ADM lower ahead of new issue pricing; Nabors' call inspires activity; Hercules, JetBlue a focus

By Rebecca Melvin

New York, May 28 - Archer-Daniels-Midland Co.'s existing convertibles moved lower Wednesday as the agricultural company's common stock lost ground and ahead of new ADM convertible paper seen pricing after the close, market sources said.

ADM planned to price $1.75 billion of three-year mandatory convertibles talked to yield 6% to 6.5% with an initial conversion premium of 18% to 22%.

The new issue was seen as the cheapest of three new deals launched on Tuesday and was expected to be the most successful, sources said.

It was the only one trading in the gray market, but at "a teeny to an eighth" over par, the reception wasn't wholehearted.

Hercules Offshore Inc.'s $250 million of 30-year convertible senior notes, to yield 2.875% to 3.375% with a premium of 47.5% to 52.5%, was seen as slightly cheap to rich, and that deal was not trading in the gray market ahead of pricing expected after the close.

Nabors Industries Ltd.'s 0% convertibles due 2023 were active in trade and moved a little lower after the oil services company announced that it was calling the issue.

Meanwhile, JetBlue Airways Corp.'s $160 million of 30-year convertible debentures, expected to price on Thursday, was causing some head scratching among analysts but generating some interest among buysiders as well. The notes were talked to yield 5% to 5.5% with an initial conversion premium of 20% to 25%.

ADM lower ahead of new paper

ADM's 0.875% convertibles due 2014 traded at 113 versus a stock price of $40.50, which was lower dollar neutral, compared to about 118 versus a stock price of $41.95 on Tuesday.

Shares of the Decatur, Ill.-based company (NYSE: ADM) dropped $2.09, or 5%, on Wednesday.

"The stock is getting killed because of this [deal] today, but these things are pretty good. They have always traded rich, always traded on an outright basis," a New York-based sellside analyst said.

"This is a really good space, with Ethanol and everything. There are a lot of things coming that investors might be scared off about, but this is a hot market," he said.

The new deal, being sold via joint bookrunners Citi, J.P. Morgan Securities Inc., Banc of America Securities LLC and Deutsche Bank Securities, looked almost 2% cheap using a credit spread of 100 basis points over Libor even though the credit default swap in the name was around 45 to 50 bps, the analyst said.

The higher credit spread was justified, he said, because the convertible issue is for mandatory equity units, not bonds.

Another source questioned the higher spread, however, suggesting that the ADM convertibles don't have a preferred structure and should be assumed to be higher up in the capital structure.

One buysider was not impressed with the deal: "What's curious about ADM is that it is an A rated company with a 6%, up 20, a 6% handle?! You've got to question why you own the 0.875s, which had been trading around 118 with a 21.3 ish conversion premium, and they are longer dated," the buysider said via e-mail.

Also in regard to the mandatories, the buysider said: "Shorting a 32-35 ish vol in any name would have sounded fantastic eight months ago ... now it's all so ennuisant!"

Hercules not seen so heroic

Hercules Offshore's Rule 144A deal, talked to yield 2.875% to 3.375% for the first five years, was seen rich to just slightly cheap depending on the volatility assumption used.

Using something close to the underwriter's credit spread of Libor plus 350 bps and 40% vol, the deal looked 0.50 point rich, according to a Connecticut-based sellside analyst.

Another analyst said the deal looked 0.25 point to 0.50 point cheap at the midpoint of talk, using 375 bps over Libor and 35% vol.

"Most things coming these days are much cheaper, so my assumption [is] that they will come at the cheap end of talk," the analyst said.

"The average cheapness is 3.5%, and that includes a lot of the big financial preferreds, so it's a weighted average, but they've come very cheap, 8% to 10% cheap," he said.

The credit wasn't bad, sources said, and some thought it set up nicely. But a buysider said, "There's nearby exposure to investment value while precluding a lot of upside due to [a] chunky premium. Add to that 1% borrow, and the underwriters know something I don't."

Answering the Nabors' call

Nabors' 0% convertibles due 2023 were active after the oil services company announced that it was calling those notes, which total about $700 million.

The convertibles are trading well above par and were expected to be converted by holders rather than redeemed.

Nabors' 0% convertibles due 2023 were seen at about 116.5 versus a share price of $41.92, compared with 118.6 versus a share price of $40.81 on Tuesday.

Shares of the Bermuda-based Nabors (NYSE: NBR) closed up 62 cents, or 1.5%.

"There is no premium left, so people were expecting them to be called and they are going to convert them out," a sellside analyst said.

The Nabors 0.94% issue, which is a large, liquid issue, was seen at about 109.65.

JetBlue lifts interest

"The new JetBlue convertible sure makes the existing 3.75% convertible look interesting at 71, with a nice 24.8% yield to maturity in less than two years. Not a bad bet for a brand like JetBlue," a New York-based buysider said.

The existing 3.75% convertibles are putable at par on March 15, 2010.

Even the ones due July 15 are trading up with a yield to put of 21%, another source said.

But many are questioning how to value the New York-based discount air carrier and whether it is going to be able stay in business given the high price of fuel.

"It's a coin flip," a Connecticut-based sellside analyst said. "They said in the conference call that they will be able to operate if prices stay where they are, and they were talking as if prices would go down and there would be potential upside. But what if prices go up?"

"The paper has a credit spread of about 2,000 basis points over Libor. How do you value this thing?" he asked.

On Tuesday, JetBlue said it plans to significantly lower its fleet and will put off buying 21 new Airbus jetliners for four to five years

Two weeks ago, credit rating firm Fitch Ratings cut JetBlue's debt ratings further into junk status, saying the company faced soaring fuel prices and "a softening revenue outlook that will likely drive larger losses and weakened free cash flow during the remainder of 2008."

Part of the proceeds from the offering of the new issue will be placed into an escrow account to pay interest for the debentures during the first three years, while the remainder will be used to pay off other bonds that mature five years earlier.

Shares of JetBlue (Nasdaq: JBLU) closed down 30 cents, or 6.8%, at $4.11 on Wednesday.

© 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.