Alcoa higher ahead of earnings; Ford adds; U.S. Steel slips; Salesforce.com, KKR to price

By Rebecca Melvin

New York, Jan. 11 - Trading in Alcoa Inc. convertibles - which is primarily tactical in nature at this point - got a boost Monday ahead of fundamental news provided by the aluminum company's fourth-quarter earnings report posted after the session's close.

The earnings report, which is considered the unofficial kick off of earnings season, showed a smaller net loss on lower revenue that missed estimates, and Alcoa shares dropped in after-hours trading.

Ford Motor Co.'s new convertibles, which like Alcoa are well in the money, were also better in trade Monday as its stock rose.

United States Steel Corp.'s 4% convertibles due 2014 are also well in the money and trading above double par. But the paper dropped a little along with the underlying shares on Monday.

Nasdaq Stock Market Inc.'s 2.5% convertibles due 2013 are not in the money, having a conversion price of $55.13 versus the current stock price of $20.28, and they traded more or less steady Monday at 93.75.

A week ago, the Nasdaq 2.5% paper was at 93.5 versus a stock price of $20.25. The company announced a $700 million offering of senior straight notes in two tranches on Monday.

Overall, trading in the convertibles secondary market was called light, with prices little changed.

The primary market was quiet during the session, but two deals emerged after the market close, including Salesforce.com's planned $500 million of five-year convertible bonds and KKR Financial Holdings LLC's planned $125 million of seven-year convertibles. Both were seen pricing Tuesday.

Alcoa adds ahead of earnings

Alcoa's 5.25% convertibles due 2014 were at 277 or 278 versus a stock price of $17.45, compared to Friday's price of 273 versus $17, and an earlier in the week quote at 261 versus $16.10.

Shares of the Pittsburgh-based company added 43 cents, or 2.5%, trading to a 52-week high. But after the market close when the company posted earnings that failed to match estimates, its shares dropped 93 cents, or 5.3%, to $16.53 in after-hours trading.

Trading in the convertibles is tactical and subject to speculation about possible inducements to convert early.

Hedge players may be buying the paper for the cash flows, rebate and cost of carry. They buy the bond as a cash flow vehicle and hedge the equity, a sellsider said.

The risk is low since the paper is not callable, and given what has happened to the stock price since the paper initially priced last March, it sets up the potential for inducement offers, or early conversion, a New York-based sellside analyst said.

In the last month, Alcoa has been the best performing component of the Dow Jones Industrial Average. But the shares came off after the company posted earnings that were a little cloudy but nevertheless seemed to miss estimates.

Its loss was narrower compared with a year earlier, but the company blamed higher electricity costs, the weak U.S. dollar and the costs associated with temporarily shutting down smelters in Italy for why the result wasn't better.

Although aluminum prices are climbing, demand from certain customers, including aircraft companies, isn't anticipated to increase significantly in the near term.

United States Steel Co., which has a 4% convertible due 2014, traded down 8 points to 209 on a 3% lower stock price on Monday.

Ford follows shares higher

Ford's new convertibles, the 4.25% convertibles due 2016, traded late Monday at 147.625 versus a $12.11 stock price, compared to 143.5 versus $11.75 on Friday.

The new paper moves with the stock on a high delta in the upper 80% to 90%.

The Ford paper is also deep in the money, but given that it priced in November as opposed to Alcoa's March, it's a little less impressive.

By way of comparison, if Ford had issued in March when its shares were between $2 and $3, the bonds today would be at about 400, a New York-based sellside trader pointed out.

Because the convertible was issued early in the equity cycle, it has more bond floor protection.

Shares of the Dearborn, Mich.-based automaker gained 42 cents, or 3.6%.

Fitch Ratings upgraded the automaker to B- from CCC. The upgrade is due to improved macroeconomic environment, Ford's current cost and pricing trends, product competitiveness, sold near-term product pipeline, liquidity position and cash flow prospects, the rating agency said.

"Fitch expects that Ford will turn cash flow positive in 2010 as an improving economic outlook and stabilizing retail financing market allows the U.S. car market to achieve an annualized run-rate of more than 11.5 million units in the second half of 2010," the ratings agency said. The outlook remains positive.

Salesforce.com, KKR to price

Salesforce.com plans to price $500 million of convertibles Tuesday that were talked to yield 0.5% with an initial conversion premium of 27.5%. The Rule 144A offering is being sold via Bank of America Merrill Lynch.

The San Francisco-based provider of relationship management service plans to use proceeds to cover the cost of convertible note hedge transactions and for general corporate purposes including possible acquisitions of complementary businesses, services or technologies, working capital and capital expenditures.

KKR Financial plans to price $125 million of seven-year convertibles Tuesday that were talked to yield 7.25% to 7.75%, with an initial conversion premium of 22.5 to 27.5%, according to a market source.

The registered offering has a 15% over-allotment option to purchase up to an additional $18.75 million of notes.

Citi, BofA Merrill Lynch and J.P. Morgan are acting as joint book-runners for the offering. KKR Capital Markets LLC is acting as a co-manager of the offering.

The San Francisco-based real-estate investment trust plans to use proceeds to repurchase or repay a portion of existing senior indebtedness.

Mentioned in this article:

Alcoa Inc. NYSE: AA

Ford Motor Co. NYSE: F

KKR Financial Holdings LLC NYSE: KFN

Nasdaq Stock Market Inc. Nasdaq: NDAQ

Salesforce.com NYSE: CRM

United States Steel Corp. NYSE: X

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