Navistar off on engine news; Lincare gains; Peabody slips; Patriot Coal on tenterhooks

By Rebecca Melvin

New York, July 6 - Navistar International Corp. was weaker on a dollar-neutral, or hedged, basis Friday after the Lisle, Ill.-based maker of engines and commercial and military trucks said it plans to transition to a new engine type, similar to those made by Cummins Inc. and Paccar Corp. Navistar shares slumped 15%.

Lincare Holdings Inc.'s convertibles were a little better, extending gains notched earlier in the week on news that Germany's Linde AG plans to buy the Clearwater, Fla.-based at-home respiratory services provider for $4.6 billion.

Peabody Energy Corp. slipped a little on a dollar-neutral basis on shares that were sharply lower after news that Australia's BHP Billiton Ltd. and labor unions have reached an accord, and expectations that that will mean less demand for coking coal exports from the United States.

But Patriot Coal Corp.'s convertibles were unchanged at a slightly elevated 31.5 bid, 32 offered level as market players await word on a creditor agreement for the St. Louis-based coal producer that is bumping up against a deadline.

Restructuring is a possibility here, a Connecticut-based trader said of Patriot Coal.

Financial markets were fairly quiet during the holiday-shortened week, having closed early on Tuesday ahead of the Fourth of July and remaining closed on Wednesday.

On Friday, markets faltered on a weaker-than-expected U.S. jobs report for June. Non-farm payrolls rose by only 80,000 in June, and unemployment remained unchanged at 8.2%, the Labor Department said.

The paltry expansion marked the third consecutive month that employment grew by fewer than 100,000 positions, and it was weaker than the 90,000 positions many expected.

On Thursday, the ADP National Employment report showed that private employers picked up 176,000 new workers in June.

Navistar weakens

Navistar's 3% convertibles due 2014 traded down to 90 bid, 91 offered, as the underlying shares slumped, closing down $4.37, or 15%, to $24.42. The convertibles were seen down at least 0.5 point on a dollar-neutral basis, a New York-based trader said.

Early in the session, the Navistar convertibles traded significantly higher at 92.55 versus a share price of $27.47, which was seen in line with Thursday's trades, according to a second, New York-based trader.

Navistar announced early Friday that it plans to revamp its Exhaust Gas Recirculation, or EGR technology, in favor of the more conventional Selective Catalytic Reduction, or SCR, technology.

Navistar said the engine, which it called In-Cylinder Technology Plus, adds "urea-based aftertreatment" to its EGR technology to meet 2010 U.S. Environmental Protection Agency rules. A 13-liter engine will be available in early 2013, with a 15-liter engine to follow, the company said.

Earlier in the week, Gimme Credit analyst Vicki Bryan said that possibly buying SCR components and installing them on its own engines is a bad idea as any jerry rigging of existing EGR engines would be a costly patch that could further devalue the company as its cash continues to be drained.

On Friday, Bryan told Prospect News via e-mail, "Given that the plan announced today is my predicted worst-case scenario, I believe bankruptcy remains a very strong and potentially near-term possibility."

Bryan wrote in a Gimme Credit note published Friday, "...it will take months and millions to develop with no guarantee of success - and Navistar has little time or cash to spare."

The company's manufacturing segment has $681 million in cash, which is down 43% year over year, "mostly because it consumed $390 million in the past two quarters on its flagging operations," Bryan said in the note.

Of the announcement Friday, which didn't include revised earnings or revenue guidance, Bryan called it "the exact worst-case scenario we projected earlier this week."

A convertibles trader was of a different opinion.

"I think I'll wait until the two big shareholders say they are selling," the trader said, referring to two activist shareholders: Carl Icahn, who holds 12% of Navistar stock, and MHR Fund Management LLC, which has built a 13.6% stake amid the recent turbulence in the shares.

"Look, if the engines work to the specifications of the EPA then this all goes away. There's much information they didn't give like capex and costs with the transition and no near term earnings guidance, which people obviously expected. I saw nothing really bad. Expecting firm guidance when the company doesn't know is asking a bit much. If you think they can produce an engine in compliance then this is all a non story."

Lincare extends gains

Lincare Holdings' 2.75% series A convertibles due 2037 were seen at 155 bid, 155.5 offered versus an underlying share price of $41.43 on Friday. That was up compared to 153.5 versus an underlying share price of $41.34 on Monday, which was up from about 120 and change on Friday.

The Lincare 2.75% series B convertibles due 2037 were seen at 170 bid, 170.5 offered versus the same underlying share price of $41.43 on Friday, which was up from 169.25 versus the $41.34 on Monday.

Both issues were active at various points of the week, including Friday, following news of the Linde takeover, and the bonds did particularly well because of their so-called hyper structure, for which the conversion ratio is adjusted in a takeout to include the incremental share factor.

In the A's on Monday, investors, on a 130% to 150% delta, made 6 to 7 points, and on the B paper, if holders had it on a 140% to 150% delta, they made about 5 points on a dollar-neutral, or hedged, basis.

Peabody slips, Patriot flat

Peabody's 4.75% convertibles due 2066 traded down to 82.75 during the session, one trader said. A second source said that the paper trades often on a hedged basis and it slipped on hedge.

Shares of the St. Louis-based coal producer dropped about 5%, ending down $1.27 at $24.86.

BHP Billiton's coal joint venture, BHP Billiton Mitsubishi Alliance, the world's biggest exporter of steelmaking coal, has reached a deal with its unions to settle a dispute with about 3,000 miners at seven operations that stopped work for a week in March and in April, BHP declared force majeure because of the strikes and inclement weather.

"I think the only reason it is hurting BTU and other metallurgical coal producers is the fear of supply coming back on line while the market is a bit soft," James Rollyson of Raymond James told Prospect News via e-mail, noting that Peabody already negotiated many of its labor agreements with a couple more yet to occur, and it hasn't had the same issues as BHP.

A second analyst said that the Peabody shares were down due to the weak jobs data and the labor settlement in Australia, which means more metallurgical coal supply coming back into the market.

Patriot Coal's 3.25% convertibles due May 31, 2013 were seen last at 31.5 bid, 32 offered on Friday, which was unchanged compared to Thursday.

Shares of the St. Louis-based coal miner started the session stronger, following two strong days of rallies, but faded into the close, ending lower by 7 cents, or 3%.

One trader said the company is pushing up against a "drop dead deadline" for its financing deal with creditors.

The trader said that some form of restructuring might be the next news the market gets.

Mentioned in this article:

Lincare Holdings Inc. Nasdaq: LNCR

Navistar International Corp. NYSE: NAV

Patriot Coal Corp. NYSE: PCX

Peabody Energy Corp. NYSE: BTU

© 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.