Ford, GM end mixed after wild ride; CIT higher on asset sales; Pier 1 under pressure; Smithfield to price

By Rebecca Melvin

New York, July 1 - The convertible bond market Tuesday mostly followed stocks for a roller coaster session in which autos - a major focus of the day - started under pressure, but then rallied in the afternoon on the back of sales figures, market sources said.

Ford Motor Co. ended about 0.50 point lower on a day, and the General Motors Corp. bonds, which were much lower early, closed higher.

"Autos were all over the place," a New York-based sellside trader said. The story was similar for much of the market, and many names ended marginally better, the trader said.

Many financials remained under pressure. But news that CIT Group Inc. intends to sell its home-lending business was viewed as a huge positive that drove its stocks and bonds sharply higher.

Elsewhere, Pier 1 Imports Inc. was under pressure after Merrill Lynch initiated coverage on the decorative home furnishings retailer at under-perform.

Convertibles players were cheered by a new issue that emerged from Smithfield Foods Inc., if for no other reason than that it wasn't a financial company. The meat processing and packaging company planned to price $350 million of five-year convertibles after the market close.

There was a plus 0.125 point to 0.5 point bid on the issue in the gray market Tuesday afternoon, but equity investors beat up the stock badly, and there was some speculation that the deal might be pulled. A syndicate source said that sensitivity to the stock was an issue, but it looked like pricing would go forward.

Convertibles mostly followed stocks up and down in uneven trading, but there was "a lot stuff very quiet," a New York-based sellsider said.

Autos end mixed after sales data

Dearborn, Mich.-based Ford reported that its June sales tumbled a worse-than-expected 28.1% to 174,091 cars and trucks sold, down from 242,029 in the year-earlier June.

Nevertheless, the shares rallied immediately after the news, helping trim losses so that the stock was only 2.1% lower on the day at $4.71. Ford's 4.25% convertible bonds were called lower by 0.50 point at 70.5 for the close.

The Ford convertible bonds have been falling pretty steadily from heights above 100 in the spring.

GM's car and truck sales fell a not-so-bad-as-expected 18.2%, which sent its shares (NYSE: GM) higher by 25 cents, or 2.2% to $11.75.

Meanwhile, GM's 5.25% convertibles due 2032 (NYSE: GBM) closed up 26 cents, or 1.9% to $13.96.

The GM 6.25% convertibles due 2033 (NYSE: GPM) closed up just 3 cents, or 0.23%, to $13.31 in heavy trade; and the GM 1.5% convertibles due June 2009 (NYSE: GRM) closed up 15 cents, or 0.7%, at $21.67.

The convertibles of the Detroit-based carmaker have a total face value of $8.4 billion.

CIT jumps, but AIG lower

CIT Group's 7.75% mandatory convertible preferred traded late in the session at $10.40, which was up by $1.87 on the day.

The CIT Group 8.75% perpetual preferred stock, which has a $50 par, traded at $46.87, which was up $6 on the day.

"It moved up on an 80 delta," a New York-based sellside trader said of the perpetual preferreds.

Shares of the New York-based commercial finance company (NYSE: CIT) closed up $2.02, or 29.7%, at $8.83.

The company announced that it would sell its home lending business to Lone Star Funds for $1.5 billion in cash, plus $4.4 billion of assumed debt. CIT Group also is selling its $470 million manufactured housing portfolio to Vanderbilt Mortgage and Finance Inc. at a loss, for about $300 million.

The sales help CIT Group exit the home lending business, which has posted millions of dollars in losses in recent quarters because of a sharp rise in delinquencies and defaults.

Also among financials, New York-based insurer and financial services giant American International Group Inc. saw its 8.5% mandatory convertibles traded actively Tuesday, and they were weaker for most of the day, although marginally better at the end of the session.

AIG shares AIG (NYSE: AIG) closed up 27 cents, or 1%, at $26.73 after notching a 52-week low mid-session

Pier 1 drags lower again

Pier 1 Import's stocks and bonds were lower after Merrill Lynch initiated coverage of the Fort Worth, Tex.-based retailer at under-perform late Monday.

The downward direction was a continuation from last week after Pier 1 made a bid for rival Cost Plus Inc. for $88 million, but subsequently dropped the bid which was not deemed high enough by Cost Plus.

Pier 1's 6.375% convertible senior notes due 2036 traded at 76 on Tuesday and were last seen at 77.25 bid, compared to a level of about 84 bid in mid June, a Connecticut-based sellside analyst.

Shares of Pier 1 (NYSE: PIR) closed down 19 cents, or 5.5%, at $3.25.

"The bonds are really cheap," the analyst said. "Pier 1 ultimately pulled their offer but a question remains whether management is really comfortable with the direction they are heading in. There is a great deal of speculation whether they are going to hit their numbers or not."

Nevertheless, there is reason for optimism, he said. Pier 1 missed its first-quarter forecast pretty badly, but for retail, it's the least important quarter.

"I think too much weight is being put on first-quarter earnings and the Cost Plus bid," he said.

Smithfield looks cheap

Although Smithfield Foods' underwriters questioned whether to move ahead with the deal due to a steep 12% drop in its equity on Tuesday, it looked likely that moving forward with the deal would be the call, a syndicate source said late Tuesday.

Smithfield planned to price $350 million of five-year convertibles after the market close.

Price talk was for a coupon of 3.75% to 4.25% with an initial conversion premium of 27.5% to 32.5%.

The equity dropped after the convertibles and stock offerings were announced ahead of the market open.

"There's sensitivity to the stock price, for sure. It ultimately looks like a good transaction though, and at least it looked like it bounced off its lows," the syndicate source said.

The convertibles were bid plus 0.125 to 0.5 in the gray market Tuesday afternoon.

"It's nice," one sellsider said. "Everybody wants to see issues that are non-financial."

There registered offering, being sold via joint bookrunning managers Citi, Goldman, Sachs & Co. and JPMorgan, has a $50 million greenshoe.

Depending on the volatility used, the deal modeled between 4.5% to 6.5% cheap, according to a Connecticut-based sellside analyst. Vol is probably 40% to 42%, but it could be anywhere between 38% to 42%, and some see it as low as 30%, he said.

An increase in vol in the near future is expected due to macro environmental factors like higher grain prices and higher pork prices, the analyst said.

"Grain prices are really high right now, and depending on what the grain prices do, that could impact the company," he said.

Based in Smithfield, Va., the company is a meat processing and packaging concern.

The convertible senior notes non-callable for life. They have dividend protection and acquisition make-whole protection via a table.

Proceeds are to pay down a short-term credit line and a revolving credit agreement. A portion is going to be used to set up hedge and warrant transactions that Smithfield expects to enter into with affiliates of certain underwriters.

© 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.