New U.S. Steel adds outright, dollar neutral; older bonds flattish; School Specialty gains

By Rebecca Melvin

New York, March 21 - United States Steel Corp.'s newly priced 2.75% convertibles traded up on an outright and a dollar-neutral, or hedged, basis on Thursday after the upsized $275 million of six-year convertibles came to market at the midpoint of price talk, market sources said.

U.S. Steel's existing 4% convertibles due 2014 were mostly stable with a solid bid after the company bought back the older paper with "a good chunk" of proceeds of the new issues. (U.S. Steel also priced an upsized $275 million of straight senior notes for a total capital raise of $500 million.)

School Specialty Inc., which filed for Chapter 11 bankruptcy protection earlier this year, saw its convertibles trade up after the Greenville, Wis.-based education company presented in court a joint plan of reorganization that takes a dual approach in moving toward both asset sales and reorganization until it is determined which option will yield the highest value. The School Specialty 3.75% convertibles due 2026 traded at 47.

Another bankrupt name in trade was A123 Systems Inc. and those 3.75% convertibles added 0.75 point to 69.75, according to Trace data.

There was a little pressure on technology names after Oracle Corp. reported a disappointing third-quarter with lower new software revenue, a decline blamed on poor sales execution by the San Francisco-based software company.

Convertible technology names in trade included Priceline.com Inc. and NetApp Inc. Both Priceline and NetApp convertibles were down by more than half a point to as much as a point on slightly weaker underlying shares.

U.S. Steel was definitely the name of the day through, with its trading volume dwarfing that of other convertibles.

Equities were down sharply as worries about Oracle's miss, euro issues and the Cyprus debt crisis trumped positive jobs data and a rise in sale of existing homes in terms of investor sentiment.

Jobless claims actually increased by 2,000 last week to 336,000 in the week ended March 16, according to the Labor Department Thursday. But the level was slightly below forecasts for 340,000 of new claims. And the more closely watched four-week moving average of jobless claims fell by 7,500 to 339,750, remaining at a five-year low.

New U.S. Steel trades up

U.S. Steel's newly priced 2.75% convertibles due 2019 traded up to 102.125 bid in early afternoon with the stock near its highs of the session at about $20.00. Earlier the new issue was seen at 101.85, and with the share pulling back somewhat - although still up on the day - to about $19.75, the new bonds were seen slightly lower near those earlier levels.

On a 60% delta, it looked to be about a point to 1.25 point of expansion on a dollar neutral basis, a syndicate source said.

Shares of the Pittsburgh-based integrated steelmaker added 27 cents on the day or 1.4% to $19.72.

"I see them up about a point to 1.25 point or as high as a 1.5 point depending on which broker you talk to," a syndicate source said. "The bonds probably mirrored the stock, which hit $20-ish and then pulled back."

The existing U.S. Steel 4% convertibles due 2014 traded in a range similar to that seen on Wednesday as a chunk of that issue were redeemed by the company with proceeds of the new deals.

The 4% paper was bid at 105.25 in early afternoon trading, which was a little higher from the morning trades and probably related to tighter supply, the syndicate source said.

A second source said that the older bond traded at 105.25 to 105.5 late Wednesday, but on Thursday they were 104.25 to 104.75. That was still within Wednesday's range.

While syndication was still finalizing allocations after the market close Wednesday, "things came together," the syndicate source said especially since U.S. Steel is a well-known entity in the convert space and the credit is solid. The company has plenty of liquidity but wanted to pre-fund looming maturities with term debt, he said.

There was limited borrow for the new issue, which discouraged hedged participation, but there were still hedged players involved in the new deal, the syndicate source said.

Meanwhile, the deal was attractive for outright players, especially given that the stock price is at "an attractive entry point," the syndicate source said. The stock price is particularly low but stable, having fallen from $40 to $60 in the middle of 2011.

The steelmaker priced the upsized $275 million of six-year convertible senior notes after the close Wednesday with an initial conversion premium of 30%.

The deal size was initially talked at $250 million. Pricing was talked at a 2.5% to 3% coupon and a 27.5% to 32.5% premium.

Concurrently, U.S. Steel priced an upsized $275 million of 6.875% senior straight notes.

The concurrent registered offerings were sold via joint bookrunners J.P. Morgan Securities Inc., Barclays, Goldman, Sachs & Co., and Morgan Stanley & Co. Inc.

The convertibles have a $41.25 million greenshoe, which was upsized from $37.5 million.

The convertibles are non-callable for four years until April 5, 2017, and then provisionally callable if the stock price exceeds 130% of conversion price. There are no puts.

School Specialty adds

School Specialty's 3.75% convertibles due 2026 traded up to 47, which was better by 1.875 points on the day.

School Specialty shares, which trade over the counter, had traded higher during the session by nearly 20%, but ended the session down 1.7%, at $0.075.

School Specialty filed a joint Chapter 11 plan of reorganization and its associated disclosure statement on March 20 with the U.S. Bankruptcy Court for the District of Delaware.

The debtors proposed a plan premised on a dual-track process in which they will simultaneously pursue a plan of reorganization and market their assets for sale.

Under the proposed plan, all asset-based debtor-in-possession financing facilities, Bayside Capital, Inc. DIP financing claims, administrative claims, priority claims and prepetition secured claims will be paid in full in cash on or as soon as reasonably practicable following the effective date.

The plan also provides that the informal steering committee of convertible noteholders will receive cash and equity in the reorganized debtors in satisfaction of their DIP facility.

Holders of general unsecured claims and holders of noteholder unsecured claims will receive equity in the reorganized debtors.

If School Specialty elects to consummate a sale in lieu of reorganizing, all or substantially all of the debtors' assets will be sold to a third-party purchaser.

If that happens, the informal steering committee of convertible noteholders as DIP lenders, the holders of general unsecured claims and holders of noteholder unsecured claims will receive cash proceeds from the sale being distributed to the debtors' creditors in lieu of equity in the reorganized debtors.

The sale process calls for initial proposals to be submitted by March 28.

In other School Specialty news, Gerald T. Hughes, School Specialty's chief administrative officer, announced Tuesday his resignation, effective as of March 31, 2013.

Mentioned in this article:

A123 Systems Inc. Pink sheets: AONEQ

NetApp Inc. Nasdaq: NTAP

Priceline.com Inc. Nasdaq: PCLN

School Specialty Inc. Pink sheets: SCHSQ

United States Steel Corp. NYSE: X

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