Convertibles mostly quiet; Six Flags drops outright, new MedImmune issues lifted 1 point

By Rebecca Melvin

Princeton, N.J., June 23 - The convertible bond market's first official summer Friday was true to form with diminished trading volume and slim staffs contributing to a generally quiet session. But other factors were in play as well, with sellers contributing to generally weaker prices, market sources said.

"It was a low volume day. We had two traders and two salesmen. We focused on the names where we have the people in," a New York-based sellside analyst said.

Larger, liquid issues like Ford Motor Co. and Intel Corp. changed hands a little, the analyst said.

The convertibles of Six Flags Inc. dropped like a rock but held mostly in line with their underlying shares, amid weak guidance, ratings downgrades and a bond covenant warning.

News of Anadarko Petroleum Corp.'s planned takeover of Kerr-McGee Corp. and Western Gas Resources Inc. sparked some interest in the energy space with the convertibles of Chesapeake Energy Corp. and Devon/Chevron heard a little better. Anadarko and Kerr-McGee are former convertible issuers, but neither company has any convertibles outstanding now, sources said.

The debut of MedImmune Inc.'s $1 billion of convertibles in the secondary market was OK, with the new paper outperforming the stock by about a point for the day, a syndicate source said. But some would have liked to see it trade more.

The new MedImmune convertibles traded midmorning at 99, when the stock came off, compared with the first trade out of the block at 100.5, a syndicate source said. But near the end of the day, the A paper (five-year tranche) was at about 100.875 to 101.125, while the B paper was at about 101.

While summer doldrums and a lower stock price were seen as part of the spotty trading problem; perhaps another factor was that the deal was pre-hedged.

"It was pre-hedged. It was a happy meal, and there just isn't as much trading of those; same with the EOP deal - but LCUT wasn't, and AMMD wasn't," a Connecticut-based sellside trader commented.

The sellsider was referring to other new convertibles issued during the week - in particular Wednesday - when Equity Office Properties Trust priced an upsized $1.3 billion of 4% exchangeables, Lifetime Brands Inc. priced an upsized $65 million of 4.75% convertibles and American Medical Systems Holdings Inc. priced $325 million of 3.25% convertibles.

Also pricing during the week of June 19 were Group 1 Automotive Inc.'s $250 million of 2.25% convertibles and Alleghany Corp.'s $260.6 million of 5.75% mandatories.

But even with that amount of new paper - more than $3 billion of new issuance - trading activity was off during the week compared to earlier in the month when prices were rising.

"Where the market was perceived to be Monday and Tuesday, people aren't willing to pay that perceived price [Friday]," a sellsider said. But convertibles held up fairly well when high yield and stocks came in, he said.

Six Flags plummets outright

Six Flags' stocks and bonds suffered on Friday; but on a dollar-neutral basis its convertibles held up pretty well, market sources said.

The carnage ensued after the New York-based theme-park operator said late Thursday that park attendance was down and that it was looking to sell off six properties and non-core assets. It also warned that it didn't expect to be able to reach its previous earnings outlook.

On Friday, KDP Investment Advisors published a research report citing, among other things, increased expenses as a headwind for the company. Moody's Investors Service and Standard & Poor's lowered their debt outlooks on Friday, further pressuring the securities.

"It's a perfect storm scenario, at least for the equity," a convertibles sellsider said. "We have a window on the debt because nothing comes due until '09."

The sellsider suggested that ticket prices to Disney theme parks are comparable to those of Six Flags, and that Six Flags has a reputation for having facilities that are not as well maintained as Disney's.

Six Flags 4.5% convertibles due 2015 was seen at around 111 to 112.5, versus a stock price of $6, compared to trades of 136, versus a stock price of $7.5, and 127.125, versus $7.40, according to one trader.

"But the bid wasn't there," the trader said at about 3 p.m. ET. "The borrow is getting very difficult. Trade was two sided this morning. But there is only an offering side now."

According to NASD trace, the 4.5% bonds changed hands on Friday at 108.52 compared to 130.866 on Monday.

The 7.25% convertible preferred shares due 2009 were indicated at 21.80, a new low, compared to about 23 previously.

Six Flags (NYSE: SIX) stock plunged $1.9, or 25.5%, to close the day at $5.55 after extremely heavy volume.

MedImmune convertibles rise

The new $1 billion MedImmune issue, including 1.375% five-year paper and 1.625% seven-year paper priced at the cheap end of talk for the coupon, but at the midpoint of talk for the initial conversion premium.

The convertibles, which traded almost in lock step, opened the session at 100.5 but by late morning were trading around 99, according to a syndicate source.

"The overall market is weaker; the stock is down, so it isn't any great surprise," the source said.

By the end of the day, however, the new convertibles had regained some ground and went out right around 101.

"One is nuking at 68, and the other is at 75, so they've been outperforming the stock all day by about a point," a syndicate source said.

The deal came in two parts. Price talk on the five-year $500 million tranche was for a coupon of 0.875% to 1.375% with an initial conversion premium of 20% to 25%; while talk on the seven-year, tranche was for a coupon of 1.125% to 1.625% with an initial conversion premium in the same range.

The Rule 144A deal was sold via joint bookrunners Merrill Lynch and UBS Investment Bank, with UBS stabilizing.

Neither tranche has any calls or puts.

There is a planned over-allotment option for up to an additional $75 million for each tranche.

Half of proceeds will to go to repurchase MedImmune's existing 1% convertible senior notes on July 17.

Gaithersburg, Md.-based MedImmune (Nasdaq: MEDI) is a biotechnology company focused on the treatment of infectious and inflammatory diseases and cancer

New EOP trades sparsely

The new Equity Office 4% convertibles were quiet, a syndicate source said late Friday. "Most of the trading activity took place yesterday."

He disagreed that the lack of activity might be due to the fact that the deal was pre-hedged. He thought instead that the reason was because many people were on vacation.

A New York-based sellsider said the new EOP 4s traded "a little over par."

A second syndicate source said early Friday that the Equity Office deal for $1.3 billion "was not a tremendous success."

"They increased the size, but priced it at the back end," he added.

American Medical's new 3.25% convertible was not heard in trade; however, its stock closed up 53 cents, or 3.47%, to $15.81.

Meanwhile, new interest has materialized in Millipore Corp.'s recently issued convertible. It was pretty much ignored in the days immediately following issuance but now seems to be gaining ground, a New York-based sellsider said.

The current market scenario didn't bother one New York-based buysider.

"I like the current pricing. We don't have to buy new issues with low coupons and low conversion premiums. We can wait until they bust - then there will be some really attractive situations," he said via e-mail. "And these issues have maturities of five to seven years, so they will be around long enough for some serious setbacks in the underlying stocks, which will create great buying opportunities."

© 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.