UBS' new GT Solar mandatories slip below par on debut; Amgen trades in line with shares

By Rebecca Melvin

New York, Sept. 10 - The convertible bond market ended Friday much as the holiday-shortened week began, with light trading, but with valuations holding up despite low liquidity as supply remains tight.

A deal from UBS AG exchangeable into GT Solar International Inc. priced late Thursday at the cheap end of talk for a dividend of 6.75% and an initial threshold premium of 20%. The deal base size was downsized to $112.7 million.

The new mandatory deal slipped below the $25 par with weaker shares, according to a New York-based sellside trader, who said he saw flippers of the paper, but that it was very illiquid.

Elsewhere, the market was quiet, sources said, with less than $400 million of bonds having changing hands near the end of the session, according to Trace data.

In the health care sector, Amgen Inc. was among the most actively traded names and was called up in line with a similar move in its underlying shares.

Microchip Technology Inc. was a technology name among the most actives. Its 2.125% paper due 2037 moved down 2 points outright to 101.9 as its shares fell $1 to $28.04.

Alcoa Inc., one of those in-the-money, low-premium names currently in focus given uncertainty about the direction of the economy and markets going forward, saw its 5.25% convertibles due 2014 changing hands little changed at nearly 188 on Friday.

A week ago, Agco Corp., another low-premium name, saw its 1.75% convertibles due 2033 jump 7 points to 154.5. That paper was quiet on Friday, while its sister issue, the Agco 1.25% convertibles due 2036, traded at 114.6, which was up 0.6 point on the day, according to Trace data.

The week was marked by a barbell shaped trading trend, sources said, with low-delta, yield names in focus on one end of the barbell and low-premium, in-the-money names, with prices around 141 to 150, in focus on the other side.

"The low premium names are appealing to those more bearish on the equity side, since if there's a pullback, these become more interesting," the sellsider said.

Trading volume for the entire week was light, with both the long Labor Day weekend and the Jewish New Year holiday putting a crimp in activity as trading desks remained thinly staffed.

In addition, traders were loathe to sell out of positions because pay through the offer side to get involved in anything else replacing the convertibles was difficult and high priced.

"We make money selling out of a position. But then how much do you pay for the next name to get involved in. Sometimes you have to pay through the offer price," a New York-based sellside trader said.

UBS-GT Solar prices on the cheaps

The UBS mandatories exchangeable into GT Solar priced at the cheap end of talk, which was for a 6.25% to 6.75% dividend and a 20% to 25% initial premium.

In addition, the deal was smaller than the originally talked $131.7 million base plus a $24 million greenshoe.

"It didn't really trade. There were flippers trying to sell. But it was so illiquid. UBS was the only one trading it. The stock was getting hit," a sellside trader noted.

The UBS-GT Solar 6.75% mandatories were around 24.375 bid, 24.625 offered versus a share price of about $7.18.

Shares of the Merrimack, N.H.-based designer and manufacturer of solar equipment ended off its lows at $7.28, which was down 11 cents, or 1.5%.

"Someone was bidding, and I was trying to hit it, but the guy on the Street fell down on me," a sellsider said, referring to a trade that fell through.

He said that the typical hedge fund-type accounts didn't get involved in the mandatory.

The paper had the qualities of a synthetic product, sources said.

UBS Securities LLC was the bookrunner. Concurrently a GT Solar stockholder offered 11 million shares, at $7.39 per share, in a public offering via UBS Securities.

In addition, the selling stockholder sold 14 million additional GT Solar shares to UBS Securities and an affiliate in connection with the mandatory offering.

The mandatories, with a par price of $25 per note, were unusual, sources said, in that UBS didn't already own shares of GT Solar before the advent of the deal and instead bought shares concurrently with the deal.

Another aspect of the deal that was unusual, according to a sellsider, is that at maturity the mandatory can be exchanged for stock, cash or a combination of stock and cash. Generally, mandatories are mandatorily converted, or exchanged, into stock or cash, the sellsider said.

"I'm not sure I've seen anything like this: Oaktree is getting out of their shares, and UBS, instead of selling them and selling a convert mandatory, is going to convert into one company's shares, but with coupons to be paid by UBS," the sellsider said.

Proceeds from the mandatories will be used by UBS to finance the forward sale of shares, to provide additional funds for its operations and for general corporate purposes outside Switzerland.

Mentioned in this article:

Agco Corp. Nasdaq: AGCO

Alcoa Inc. NYSE: AA

Amgen Inc. Nasdaq: AMGN

GT Solar International Inc. Nasdaq: SOLR

Microchip Technology Inc. Nasdaq: MCHP

UBS AG NYSE: UBS

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