafers is the biggest question mark surrounding the industry sector as heavy demand has squeezed supply of the industry's raw material.

Another analyst, who said the paper looked about 1.5% cheap using a credit spread of 700 bps over Treasuries and 45% volatility, said a somewhat narrower spread was merited because Suntech had hedged a significant amount of its exposure to the polysilicon market through contracts.

The new issue was bid up about ½ point in the gray market, but its existing 0.25% convertible notes, also sold via Goldman, UBS and ABN a little more than a year ago, didn't fare as well. They fell as much as 5 points to close at 95.8 versus a stock price of $30.24, compared to a close of 101.8 on Monday, versus a stock price of $332.07.

The new notes are non-callable and there are no puts. Net share settlement is at the company's option. Suntech expects to use most of the proceeds, or $300 million, for procuring upstream supplies, and the balance is earmarked for production capacity expansion and new technology commercialization.

Shares of the Wuxi, China-based maker of solar cells (NYSE: ST) closed down 5.7%.

Raser plans $75 million issue

Raser Technologies plans to price $75 million of five-year convertible bonds after the close on Thursday. There is a greenshoe of $25 million on the Rule 144A deal.

Price talk on the senior convertible notes is for a coupon of 5.5% to 6.5%, with an initial conversion premium of 20% to 30%. Merrill Lynch is sole bookrunner.

A portion of the proceeds will be placed in an escrow account that will be invested in government securities to fund the first four interest payments.

Most of the net proceeds will be used to continue well field and other development activities for geothermal power plants that Raser intends to develop and for general corporate purposes.

In addition, Raser expects to use a portion of net proceeds to fund the interest escrow account and fund the cost of call spread and prepaid forward share repurchase transactions.

Raser is a technology licensing and development company focused on geothermal power generation projects.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.