New issues continue to pace outsized gains; Textron up on debut; ProLogis gains on earnings

By Rebecca Melvin

New York, April 30 - Convertible paper, which has been riding higher with stocks through much of April, was steady to higher on Thursday, led by recent new issues, which continue to pace remarkable gains.

"Look at the JCI bonds: they're close to double par after just six weeks in the market," a New York-based sellside desk analyst said, commenting on Johnson Controls Inc.'s 6.5% convertible bonds, which priced March 10 and traded Thursday at 178 versus a stock price of $18.75.

One of the most remarkable trends in the convertible market right now is the price action of the new issues, the sellsider said.

A case in point was Textron Inc.'s newly priced 4.5% convertibles, which debuted in the secondary market Thursday, trading up to about 110 before tapering back, along with their shares, for a 107.5 bid, 108 offered finish.

Newell Rubbermaid Inc., which also priced a new issue in March, saw its convertibles jump along with a 20% surge in the underlying shares after the Atlanta-based household goods company reported net sales for its first quarter declined 16% to $1.20 billion compared to $1.43 billion in the first quarter of 2008. But profit fell less than expected, gross margin improved 90 basis points to 35.1%, and full-year guidance was reaffirmed.

Among established issues, ProLogis was another mover after it posted first-quarter earnings, with active trade in convertibles amid a 7.7% climb in its shares.

The Denver-based industrial real estate investment trust reported a decline in revenue but significant progress on de-leveraging initiatives.

"...we believe we have substantially addressed our anticipated cash needs through 2012," ProLogis chief executive Walter Rakowich said in a release.

Ford Motor Co.'s bonds jumped as investors fled to the perceived safety of the Dearborn, Mich.-based automaker after news that competitor Chrysler LLC had filed for Chapter 11 bankruptcy.

Newmont Mining Corp. was fairly quiet and steady after the gold and copper producer reported first-quarter net income fell 50% on 20% lower sales.

Likewise, Mylan Inc., another popular convertibles name, wasn't very active after the Canonsburg, Pa.-based generic and branded drug maker reported a first-quarter profit and raised the low end of its 2009 outlook.

Financial preferreds also remained quiet ahead of stress test results that are expected to be revealed by the government next week.

The end of the month didn't bring about any unusual trading patterns, sources said. In general, the market has been stronger with gains in equities.

It's been bid only of late, a Connecticut-based sellside trader said.

The Dow Jones Industrial Average closed at 8,185.73, which is up nearly 8% for April; the S&P 500 stock index closed at 872.81, which is up 9% for the month; and the Nasdaq Stock Market closed at 1,717.30, which is up 12% for the month.

Textron adds nicely

Textron's newly priced 4.5% convertibles were seen closing at 107.5 bid, 108 offered at the close by one New York-based sellside firm. Shares opened higher, trading at high at $11.47 during the session before moving back down to the flat line, and ending off 8 cents, or 0.74%.

The aircraft, industrial and finance company, based in Providence, R.I., priced an upsized $540 million of the 4.5% convertibles, which was $240 million more that talk.

The pricing came through the aggressive end of talk for the coupon, which was 5.25% to 5.75%, and at the aggressive end of talk for the initial conversion premium, which was 20% to 25%.

The four-year paper will be non-callable for life, with no puts.

Proceeds will be used to repay debt and purchase a call spread.

Several sellsiders said they "played" in this name, as well as in the new Arcelor Mittal convertibles, which were seen during the session at about 104.375.

As for trends in the convertibles market, one sellsider said, "The only thing I've seen in the last two months is the price action in the new issues. Every single one is trading up out of the gate, and some are trading up hugely."

A lot of the strength has to do with the rally in equities. But in addition, the new paper coming seems to be attractively priced and coming from the types of issuers in which investors are interested in owning, the sellsider said.

Whether the equity rally had been overdone, the sellsider was skeptical. "People don't want to miss anything; they don't want to miss the rally," the sellsider said.

He predicted that the market action should continue "as long as the equity market doesn't collapse again."

Concurrently with the convertibles issue, Textron priced an upsized 20.7 million of common stock at $10.50 a share. The offering had originally been talked at 19 million shares.

Ford continues to climb

Ford's 4.25% convertible bonds due 2036 ended the session at about 76 versus a share price of $5.98. The convertibles were up about 6 points outright, versus a 9.7% climb in the underlying shares.

One sellsider said it was the first time in a long time that the issue was quoted by price and not in points. But another sellsider said the issue was still being quoted in points.

The paper has moved up dramatically from lows in the teens and with a stock price at $2.00.

President Barack Obama announced the bankruptcy filing of Chrysler around midday. The reorganized company will have board of nine members, with six selected by the government and three from the FIAT company, with one FIAT employee.

Bob Nardelli, Chrysler's chairman and chief executive, will step down following the restructuring.

President Obama said that the company had to file for bankruptcy due to what he called "a small group of speculators," referring to the several hedge funds that are secured lenders of Chrysler, who didn't agree to the deal put forward by the government.

Nevertheless, the president said that the bankruptcy filing was the best outcome for Chrysler and for the country.

The Chrysler news caused investors to bid up the other car companies, notably Ford, as it is perceived as the strong player in the big three pack.

But one sellsider pointed out that given the pattern of other industry bankruptcies, that's not necessarily going to be the outcome.

"Look at the airlines," the sellsider said. "Everyone filed except AMR, and they were the ones that got left with all the legacy costs that the other ones were freed off. What does that mean for Ford if they are the only ones that don't file? I don't know. Then they are the only ones with union legacy contracts. But maybe it means that they'll have better employee morale, and they'll make better cars."

Mentioned in this article:

Ford Motor Co. NYSE: F

Johnson Controls Inc. NYSE: JCI

Mylan Inc. NYSE: MYL

Newell Rubbermaid Inc. NYSE: NWL

Newmont Mining Corp. NYSE: NEM

ProLogis NYSE: PLD

Textron Inc. NYSE: TXT

© 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.