U.S. Steel holds in on hedge despite stock drop; SBA Communications sees sellers; AMR flat

By Rebecca Melvin

New York, March 5 - The convertible bond market was quiet on Monday, with trading muted as underlying shares were under pressure amid concerns about a stumble in the global economy; and the primary convertible market was silent, market players said.

"Valuations were pretty much unchanged on light trading," a convertibles trader said.

United States Steel Corp., which found buyers last week, was lower outright, but held in well on a dollar-neutral, or hedged, basis amid a 4.7% drop in the underlying shares.

The Pittsburgh-based integrated steelmaker was hit by worries about the global economy after China cut its economic growth forecast.

SBA Communications Corp.'s short-dated, 1.875% convertible saw sellers and was active. Shares of the Boca Raton, Fla.-based wireless infrastructure company ended higher by 1% after a Wedbush upgrade to "outperform" from "neutral" on valuation and likely upside to management's outlook following its Mobilitie transaction close. Wedbush raised its price target for shares of the company to $54 from $51.

US Airways Group Inc.'s 7.25% convertibles due 2014 were not heard in trade despite an 8.3% drop in the underlying shares of the Tempe, Ariz.-based airline.

The drop was precipitated by news that US Airways' passenger revenue growth slowed in February, which points to the airline not being able to raise fares and fees easily to offset higher oil prices.

In the distressed area, AMR Corp.'s 6.25% convertibles due 2014 were active again, but more or less unchanged from Friday at 32.5 bid, 33 offered, a Connecticut-based trader said.

2.95% February return

Convertibles were up again in February, returning 2.95% as equity markets continued to pull higher, and extending a nearly 6% rally for convertibles in January, also tied to higher shares, a Barclays Capital convertible analyst said.

The convertibles return compared to a 2.38% return for high-yield securities and 0.75% for investment-grade paper, against a backdrop of a 4.32% higher Standard & Poor's 500 stock index.

The basket of stocks underlying the convertibles universe rose 3.06%, Barclays said.

In addition, credit spreads continued to tighten: Barclays' high yield "B" index was tighter by 60 basis points to 573 bps, and the investment-grade spread was tighter by 24 bps to 167 bps.

What continues to aid the convertible market - but by how much more, remains to be seen - is that yield is so difficult to come by and rates are so low, that investors are on the hunt for yield, the analyst said.

Improving economic numbers, which in turn mute fears, or expectations, of default has promoted the hunt for yield, the analyst said.

"That's what has happened. It will not tighten a lot more from here, but it could tighten a little bit more," he said.

New issuance remains in the doldrums, however, he pointed out, with only two more issues added in February to the two issues tallied in January for a paltry $850 million in new issuance for the year to date.

U.S. Steel little changed

U.S. Steel's 4% convertibles due 2014 traded at 112.25 bid, 112.5 offered versus an underlying share price of $26.30, a New York-based trader said, which was down compared to 114.75 versus an underlying share price of $27.51 on Friday.

The pricing was lower outright, but held up well on a dollar-neutral basis, the trader said.

U.S. Steel shares fell $1.28, or 4.7%, to $26.23 on Monday amid headlines that China cut its 2012 growth forecast.

China premier Wen Jiabao said the target for economic growth would be 7.5%, which is down from the 8% target that had been in place for eight years.

The warning took a toll on cyclical names on Monday, in particular raw materials and mining names.

In addition, a reading on business activity in Europe contracted more than expected in February, further exacerbating worries about a possibly slowing global economy.

Nevertheless, in data pertaining to the United States, the U.S. economy beat estimates. The service sector expanded at a faster pace in February and factory orders declined less than expected.

SBA sees sellers

SBA Communications' 1.875% convertible senior notes due 2013 traded on Monday at 120 versus an underlying share price of $47.70, according to a sellside trader.

SBA shares moved up 51 cents, or 1%, to $47.61 on Monday.

The convertibles were said to be active, with a lot of sellers in the name.

"Vol. collapsed," the trader said. "With the short-dated paper, there is not a lot of time to make up the premium."

The trader said that he thought the company could be taken over by the likes of an American Tower Corp. or Crown Castle International Corp., but he noted that he didn't know what kind of legal hurdles such takeout plans would come up against.

Wedbush equity analysts Suhail Chandy and Scott Sutherland said in a research note dated March 4 that following the close of the Mobilitie transaction in the second quarter, they thought there would be an upward revision of management's outlook and that SBA's current valuation discount compared to American Tower "is unwarranted."

"We like the Mobilitie acquisition and believe that this was a fairly priced transaction at a 6.9% yield. It adds a set of good quality assets and is expected to be immediately accretive to equity free cash flow," they wrote.

Where the analysts admitted they could go wrong is that while they see upside to SBA's estimates and like the fundamental story, the company has underperformed during periods of macro contraction.

In addition, the multiples could always contract across the sector, they said. But from a fundamental standpoint, they do not expect to see multiples contract going into what is likely a solid two-year period of growth driven by strength in lease amendments from 4G overlays.

US Airways silent

A market in US Airways' 7.25% convertibles due 2014 was cited at 168.625 versus an underlying share price of $7.63, which was Friday's close.

That was the most recent market from one bank in New York; other sources did not have quotes.

While the convertible wasn't active on Monday, the deep in-the-money name was expected to trade consistently at parity plus a few points, an analyst for the bank told Prospect News.

US Airways shares fell 60 cents, or 8.3%, to $7.00 on Monday after the airline said its traffic rose 8% last month, led by an increase in domestic passengers, but that revenue per available seat mile rose only 7% in February, which was less than in previous months.

The airline flew paying passengers 4.5 billion miles last month which was up from 4.2 billion in February a year ago. U.S. traffic rose 9%, while transatlantic traffic rose 3.7% and Latin American traffic rose 2%.

The number of available seats rose 5.6% as it increased flying in the U.S. and across the Atlantic. The number of available seats to Latin America dropped slightly. Airlines can raise their number of available seats by adding to their active fleets or by flying bigger planes on routes with more demand.

US Airways' load factor rose 1.6% to 77.9%.

Mentioned in this article:

AMR Corp. Pink Sheets: AAMR

SBA Communications Corp. Nasdaq: SBAC

United States Steel Corp. NYSE: X

US Airways Group Inc. NYSE: LCC

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.