Horizon Lines spikes on debt deal; Teleflex flat to better on hedge; all eyes on payrolls

By Rebecca Melvin

New York, June 2 - The convertible bond market "felt heavy" Thursday and was busier than it has been in recent days but trading was not all in one direction, market sources said.

The tone followed on the heels of a broad-based 0.25 point loss Wednesday when stocks stumbled on weaker-then-expected economic data.

"The premium of the convertibles market was coming in a little bit" as both stock prices and convertible prices slipped, a New York-based trader said.

"I've got orders today, but can't get anything done," the trader said, regarding difficulty finding the other side of desired trades for accounts.

"People want to do things today and they haven't wanted to do anything for weeks," the sellsider said, adding that there were no trends to be discerned in the orders, which were for both purchases and sales.

Among specific names, Horizon Lines, Inc. convertibles spiked 8 points outright in heavy volume early, but came off that level by about 4 points, all after the Charlotte, N.C.-based ocean shipping and integrated logistics company announced it has entered into an exchange agreement with a majority of the holders of that paper.

The Horizon exchange involves bonds, stock and cash and since the value of the bonds and stock is subject to interpretation, there were a variety of different players in the name on Thursday, a trader said.

Teleflex Inc. convertibles were also trading and deemed in line to 0.375 point better on a hedged basis as shares of the Limerick, Pa.-based medical device company came off following word that a roadshow was starting for a $250 million offering of 10-year senior subordinated straight notes.

China Medical Technologies Inc.'s 4% convertibles due 2013 were active in trade.

Sino-Forest Corp. convertibles took a hit as their Toronto-listed stock slumped on fraud allegations, a market source said

Economic data Thursday came in weaker than expected and weighed on equity markets, which were mostly lower.

The government said that first-time applications for unemployment benefits fell to 422,000. The number slipped from 424,000 applications the previous week, but was still above the 419,000 that economists had expected. Applications below 375,000 are thought to signal consistent job growth.

U.S. factory orders for April were reported down 1.2%, which was 20 bps worse than expected.

On Friday, the widely anticipated U.S. nonfarm payrolls data is expected to be released and many have trimmed their forecasts following the reports that came out earlier in the week.

Goldman Sachs & Co. cut its forecast earlier in the week and now expects payroll growth to decelerate to 100,000 jobs in May, and another forecast put the number at 125,000 jobs, which is significantly reduced from the 244,000 jobs in the Labor Department's April report.

Horizon trades up on exchange

Horizon Lines' 4.25% convertibles due 2012 jumped about 8 points to 94 in early trade and subsequently came off slightly to trade at 93 and then lower, which was up from the mid 80s previously.

Shares of the Charlotte, N.C.-based shipping company surged 31 cents, or 31%, to $1.3319 in double the average amount of trading volume, and settled higher by 20 cents, or 20%, at $1.22.

"The initial spike was probably short covering," a New York-based sellside trader said.

A second trader said that holders had no choice but to accept the exchange, and that because different pieces of the exchange offer are "moving around, people's interpretation is going to fluctuate."

Horizon entered into an agreement with holders of a majority of its 4.25% convertible senior notes in a transaction that will refinance the company's entire capital structure, the company said in its announcement.

The agreement calls for a complete refinancing in conjunction with a new up to $125 million asset-based revolving loan facility. Horizon said the ABL facility is being negotiated with a leading financial institution.

The company's current debt structure consists of a $225 million senior secured revolving credit facility, a $125 million secured term loan and $330 million of unsecured 4.25% convertible senior notes.

Horizon Lines said the recapitalization will eliminate the refinancing risk related to the maturity of its existing convertible notes and existing bank debt in 2012 and will provide liquidity to fund continued operations through new senior secured notes and new ABL facility.

Also under the recapitalization, the company's balance sheet will be immediately deleveraged by $50 million through a debt-for-equity exchange. Additional deleveraging could be accomplished through the early conversion of the new convertible secured notes to be issued in an exchange offer.

The refinancing is expected to be completed in August. Under the agreements, the company will offer to exchange the existing $330 million of unsecured 4.25% convertible senior notes for a new series of $200 million 6.0% 51/2-year convertible secured notes, which will be convertible into common stock at $1.70 per share, as well as $80 million in cash and 38.5 million shares of common stock, with would represent about 56% of the outstanding capital stock of the company at closing.

In addition, Horizon said is expected to have the right to convert the new 6.0% convertible secured notes, beginning three months after the issuance, in increments not to exceed $50 million. The 30-day weighted average price of the stock must be at least $2.00 on the first conversion date. The subsequent 30-day weighted average price of the stock must be at least $2.10 on the second conversion date, $2.30 on the third and $2.40 on the fourth and final conversion date.

Each subsequent conversion date must be at least three months after the previous conversion date.

Teleflex flat to stronger on hedge

Teleflex' 3.875% convertibles due 2017 traded at 115.25 bid, 115.75 offered versus an underlying share price of $60.90.

They were about 0.375 point better on hedge. "Any time you do any kind of financing, the credit is considered better," a trader said.

A second trader said that he "heard a huge seller this morning and then more bonds bought than sold, so it looks like a dealer sold some off his pad as well."

The public offering of straight notes is expected to price in the middle part of next week.

Bank of America Merrill Lynch, Goldman Sachs & Co. and J.P. Morgan Securities LLC are the bookrunners for the sale, which will be sold from a shelf registration with the Securities and Exchange Commission.

The notes come with five years of call protection.

Proceeds will be used to prepay $125 million of its existing credit facilities and for general corporate purposes which may include capital expenditures, acquisitions and additional debt repayment.

Standard & Poor's said that it assigned a preliminary BB- rating and 5 recovery rating to Teleflex' $250 million of senior subordinated notes and raised the debt rating on the $400 million of senior subordinated convertible notes to BB- with a 5 recovery rating from a B+ debt rating with a 6 recovery rating.

The improved recovery prospects for the senior unsecured class of debt reflect a net reduction in secured debt, the agency said.

Teleflex plans to repay $125 million of its secured term loan with proceeds from the $250 million issue. As a result, there is a modest increase in collateral available to unsecured lenders.

The ratings reflect the expectation that the company's financial risk profile will gradually benefit from EBITDA growth tied to its diversified portfolio of disposable medical products and debt repayment and the company's fair business risk profile, the agency said.

Mentioned in this article:

China Medical Technologies Inc. Nasdaq: CMED

Horizon Lines Inc. NYSE: HRZ

Sino-Forest Corp. Toronto: TRE:TO

Teleflex Inc. NYSE: TFX

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