Whiting Petroleum slips below par on debut; Watson up; newly priced issues in focus

By Rebecca Melvin

New York, June 18 - Whiting Petroleum Corp.'s newly priced 6.25% convertibles slipped below par on their debut in the secondary market on Thursday to settle at 99.35-99.50, after some trades above par, according to syndicate sources.

The $300 million of perpetual convertible preferred stock, which priced at the midpoint of talk after the close Wednesday, had been seen 3% cheap at the midpoint of talk by one sellsider ahead of pricing.

Liz Claiborne Inc. priced on the cheap end its $75 million of five-year convertible senior notes after the close Thursday to yield 6% with an initial conversion premium of 20%. Shares of the women's apparel designer and retailer sank 26% in the session ahead of pricing.

Watson Pharmaceuticals Inc. moved up nicely to trade at 98, which was up about 2 points the day after the Corona, Calif.-based generic drug maker said it planned to buy privately held Arrow Group for $1.75 billion in cash and stock, a move that will help expand its reach in overseas markets.

Also among generic pharmaceutical makers, Teva Pharmaceutical Industries Ltd. issued a notice of convertibility Wednesday for its Teva 0.5% series A convertibles due 2024 and its 0.25% series B convertibles due 2024.

Investors should take advantage of the conversion window and tender since both bonds are deep in the money and trading below parity, with current yield below dividend yield, Barclays Capital analysts Manoj Shivdasani, Venu Krishna and Peng Cheng recommended.

Otherwise trading activity seemed focused on recently issued paper, with Allegheny Technologies Inc.'s 4.25% convertibles in trade at 114.25 versus a stock price of $37.65; Hertz Global Holdings Inc.'s 5.25% convertibles seen in trade at 103.75 versus a stock price of $7.00; and Covanta Holding Corp.'s 3.25% convertible due 2014 at 104.75 versus $16.25. All three of the issues were issued in the second half of May.

Whiting slips below par

Whiting Petroleum's 6.25% perpetual convertible preferred stock closed at 99.35 bid, 99.50 offered, according to a syndicate source. A separate source put the close at 99.5 bid, 100 offered.

The paper had traded above par, but weakened along with the underlying shares.

Shares of the Denver-based oil and gas company settled lower by 25 cents, or 0.7%, to $36.70.

The deal came in the middle of talk for a dividend of 5.75% to 6.75% and an initial conversion premium of 15% to 20%.

The conversion price is $43.4163 and the conversion ratio 2.3033 shares per $100 liquidation preference preferred.

Settlement is scheduled for June 23.

The shares are non-callable for four years, and provisionally callable after that subject to a 120% price hurdle. The paper will be share settled.

Watson, Teva in focus

Watson's 1.75% convertibles due 2023 traded up to 98, but settled around 97.375 area, which was still up by more than a point on the day.

Shares of the generic drug maker surged $1.63, or 5.4%, to $31.90.

On Tuesday, the Teva As traded at a 1.75 point discount because of the structure, according to a New York-based sellside trader, who said at that point the paper couldn't be converted.

Following the convertibility notices, Barclays analysts recommended converting the A and B paper, and swapping into two other Teva convertible issues, the series C and D paper, for continued exposure.

Teva also has 0.25% series C convertibles due 2026 and 1.75% series D convertibles due 2026.

Converting the As and Bs series means 26.8391 ADRs and 28.8529 ADRs, respectively, and holders have until the close of business June 23 to convert.

"Given both bonds are deep in the money, trading below parity with current yield lower than dividend yield, we recommend investors make use of the conversion window and tender the debentures for conversion," the analysts wrote in a research note.

"We recognize that dedicated outright convertible funds that want continued high delta exposure to TEVA might be reluctant to convert. But by not tendering for conversion they would be holding on to bonds that are likely to become less liquid after other holders convert and would likely slightly underperform the ADRs on a total return basis going forward," they said.

They noted that dedicated outright funds that aren't mandated to own could continue to hold the As/Bs if they have a strong positive view on the stock and are seeking high delta exposure.

They said the Bs are better than the As given the shorter 0.6 year put on the Bs versus a 4.6 year put on the As.

The Bs have a higher bond floor of 98.43 relative to the As that have a bond floor of 81.87, they added.

Holders of the Bs who want to get out of their position could likely find some buyers and not have to go through the conversion process. On a relative basis secondary demand for the As is likely to be less than that for the Bs.

The Teva A paper settled at 126.5 on Thursday, which was down about 2 points on the day.

Mentioned in this article:

Allegheny Technologies Inc. NYSE: ATI

Covanta Holding Corp. NYSE: CVA

Hertz Global Holdings Inc. NYSE: HTZ

Liz Claiborne Inc. NYSE: LIZ

Teva Pharmaceutical Industries Ltd. Nasdaq: TEVA

Watson Pharmaceuticals Inc. NYSE: WPI

Whiting Petroleum Corp. NYSE: WLL

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