Rate-sensitive convertible notes under pressure; Frontier Communications, Anadarko on tap

By Rebecca Melvin

New York, June 4 – U.S. convertibles were mixed with pockets of weakness particularly in longer-dated, rate-sensitive issues on Thursday, a New York-based trader said.

Weakness was not limited to rate sensitive names, however, as a combination of factors appeared to be pressuring the market, including the broader market tone and the fact that there has been a significant amount of new paper pricing this week and last, the trader said.

“The tone was mixed with some things definitely better for sale, but there was a certain amount of randomness to it,” the trader said.

PennyMac Mortgage Investment Trust’s 5.375% convertibles were weaker. The non-callable, exchangeable bonds due 2020 changed hands at 94.3, which was down from about 95. A second source had it marked 94.549 bid, 95.299 offered at the close.

Shares of the Calabasas, Calif.-based real estate investment trust were down about 18 cents, or nearly 1%, at $18.32.

Horizon Pharma plc’s 2.5% convertibles due 2022 – which isn’t a rate-sensitive or longer-dated issue – “went out weaker by about 0.5 point.” It was quoted at the close at 131.75 bid, 132. 75 versus a share price of $31.31.

The BioMarin Pharmaceutical Inc. convertibles were also weaker, with the A tranche noted to have come in by 0.375 point. “That isn’t long dated, but it was definitely weaker,” a trader said.

Huron Consulting Group Inc. and Scorpio Tankers Inc. were also mentioned as being weak.

Huron’s 1.25% convertibles due 2019 looked like it was down at least 0.75 point, the trader said.

Market players may be needing to make room in their portfolios for the new deals, including two which were expected to price late Thursday.

Frontier Communications Corp. was expected to price $1.75 billion of mandatory convertible preferred stock after the market close. That deal was talked to yield 11.125% to 11.625% with an initial conversion premium of 12.5% to 17.5% and was looking roughly fair value, sources said.

In addition, Anadarko Petroleum Corp. planned to price $325 million of tangible equity units, exchangeable into shares of its subsidiary Western Gas Equity Partners LP. That deal is talked at a 7.5% to 8% coupon and 20% to 25% premium.

But ON Semiconductor Corp.’s 1% convertible bonds, which debuted in the secondary market on Wednesday, were seen up slightly, extending gains for a second day.

As for the broader markets, equities were weak and bonds were volatile. Bond yields pushed higher before ending lower. The yield on the 10-year Treasury note fell to 2.30% from 2.36% late Wednesday.

Greek debt repayment and the U.S. monthly jobs report due out Friday were concerns in the market on Thursday.

“It looks like the news out of Greece shows the situation is not progressing well,” a trader said.

The next read on the U.S. economy, namely in the form of the U.S. payrolls report, may have also induced some anxiety, with the new deals also cited as a factor in Thursday’s session.

“Maybe people are parting with stuff to make room for that,” the trader said. Some of it “has been fully valued for a while.”

Frontier notes about ‘fair’

Frontier was offering both a $1.75 billion mandatory deal and a secondary stock offering for $750 million.

Frontier shares were volatile, moving down by 7% on Thursday after jumping on Wednesday after the company launched the deals and after DA Davidson upgraded shares to “buy” from “neutral,” citing the fact that the new deals remove a debt overhang.

A convertibles trader commented on the Frontier mandatory saying, “there is a lot of paper in that sector in an eroding legacy business. I think common swap might work, but think the valuation is fair.”

A second trader said Frontier “models OK,” but considering the company’s high dividend on the common stock at 8.4% to 9% common yield, the issue wasn’t likely to trade well, he thought.

“When you factor in the high coupon on the common, it’s not going to play well. Hedge funds are going to hate it, I think,” a trader said, citing the problem of breaking even versus the common.

Frontier shares ended down 38 cents, or 7%, at $5.00.

ON Semi better again

ON Semiconductor’s new 1% convertibles due 2020 were quoted late in the session at about 103 with the underlying shares at $12.88.

That was up about 0.125 point to 0.25 point on a dollar-neutral, or swap, basis, a New York-based trader said. And the improvement was on top of a 2.5 point expansion on Wednesday.

ON Semiconductor shares were down 38 cents, or nearly 3%, at the close.

“I’d say based on the share price, they expanded a touch,” the trader said.

On Wednesday, the new ON Semiconductor bonds traded at 103.8 and 103.9, according to Trace data.

The Phoenix-based semiconductor company priced $600 million of the senior notes at the rich end of talked terms.

The bonds priced with a 42.5% initial conversion premium, and the terms represented the rich end of talked terms, which was for a coupon of 1% to 1.5% and a premium of 37.5% to 42.5%.

There is an over-allotment option for up to $90 million of additional notes. Joint bookrunners were Morgan Stanley & Co. LLC, J.P. Morgan Securities LLC and BofA Merrill Lynch.

The bonds are non-callable and have no puts.

Mentioned in this article:

Anadarko Petroleum Corp. NYSE: APC

BioMarin Pharmaceuticals Inc. Nasdsaq: BMRN

Horizon Pharma plc Nasdaq: HZNP

Huron Consulting Group Inc. Nasdaq: HURN

ON Semiconductor Corp. NYSE: ON

PennyMac Mortgage Investment Trust NYSE: PMT

Scorpio Tankers Inc. Nasdaq: STNG

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