Allegheny Technologies trades lightly; Saks mostly flat after smaller-than-expected loss

By Rebecca Melvin

New York, Aug. 18 - Convertible bonds Tuesday weren't moving in the same direction that equities were heading, which was up; but market players said they weren't seeing weakness in convertibles as much as light volumes.

"I'm not seeing that at all," a New York-based sellsider said when asked about lower trades in specialty metals producer Allegheny Technologies Inc. convertibles versus its common stock, which ended the day up 3%.

"It also depends on your deltas. Mostly, it was just quiet," the sellsider said.

The delta of a convertible is the sensitivity of the bond's price to changes in its underlying shares.

Better-than-expected results from retailer Saks Inc. pulled that company's two convertible issues into trade on Tuesday, with that paper called flat to lower despite a 7% gain in their underlying shares.

Hertz Global Holdings Inc. was mostly flat versus shares that were 1.6% higher.

Also mentioned in trade were FPL Group Inc.'s mandatory convertibles, which priced in late May at the same time that Hertz and Saks did. The mandatories were little changed, in line with the common stock.

Watson Pharmaceuticals Inc. wasn't in focus, according to several sources, despite headlines in that name. The Corona, Calif.-based pharmaceuticals company said it plans to call the Watson convertibles and repay $100 million of term loan borrowings using part of the proceeds of an $850 million straight bond offering that priced Tuesday.

"They were trading over par versus the stock. If they get called, you lose money if the stock trades higher. If you paid over par and the stock is unchanged, you lose your premium over par," a New York-based sellside trader said of the Watson 1.75% convertibles.

Saks trades mostly flat

Saks' 7.5% convertibles due 2013 traded at 120.5 versus a stock price of $5.25 during the session, but they were closed at 118 versus a stock price of $5.72, which was flat to lower compared to 119.44 for the previous session, according to a New York-based sellside analyst.

Saks' 2% convertible due 2024 traded at 74 during the session and were indicated at 76 at the close.

The New York-based retailer posted a fifth consecutive loss of $54.5 million, or 39 cents a share, for the three months ended Aug. 1, but that was better than expected, although worse than the $32.7 million loss in the same period a year earlier.

The purveyor of luxury goods has been hurt by the recession that has caused consumers of all stripes to cut back on spending. But despite lower sales, the company has been able to reign in expenses and gross margin has improved.

Saks chairman and chief executive Stephen I. Sadove noted in the press release, "Although the economic environment remains difficult, I am extremely pleased with our expense management, and our gross margin performance exceeded our expectations."

"Comparable-store sales declined 15.5% in the second quarter, in line with our expectations," Sadove continued.

Second-quarter comparable-store sales benefited from the shift of a spring season clearance event into the second quarter this year from the first quarter last year. Excluding this shift, management estimates that comparable-store sales would have declined about 18.5% for the second quarter. For the six months ended Aug. 1, 2009, comparable-store sales fell 22.4%.

Saks Fifth Avenue stores continued to experience weakness across all merchandise categories and geographies. The sales decline in the New York City flagship store continued to be higher than the company's total comparable-store sales decline.

Allegheny, Hertz a little weaker

Allegheny Technologies' 4.25% convertibles due 2014 traded at 101.25 versus a share price of $26.15 on Tuesday. Another sellsider quoted the paper at 101.20 versus a share price of $26.25.

At the close, the Allegheny 4.25s were seen at 101.625 versus a share price of $26.91. Trace called this level down by about 2 points, but another pricing source had the paper up by about the same amount.

Shares of the Pittsburgh-based specialty steel producer ended up 79 cents, or 3%, at $26.91.

When the stock was about $10 higher, the convertible was at about 114.

Only about $2.5 million of bonds traded on Tuesday, a sellsider said. "It was very quiet."

Hertz 5.25% convertibles due 2014 traded at 140 versus a share price of $10.25, which was little changed versus a share price of $10.10 on Monday.

Shares of the Park Ridge, N.J.-based auto and equipment rental company gained 16 cents, or 1.6%, to $10.26 on Tuesday.

FPL's 8.375% mandatories traded at 51.40 versus a share price of $56.00 on Tuesday, which was up slightly from about 51.2 on Monday.

Shares of the Juno Beach, Fla., electric power producer added 55 cents, or nearly 1%, to $56.97 on Tuesday.

Watson little changed

Watson's 1.75% convertibles due 2023 were seen little changed, trading just over par versus their stock price, which ended the day at $34.61, which was up 9 cents, or 0.26%.

The company said it plans to redeem its $575 million outstanding principal amount of convertible contingent senior debentures due 2023 and to repay $100 million of term loan borrowings under its credit agreement.

The redemption and repayment will be funded with some of the proceeds from Watson's offering of $850 million principal amount of five- and 10-year senior unsecured notes, according to a company news release.

Watson, which is focused on pharmaceuticals in the areas of urology, women's health and nephrology, priced an $850 million split-rated deal via Bank of America Merrill Lynch and Barclays Capital Inc., with Wells Fargo as a manager.

Mentioned in this article:

Allegheny Technologies Inc. NYSE: ATI

Hertz Global Holdings Inc. NYSE: HTZ

FPL Group Inc. NYSE: FPL

Saks Inc. NYSE: SKS

Watson Pharmaceuticals Inc. NYSE: WPI

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