Convertibles mixed to lower; new MF Global slips below par; new Chart trades at issue

By Rebecca Melvin

New York, July 29 - MF Global Holdings Ltd.'s newly priced 3.375% convertibles dropped below par on their debut Friday after the New York-based commodities and derivatives broker-dealer priced an upsized $325 million of seven-year senior notes at the cheap end of talked terms.

Also seeing first-day action was Chart Industries Inc., which was called "at issue" for the new 2% convertibles that came at the midpoint of price talk and were upsized by $20 million to $250 million by the Ohio-based engineering-procurement-construction company.

Back in established issues, Amerigroup Corp. was deemed one to day's best performers in convertibles and said to have expanded given a slump in the Virginia Beach, Va.-based managed health care company's shares on lower-than-expected earnings.

Overall, convertibles were mixed to lower for the week, although trading seemed to be "on hold" on Friday as the debt ceiling deal impasse in Washington rattled investors.

"Today was kind of crazy. I don't really have much to say - been focused on other things today," said one New York-based trader who on Thursday had identified several relevant trends.

On Thursday, the trader said there were net buyers of shorter-dated convertibles and issues that have more of a bond floor. He said there were sellers of things either that had done well recently or more weak credits. Some of the selling was caused by portfolio managers needing to make room for the week's new paper.

Another source said there was "a lot of price discovery" on Friday, meaning that market participants were inquiring to see at what level paper was whether it was trading or not.

The market was rattled by the fact that there was still no decision on the debt ceiling, and while Republicans and Democrats claimed to be fairly close, it seemed that the stalemate could drag on past the Aug. 2 deadline on which payments due were expected to exceed the nation's current ability to pay.

President Barack Obama addressed the nation for the second time in a week on the issue Friday morning. He said that a resolution that was bipartisan was "urgent," and he labeled the plan that the House of Representatives was trying to pass at that time as one that would not satisfy the majority of Republicans and Democrats, wouldn't solve the problem, and had "no chance of becoming law."

He said the U.S. "didn't have a AAA political system to match its AAA credit rating."

In reference to the gross domestic product data, which came in much weaker than expected Friday, Obama said, "...on a day when we've been reminded of how fragile the economy" is, he was sure that the problem was one "we can solve"

In convertibles, volume picked up in the past week in part due to improved supply.

"Anecdotally, I hear headlines like Soros giving back money, SAC giving back money, and I wonder if the hedge fund space in general is starting to return some capital simply because of the lack of return factor, and it's not just in our sector, it's everywhere," a trader said.

The uncertainty combined with the boosted supply has created a subtle shift at the margins, the trader said.

"The investor base in convertibles has gotten more price sensitive and more selective about what it will play," he said. A couple of the deals in the past week "came at the cheaps and went nowhere."

MF Global trades below par

MF Global's new 3.375% convertibles traded down to 99 bid, 99.5 offered in the early going Friday with the underlying shares at $7.47, which was the previous close. The shares opened up lower at $7.37 and closed at that same level, which was down 10 cents, or 1.3%.

The deal was said to have come partially on swap.

The deal was also not seen as a great negative for the credit as proceeds of the deal were earmarked to repurchase a near-term issue.

"Between the buyback and the fact that it was coming partly on swap for some of the bigger hedge players, it changes the impact of the deal," a New York-based trader said. Otherwise, the fact that it is a known convertible issuer and could be labeled a "serial issuer," and the fact that it's in the financial sector, which is not one that all convertibles players like to play, could have been significant detractions.

MF Global priced an upsized $325 million of seven-year convertible senior notes after the close of markets Thursday at par to yield 3.375% with a 32.5% initial conversion premium.

The registered, off-the-shelf deal was initially going to be $300 million in size. The $45 million over-allotment option was left unchanged.

Pricing came at the cheap end of talked terms.

Goldman Sachs & Co. and Citigroup Global Markets Inc. were the joint bookrunners. Co-managers were Bank of America Merrill Lynch, J.P. Morgan Securities LLC, Deutsche Bank Securities Inc. and RBS Securities Inc.

About $131 million of the proceeds will be used to repurchase $109.1 million of MF Global's outstanding 9% convertible senior notes due 2038, for general corporate purposes and to fund the cost of convertible note hedge transactions.

New Chart trades at issue

Chart Industries' new 2% convertibles traded at around par and the underlying shares ended little changed, or down 4 cents at $53.06.

The deal was upsized to $250 million, and the registered deal has an over-allotment option for an additional $37.5 million. Initially the deal was talked at a $230 million base with a $34.5 million greenshoe.

Pricing came at the midpoint of talk, which was for a 1.75% to 2.25% coupon and a 27.5% to 32.5% premium.

"That kind of pricing leaves no cheapness built in, and with them being long [dated] 3%, up 30% over seven years, if you try to set that up on swap it doesn't bring a great rate of carry," a New York-based trader said.

With these long deals, changes in credit spreads could mean that "what's cheap today could easily look rich tomorrow," the trader said.

About $175 million of the proceeds will be used to purchase Chart's senior subordinated notes due 2015, with remaining proceeds to fund the cost of convertible note hedge and capped call transactions and for general corporate purposes.

JPMorgan and Morgan Stanley & Co. LLC were the joint bookrunners. The co-manager was Piper Jaffray & Co.

Amerigroup expands

Amerigroup's 2% convertibles due 2012 traded at 127 versus a stock price of $52.00, according to one pricing source.

A second source said the offer side of the deal was 4 points to 4.5 points versus a stock price of $52.00.

Amerigroup's shares fell $12.41, or 18%, to $55.00 on Friday.

"They expanded due to the sharp fall in the stock," a New York-based trader said. "I'd wager a guess that they are the best performer in convertibles [Friday]."

For the second quarter, the company reported net income of $44.3 million, or 83 cents a share, compared to $67.2 million, or $1.31 a share, a year ago.

Total revenue rose 6% to $1.53 billion.

Analysts had expected earnings of $1.12 a share, excluding special items, on revenue of $1.56 billion.

Earnings were hit by premium adjustment in Georgia caused by anomalies in monthly membership records.

The anomalies in the Georgia monthly membership files indicated that the state's member records were not updated, causing duplicate premium payments for the same member.

Mentioned in this article:

Amerigroup Corp. NYSE: AGP

Chart Industries Inc. Nasdaq: GTLS

MF Global Holdings Ltd. NYSE: MF

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