Johnson Controls rises on exchange offer; Alcoa, others bid up on speculation of exchanges

By Rebecca Melvin

New York, Aug. 20 - A group of relatively new, in-the-money convertible bonds were bid up Thursday on speculation that the exchange offer unveiled by Johnson Controls Inc. early in the day may be repeated by other issuers.

"People are thinking that there could be more of these offers forthcoming," a New York-based sellside desk analyst said.

Johnson Controls, which gained on Wednesday, jumped again on Thursday.

Alcoa Inc.'s convertibles, which like Johnson Controls were recently issued and are deeply in the money, were also higher on strong volume as they are a likely candidate to be taken out in this manner, sources said.

Additional names of this stripe include Ingersoll-Rand Co. Ltd., United States Steel Corp., Newell Rubbermaid Inc. and Wyndham Worldwide Corp. And these names were also mentioned in trade at higher levels.

The aggressive bidding on those issues livened up the session, but it was still quiet overall given that many are on the sidelines during the current August vacation period.

LifePoint Hospitals Inc. remained active in trade at steady to slightly lower pricing, after moving lower by about 1.7 points on Wednesday.

Financials, which were propping up the equity markets, weren't fostering notable activity in the convertible market, sources said.

The primary market remained quiet in the U.S. market as it has been all week, but there were deals priced in Europe and Canada and another launched in Singapore. The issuers included Air Berlin plc, Western Resources Group Inc., Exchange Income Corp. and First Resources Ltd.

Johnson Controls gains

Johnson Controls' 6.5% convertible bonds due 2012 traded up another 5 or so points over parity on Thursday after gaining 5 points on Wednesday for a total 12 points over parity, which is where the company's exchange offer is being made.

The dollar price is up 2.2 points to 235.675.

The company is offering to exchange the Johnson Controls 11.5% convertible mandatories due 2012 for an additional 6.5 points.

Shares of the Milwaukee-based supplier to the automotive and commercial building sectors slipped 41 cents, or 1.6%, to $24.99 on the day.

"Essentially it's a win-win situation," a New York-based sellside trader said.

For investors the Johnson Controls bonds were at a 5-point premium, and the company offered to take them out at 12 points, he said.

From the issuer's perspective, they can buy back the convertibles at a discount to the net present value of the coupons.

"They are NPVing everything. They have to pay a relatively high 6.5% in the three years until they mature. In today's terms, let's say that's $14 or $15, so it makes sense for them to exchange them," the sellsider said.

The sellsider said that holders of the Johnson Controls paper made over 5 points overnight.

Similar exchanges eyed

Other deep in-the-money convertibles are likely to be the subject of similar exchanges, he said. "This played out a couple of years ago in about 2005 when a lot of funds out there owned these types of bonds and talked to the companies. But what's unique about this is that it's a real offer for the bonds and mandatories that is open to any and all holders. So it's widespread."

The company announced at the beginning of the day that it has begun offers to exchange any and all of its 6.5% convertible senior notes due 2012 and up to 8.55 million of its mandatories for cash and common stock.

For each $1,000 principal amount of convertible bonds, the company is offering 89.3855 shares of common stock, $120 in cash and accrued interest up to but excluding the settlement date.

For each mandatory, or equity unit, Johnson Controls is offering 4.8579 shares of common stock, $6.50 in cash and a distribution consisting of the pro rata share of accrued interest on the company's 11½% subordinated notes due 2042 that form a part of the corporate units up to but excluding the settlement date.

Both offers expire at 11:59 p.m. ET on Sept. 17.

The company originally issued $402.5 million principal amount of the convertibles and 9 million corporate units in March 2009.

The notes are convertible at an initial conversion rate of 89.3855 shares per $1,000 principal amount.

Each mandatory consists of a purchase contract obligating the holder to purchase from the company shares of its common stock and a 5% undivided beneficial interest in $1,000 principal amount of the subordinated notes, owned by the holder but pledged to the company to secure the holder's obligations under the purchase contract.

Johnson Controls said it is making the exchange offers to reduce its outstanding debt and related ongoing interest expense.

The completion of each exchange offer is subject to the effectiveness of the registration statement relating to the exchange offers, which was filed Aug. 20 with the Securities and Exchange Commission but has not yet become effective, and, in the case of the corporate units exchange offer, the continued listing on the New York Stock Exchange of the corporate units that remain outstanding after the exchange offer.

Neither offer is conditioned on the completion of the other or on the tender of any minimum number of securities.

Bank of America Merrill Lynch and Barclays Capital Inc. are the joint lead managers, and Citi is the co-dealer manager.

Alcoa also over 200

Paper fitting the category of recent, in-the-money issues include Alcoa. Its 5.25% convertible senior notes due March 2014 traded at 210 on Thursday, which was up about 3 points.

Alcoa is "the most direct correlation time-wise and framework-wise and it is the No. 1 volume name," a New York-based sellside trader said.

The other issues are high, but not as high as the Alcoa and Johnson Controls paper.

And one East Coast buysider said, "Some probably will get flushed out, others won't. It's more of a liability management issue at these prices rather than an economically rational thing to do."

Ingersoll-Rand's 4.5% senior exchangeable notes due 2012 were seen changing hands at more than 180, which was up from 173.5 on Wednesday and up from 166 on July 27.

One sellsider quoted a trade in Ingersoll at 180.5 versus a share price of $30.00.

U.S. Steel's 4% convertibles due May 2014 traded at 156 versus a share price of $43.60, compared to 146.932 on July 28.

Another source put the U.S. Steel paper at closer to 150 at the close.

Newell Rubbermaid's 5.5% convertibles due March 2014 traded at 174 versus a share price of $13.60, and Wyndham Worldwide's 3.5% convertibles due May 2012 changed hands at 134.5 versus a share price of $15.25, compared to 107.5 versus a share price of $11.25 on May 29. Wyndham is a Parsippany, N.J.-based hospitality company.

Mentioned in this article:

Alcoa Inc. NYSE: AA

Ingersoll-Rand Co. Ltd. NYSE: IR

Johnson Controls Inc. NYSE: JCI

LifePoint Hospitals Inc. Nasdaq: LPNT

Newell Rubbermaid Inc. NYSE: NWL

United States Steel Corp. NYSE: X

Wyndham Worldwide Corp. NYSE: WYN

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