Genesee & Wyoming performs well on debut; Bank of America preferred up; homebuilders mixed

By Rebecca Melvin

New York, Sept. 14 - Genesee & Wyoming Inc.'s newly priced 5% mandatory convertible traded well on its debut in the secondary market on Friday after the Greenwich, Conn.-based railroad company priced $200 million of its tangible equity units at the rich end and beyond the rich end of original talk late Thursday.

The new Genesee & Wyoming convertible was trading at 102.5 bid, 103 offered in early afternoon trading and ended the session a little higher, with the top end of the range touching 103.25.

Back in established issues, the convertibles market felt "heavy" to some market participants and "quiet" to others as a sharp and swift asset shift was underway among investors, including heavy selling of Treasuries and buying of equities in reaction to the Federal Reserve's new open-ended program to buy mortgage-backed securities to speed economic recovery and keep its interest rates near zero into mid-2015.

In tandem with a rally in financials, Bank of America Corp.'s 7.25% series L perpetual convertible preferred was up a bit in the 109 to 110 context, which was up a point to a point and a half on the day, a New York-based convertibles analyst said.

Shares of the Charlotte, N.C.-based commercial bank gained 15 cents, or 1.6%, to $9.55.

Homebuilders, which stand to benefit from the mortgage-backed securities buying program, were mixed. But the convertibles market's new Meritage Homes Corp. convertible due 2032 was still being eyed as an issue that did well.

Otherwise, there didn't appear to be strong conviction in the market one way or the other, an analyst said. "There were no dollar-neutral moves."

The week's five new issues were said to have done very well, while the market's other usual suspects, including Gilead Sciences Inc. and Medtronic Inc., were trading actively but unremarkably.

For the week, equities were steady to stronger and rallied sharply on Thursday with the Fed announcement, but that rally started to fade around midsession Friday, although they still ended up for the day.

Convertibles for the week lagged equities. There was good two-way flow, but with mostly outright buyers and hedge fund sellers in many of the balanced names.

It was difficult to say why hedge funds were selling. "Whether it was to make room for new issues or repositioning of bonds that they already had, it wasn't clear," a New York-based trader said.

But he said convertibles have lagged, especially in high-yield names.

On Friday, Treasuries were selling off, so interest rates were higher. But that wasn't likely to be a long-term trend. "The Fed still seems wanting to control interest rates, and they are going to be in there at some point to buy to keep them at a low level. It spills into their ultimate goal to [keep] mortgage rates low," the trader said.

Digesting the Fed moves

"People were digesting the Fed move," a trader said about Friday's session. "Accounts are trying to believe that QE3 will pull the U.S. out of its recessionary funk, but that's [debatable]." In the meantime, equities are likely to be strong for the next couple of weeks, and then attention will shift to the looming fiscal cliff, he said.

While many believe that the Fed move is a game changer, several convertible players were skeptical.

"Bernanke's term expires in January 2014, and if Obama isn't president, then he's not going to be there that long, so the whole idea of QE forever might be shorter than we think," a New York-based trader said.

The scenario in which QE looks bad for convertibles is if volatility collapses, a New York-based analyst said.

On Friday the VIX was at 14 and it is down significantly in the past 12 months, he said. Convertibles are both an equity-volatility product and a credit product, so if QE dampens vol., or it collapses without a material improvement in credit spreads, "then that is bad from a convert perspective," the analyst said.

Typically, though, if vol. is collapsing, credit spreads are tightening. But there could be "a lot of different effects," he said. "It's really hard to say."

If stocks start to go down, it could discredit the policy, and sentiment would dive, he said. The big question is whether the Fed's move is "really enough to stave off recession in the next three months."

Genesee & Wyoming adds

Genesee & Wyoming's newly priced 5% mandatory convertible tangible equity units traded up to102.5 bid, 103 offered in early afternoon, and near the close were seen at 102.5 bid, 103.25 offered.

Genesee shares climbed $1.81, or 2.8%, to $66.62.

"The deal did well," a New York-based trader said. "With mandatories, you've got outright income types buying this. Mutual funds find it appealing, even if the more sophisticated convert guys say this is overpriced."

Genesee & Wyoming priced its $200 million of three-year tangible equity units with a 5% dividend and a 25% initial conversion premium.

Pricing came at the rich end of original dividend talk, which was 5% to 5.5%, and beyond the rich end of original premium talk, which was 17.5% to 22.5%. But talk was revised just before pricing to 5%, with a premium of 22.5% to 25%.

The company also sold $226.625 million, or 3.5 million shares, of common stock at $64.75 per share, including 233,996 shares of stock being sold by the chairman of the board of directors.

The registered mandatory convertibles deal includes a $30 million over-allotment option and was sold via joint bookrunners Bank of America Merrill Lynch, Citigroup Global Markets Inc. and J.P. Morgan Securities LLC.

Co-managers are BB&T Capital Markets, a division of Scott & Stringfellow LLC, RBC Capital Markets LLC, Wells Fargo Securities LLC, Santander Investment Securities, Inc., Raymond James & Associates Inc., Stifel, Nicolaus & Co. Inc., Dahlman Rose & Co. LLC, Stephens, Inc. and Wolfe Trahan Securities.

Mentioned in this article:

Bank of America Corp. NYSE: BAC

Genesee & Wyoming Inc. NYSE: GWR

Meritage Homes Corp. NYSE: MTH

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