BorgWarner rises in gray market after deal launch; Alcoa slips ahead of earnings; Ford stronger

By Rebecca Melvin

New York, April 6 - A new issue greeted convertibles players to start the week Monday, and although the newly launched BorgWarner Inc. offering gained in the gray market ahead of pricing and attracted a fair amount of attention, the session overall was labeled "pretty quiet."

The automotive component maker launched the deal ahead of the market open and priced the upsized $325 million of bonds after the close. During the session, the registered deal traded as high as 107.5 bid, 108.5 offered in the gray, market sources said.

Also among auto names, Ford Motor Co.'s convertible preferreds and bonds were higher after word that the company's investors had agreed to turn in $9.9 billion in debt in exchange for cash and stock.

As part of the exchange, the vast majority, or 88.15%, of the once-actively traded Ford 4.5% convertible bonds were tendered.

Alcoa Inc. traded a little weaker ahead of its earnings report seen coming after the close on Tuesday.

One of the session's most actively traded names, Transocean Inc., traded a little firmer even as its shares slipped.

Financial names were mostly quiet despite weaker underlying shares, which were pulled down in response to a research report by analyst Michael Mayo, who predicted bank loan losses will exceed the Great Depression and initiated coverage on 11 national and regional banks at "underperform" or "sell."

PNC Financial Services Group Inc.'s 4% convertible bonds were not trading at all, for example, and had 98 prints, a New York-based sellside trader said.

Likewise, General Growth Properties Inc. convertibles were quiet despite activity in their underlying equities. In this case the equities surged amid rumors that the company had reached a settlement with debt holders on restructuring debt.

In response to a New York Stock Exchange request, the company issued a press release that stated it was not aware of any circumstances that might explain the unusual market activity.

BorgWarner up in the gray

The convertibles offering of BorgWarner, the Auburn Hills, Mich.-based auto components maker, was well-received by investors, a syndicate source said. But there were concerns surrounding this debt, nevertheless.

"It will likely be the first debt out; the only real concerns I have are refinancing the revolver, which comes due in July and Moody's potential downgrade to junk," one sellside analyst said.

BorgWarner products help improve vehicle performance, including fuel efficiency, stability and air quality, and with the push toward more stringent fuel economy regulations, BorgWarner should be "a nice long-term play," the sellsider said.

The $275 million issue size was considered "not that big" and probably just about the norm for the time being.

Talk for the coupon was 3.75% to 4.25%, with an initial conversion premium of 22.5% to 27.5%.

The pricing, while tighter than some deals seen since the primary market revived in March, was still good enough to please investors.

"They got what they were hoping for," a sellsider said of investors.

The registered offering was being sold via joint bookrunners Morgan Stanley & Co. Inc., Merrill Lynch & Co., Citigroup Global Markets Inc. and Deutsche Bank Securities Inc.

There are no calls or puts. Upon conversion, holders may receive cash, shares or a combination of both. There is a greenshoe for up to an additional $41.25 million of bonds.

Proceeds are intended for general corporate purposes, including repayment of short-term debt. A portion of proceeds will be used to cover the cost of convertible note hedges.

BorgWarner expects to enter into convertible note hedge transactions with one or more of the underwriters of the notes and their affiliates, as well as into separate warrant transactions with hedge counterparties.

BorgWarner's senior, unsecured long-term debt is rated BBB by Standard & Poor's and Ba1 by Moody's Investors Service.

Ford preferred up more than 10%

Ford's 6.5% convertible trust preferreds due 2032 were seen at 11.20, up 1.75 from previous levels, according to a sellside trader. That was more than a 10% gain, he said.

The common stock of the Dearborn, Mich.-based automaker jumped 16% to $3.77 during the session after the company announced Monday that it was able to successfully reduce its debt by $9.9 billion, or 28%, through its exchange offer that began last month.

About $4.3 billion of Ford's 4.25% senior convertible notes due in December 2036 were validly tendered under the debt-for-stock deal, which will result in the issuance of 468 million shares. Separately, under Ford Credit's tender offer, about $3.4 billion of notes were tendered, at a total purchase price of $1.1 billion.

Alcoa a little weaker

Alcoa's 5.25% convertibles due 2014 traded at 140 versus a share price of $7.70, which was down from 144 versus a share price of $8.17 on Friday.

Shares of the Pittsburgh-based aluminum producer, which will kick off earnings season Tuesday, were down 26 cents, or 3%.

Aluminum prices have been on a year-long decline, and even though there have been signs of recovery lately, investors still weren't expecting a robust quarterly report. For convertible players, however the report wasn't expected to be a "credit event" as one sellsider said, pointing out that the company has raised funds.

As of late afternoon, $53 million of Transocean bonds had changed hands, which was a decent chunk of overall volume.

The Transocean 1.625% convertibles, or series A, traded at 94 versus a share price of $63.25. The series A convertibles were seen settling at 93.75, compared to 92 on Friday.

The Transocean 1.5% convertibles, or series B paper, traded at 88 versus the $63.25 share price. That paper was seen settling at 88.8, compared to 87.875 on Friday.

Shares of the Houston-based oil-services company ended the session down $1.18, or nearly 2%, at $64.34.

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