Convertibles weaker; Jefferies, other new issues down; Allegheny lower; General Cable up

By Rebecca Melvin

New York, Oct. 28 - Convertibles continued weaker on Wednesday, with recent new issuance especially hit hard, as players weighed the direction of markets in light of economic data that isn't that bullish, sources said.

Jefferies Group Inc., which priced $300 million of 20-year convertibles last week, traded at 95 on Wednesday versus a stock price of $26.25. Its underlying shares have shed 2.9% since the deal priced.

AMR Corp.'s recently priced 6.25% convertibles seem to be on a crash course as the paper traded down to 84 Wednesday versus a share price of $5.60. That compares to 94.75 versus a share price of $6.70 last Wednesday.

Elsewhere, Allegheny Technologies Inc. was tracking lower with its underlying shares as were many decent names in a market where equities and credit are both under pressure.

But General Cable Corp. 1% convertibles gained Wednesday following word that the cable and wire manufacturer started an exchange offer for those senior convertible notes due 2012.

Meanwhile, Textron Inc. retraced some of the gains notched Tuesday when the paper added 8.5 points after the industrial company posted a modest profit for the quarter.

Textron's 4.5% convertibles due 2013 traded at 161.5 versus a share price of $18.80, compared with 168.522 on Tuesday.

Trading action was limited by a lack of bidders. "Everyone is on the same side," a New York-based sellsider said.

"Bonds are coming in with [equities], but there is a part of the convert universe that people think will bounce back quicker and harder than the rest," the sellsider said.

A New York-based sellside desk analyst said, "Investors are possibly getting a little skittish. The market's had a huge run this year, and the economic data are not really that bullish, certainly not enough to warrant more upside for equities based on the fundamental picture right now."

The Commerce Department reported Wednesday that new U.S. home sales dropped 3.6% in September to a seasonally adjusted annual rate of 402,000, which was much lower than the increase to a seasonally adjusted annual rate 440,000 that economists expected.

Stocks slid. The Dow Jones Industrial Average ended down 119 points, or 1.2%, to 9,762.69; the S&P 500 index lost 21 points, or nearly 2%, to close at 1,047.63; and the Nasdaq Stock index lost 56 points, or 2.7%, to 2,059.61.

General Cable gains on tender

General Cable's 1% convertibles due 2012 were quoted at 95 bid, 95.5 offered on Wednesday, which was steady compared to late Tuesday when the tender was first announced but up from about 85 bid, 86 offered earlier in the day.

That level was seen to be full value given the exchange valuation.

The company is offering $925 principal amount of its new subordinated convertible notes due 2029 for each $1,000 principal amount of its outstanding 2012 notes. General Cable will also pay accrued interest.

Until Nov. 15, 2019, the 2029 notes will bear interest at the rate of 4.5% per year, and after that date, the notes will bear interest at 2.25% per year.

One sellside source didn't like the duration of the new notes and wondered if a put might be added to the offer to get it done.

Another sellsider agreed that he didn't like the lack of a put or the coupon step-down.

But a third sellsider said the 95 price was about right, given certain credit assumptions and borrow cost that made the new structure model out to about 104ish.

"Due to the new structure, you have a new constituency buying: outrights selling and convert arb investors buying. Yes, the duration is long, but the premium, coupon, hard call, etc. are such that arbs can set up heavy and break-even inside of call protection, leaving any duration outstanding as coupon gravy," the sellsider said.

In addition, high-yield investors saw a nice pop from 86 to the mid 90's; consequently, they were happy to take profits, and investors on swap have something to chew on also, the sellsider said.

The modeled value looked about right to two other sellsiders.

"We came to the same conclusion here, although looking at long dated paper like Microchip Technology Inc. we note the premium is far smaller at a lower dollar price," a New York-based sellsider said.

Another trader agreed with the model at fair value, "but I don't think the new bonds should trade at fair value when the standard in the convert market is for most issues to model a little cheap."

"I thought the new bonds should trade around par, making them 3.6% cheap, similar to the old ones. That would make the exchange worth 92, 93. The 95.5 should be full value, which should make the old bonds a sale. That said, if that is where they trade, that is what they are worth - today," the trader, based in New York, said.

The offer ends at midnight ET on Nov. 24. Holders will be able to convert the new securities at an initial conversion price of 122.5% of the volume-weighted average price, with a minimum conversion price of $36.75. The VWAP will be the arithmetic average of the stock's daily VWAP during the 10-trading-day period ending on the scheduled expiration date for the exchange offer.

Because the initial conversion price will not be less than $36.75, the maximum initial conversion rate will not be greater than 27.2109 shares per $1,000 principal amount of 2029 notes.

The exchange offer is conditioned on holders of at least $100 million of the notes tendering.

General Cable's 0.875% convertibles due 2013 were little changed at about 92.

Shares of the Highland Heights, Ky.-based industrial company fell $1.65, or 5%, to $31.89.

General Cable produces and distributes copper, aluminum and fiber optic wire and cable.

Allegheny Technologies slides

Allegheny Technologies 4.25% convertibles due 2014 settled around 111 versus a share price of $29.70 on Wednesday. Last week the paper was quoted at 122.6 bid, 122.72 offered versus a share price of $37.56.

The Pittsburgh-based specialty metals maker saw its stock come in pretty hard last week on earnings, and on Wednesday its shares were down another 5%.

"It's tracking with the stock. They are supposed to track. And it has a decent coupon," a sellsider said.

Mentioned in this article:

Allegheny Technologies Inc. NYSE: ATI

AMR Corp. NYSE: AMR

Jefferies Group Inc. NYSE: JEF

General Cable Corp. NYSE: BGC

Textron Inc. NYSE: TXT

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