Airline convertibles higher in trade; Actuant active; Tyson quiet; Annaly Capital to price

By Rebecca Melvin

New York, Feb. 8 - The convertible bond market was relatively quiet on Monday as equities wavered, but resumed their weakening trend, and volatility, which heated up last week, edged up again.

"It was pretty slow today," a New York-based sellside desk analyst said.

Another sellsider said volatility going up is going to be a major factor in how convertibles are now played.

"Look, we didn't have that [volatility] for a whole year; that's a long time," the sellsider said about rising vol.

In the current environment, players should probably be looking to lower delta names, and while that's going to mean more capital on the long side, "that's probably the way to go," the sellsider said.

A few airline convertibles were in trade as shares in the sector pulled higher and then dropped off toward the close of markets.

AMR Corp.'s convertibles, which dropped below par last week, were back up, trading at 101 during the session.

UAL Corp., the Chicago-based parent of United Air Lines Inc., was also better, and Continental Airlines Inc. paper was also in trade.

McMoRan Exploration Co.'s 8% perpetual convertible preferred shares were higher after the company induced conversion on about half of the issue.

Actuant Corp., a Butler, Wis.-based maker of industrial products, saw its 2% convertibles due 2023 trade at 101.41 versus a share price of $16.25, which was pretty much in line and looking like an interesting play at this level close to par. Actuant is a medium delta name, a sellsider said.

Tyson Foods Inc. was seen a little higher, though not active in trade, as its shares pushed higher amid improving consensus on its credit picture following Friday's solid earnings report.

In the primary market, Annaly Capital Management Inc., a real estate investment trust, launched a $500 million offering of five-year convertibles that was expected to price before the market open on Tuesday.

Seeing the launch cheered market participants.

"The universe is getting kind of stale. I think you'll find that is kind of the general complaint everywhere," a New York-based sellside trader said.

Airlines higher in trade

AMR's 6.25% convertibles due 2014 traded at 101 versus a share price of $7.50, which was the top of its stock trading range on Monday. The AMR convertibles ended a little lower at about 100.50, but that was much better than a trade that went off on Friday at 95.5 versus a share price of $6.90.

Two weeks ago, the AMR convertibles traded at 99 versus a share price of $7.25. The volatility in airline shares makes them a good play in convertibles.

Shares of Fort Worth-based air carrier closed up 2 cents, or less than a third of a percentage point, to $7.32.

UAL's 6% convertibles due 2029 traded at 169.75 versus a share price of $13.25 on Monday, which compared to 168 on Friday. Two weeks ago the UAL paper traded at 163.5 versus a share price of $12.70.

Shares of UAL on Monday retained their intra session gains, closing up 29 cents, or 2.3%, at $13.07.

Continental Airlines also saw its convertibles in trade. The Continental 4.5% convertibles due 2015 traded at 111 versus a share price of $17.90.

Shares of the Houston-based carrier also pulled back to the close, ending the day down 2 cents to $17.36, after trading at high as $18.10 intraday.

Annaly Capital to price

Annaly's $500 million of five-year convertibles was talked to yield a coupon of 3.5% to 4% with an initial conversion premium of 20% to 25%.

The New York-based real estate investment trust's registered offering of unsecured senior notes will be mandatorily converted if the daily VWAP of the shares exceeds 130% of the conversion price for 10 of 15 consecutive trading days, subject to a coupon make-whole.

Credit Suisse Securities (USA) LLC is the underwriter.

There is dividend protection.

Proceeds are expected to be used to purchase mortgage-backed securities for its investment portfolio and for general corporate purposes.

The REIT focuses on a portfolio of mortgage-backed securities.

More issuance from the REIT sector was expected as a means for potential issuers to refinance heavy debt loads, and the REIT sector in general now has a lot of debt.

McMoRan higher

McMoRan Exploration's 8% convertible preferred shares, which are priced on a points basis, traded at parity plus 18 points on Monday, compared to a recent trade at parity plus 14.575 points.

The New Orleans-based oil and gas exploration and development company saw its common stock drag by 36 cents, or 2.4%, to $14.82 on the other hand.

McMoRan has induced conversion of about 43,000 shares - 49% of the total outstanding - of its 8% convertible perpetual preferred stock with a liquidation preference of $42.6 million into approximately 6.2 million shares of McMoRan common stock at a conversion rate equal to 146.1454 shares of common stock per share of the preferred stock, according to a SEC filing.

To induce the early conversions of these shares McMoRan will pay $7.9 million in cash to the holders of these shares. In addition, these holders will receive the previously announced dividend on the preferred stock payable on Feb. 15.

The preferred annual dividend savings following these transactions is about $3.4 million. McMoRan said.

After giving effect to these transactions, McMoRan will have outstanding about 44,000 shares of preferred stock and about 92 million shares of common stock. Assuming conversion of McMoRan's remaining preferred stock and the outstanding 6% mandatory convertible preferred stock, McMoRan would have between 109.3 million and 111.5 million common shares outstanding.

Tyson moves higher

Tyson's 3.25% convertibles due 2013 were offered early at 112 versus a share price of $14.65, according to one sellsider, who didn't see the paper trade.

According to Trace data, the convertibles traded at 114.665 on Monday, which was up 2 to 3 points with its higher stock price, compared to 113.5 versus a share price of $15.00 on Friday.

Tyson shares settled up 44 cents, or 3%, at $15.09 on Monday.

"Tyson convertibles move with the shares. There's no mystery why they're where they are," a sellsider said, adding that he always thought the company's credit picture looked pretty good.

In addition, the meat producer posted strong quarterly results Friday, reflecting continued momentum from the second half of 2009, said Craig Hutson, a Gimme Credit analyst, who published research on the name Monday.

Tyson sales for the quarter rose 1.7% and volume growth of 4.6% more than offsetting average price declines of 2.7% due generally to weak consumer demand for protein. Volumes rose in chicken due to an acquisition, and its beef business gained market share. Higher chicken sales outweighed lower sales in pork and prepared foods.

Tyson's operating income rose in each of its segments but was most dramatic in chicken, which was profitable for the third straight quarter. Chicken operating income of $78 million compared to a loss of $266 million one year ago.

Tyson benefited from $84 million of lower grain costs and a modest hedge gain versus a $188 million loss in 2009. Tyson's results were impressive considering end markets remained challenging, albeit improved, Hutson said in his report, "Eat Mor Chikin."

Although China has imposed import duties on U.S. chicken and Russia has banned all U.S. chicken imports because American poultry is treated in a chlorine rinse, Tyson's turnaround isn't supposed to be critically affected, Hutson said.

Tyson's credit profile has improved, with leverage down to 2.5 times. Tyson had excellent liquidity with an unused $1 billion revolver that expires March 2012.

"We believe Moody's and S&P are likely to change their negative outlooks on Tyson. We expect Tyson to continue to use its free cash flow for debt repayment in an effort to repair its balance sheet," Hutson wrote.

Gimme Credit has changed its recommendation to outperform.

Mentioned in this article:

Actuant Corp. NYSE: ATU

Annaly Capital Management Inc. NYSE: NLY

AMR Corp. NYSE: AMR

Continental Airlines Inc. NYSE: CAL

McMoRan Exploration Corp. NYSE: MMR

Tyson Foods Inc. NYSE: TSN

UAL Corp. Nasdaq: UAUA

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