General Growth up in active trade on Simon offer; AMR extends gains; Ingersoll-Rand slips

By Rebecca Melvin

New York, Feb. 16 - General Growth Properties Inc.'s convertibles jumped 4 or 5 points Tuesday in active trade after word that Simon Property Group Inc. has offered to acquire its smaller competitor for about $10 billion and will make good on General Growth's convertible paper plus accrued interest, market sources said.

General Growth was also stronger and active on Friday.

AMR Corp.'s convertibles extended gains along with their underlying shares, trading at 114.5 versus a share price of $9.00.

Ingersoll-Rand plc's convertibles slipped further but then pared losses in tandem with a mild bounce back in their underlying shares on Tuesday. The company's securities sank on Friday when the diversified industrial firm reported 10% lower revenue for the fourth quarter and earnings from continuing operations in the mid-range of prior guidance, while guiding toward a mixed outlook for activity across its major end markets in 2010.

Intel Corp.'s convertible bonds were in trade, little changed to slightly higher, after an analyst raised his rating on the chip giant's stock to "buy" from "hold."

Overall, activity in the convertibles market was quiet Tuesday, the day after a three-day holiday weekend and as another snowstorm socked in New York, sources said.

"I'm bored," a West Coast-based sellisder said, mentioning the holiday and the East Coast snow.

Both the convertibles secondary and primary markets have been in a sort of stand off, the sellsider said.

Demand picture eyed

"We're definitely in a quiet phase as far as new issuance goes despite the fact that we're in that sweet spot, where equities have rallied, rates are low, and companies have not been able to go to the well for a fairly long period of time. At this point, there is pent up demand on both sides," the sellsider said.

"Corporate CEOs and CFOs are willing to have conversations and ask for terms, and we're willing to provide them terms. They are on the road, selling their story, but it seems there just isn't any traction," the sellsider said.

The sellsider felt that the secondary market is also quiet as "everyone seems to be waiting for some kind of catalyst," although what that catalyst might be is something of a mystery.

"I'm not sure anyone even knows what that catalyst is," the sellsider said.

Part of the impasse may be that the market hasn't yet adjusted to a diminished role of hedge funds compared to the recent past.

Hedge funds now account for about 50% of the market and not 70% to 80% as was the case prior to the Lehman Brothers Holdings Inc. bankruptcy in September 2008.

"There is a difference of opinion over the pricing of convertibles issues, and over the past 10 years it was a function of the arb community that was geared toward financial engineering that could dictate their terms," the sellsider said.

"They were the linch pin, and now the hedge fund community is not a dominating factor, but a balancing factor in the market," the sellsider said.

"It used to be people said, we can sell 80% of the deal to the arbs on these terms," the sellsider said. But now the outrights and fundamentals have a bigger part.

European market softer

European convertible markets softened on Tuesday as investors took profits on better valuations, while volumes continued to languish, a London-based sellside trader said.

"The market's better for sale at the moment," the trader said. "In terms of individual names, I can't really name any because there's very little liquidity. But in general it's just better for sale."

The market had a "false rally" on the back of Barclays plc's 2009 results, the trader added.

"It was inevitable that we had some consolidation," the trader said.

But one of the bigger problems for the market is that liquidity remains thin, and valuations of the convertibles do not paint a complete picture, the trader said.

"The market's not very liquid right now," the trader said. "If the bonds go up and you sell them, if they cheapen you can't buy them back."

The lack of volumes is partly due to lingering concerns about the credit outlook for Greece and partly due to a quiet primary market, the trader added.

"We haven't had any new issues as well, so people aren't selling anything to buy the new issues," the trader said.

General Growth jumps

General Growth's 3.98% exchangeable convertibles due 2027 jumped up to 102.5 bid, 103.5 offered on Tuesday, up from 98 on Friday, according to sellsiders.

Markets were closed Monday in observance of Presidents Day.

In November, General Growth's convertible bonds had jumped up to the upper 80s and then into the 90s, from the upper 70s in anticipation of such a bid from Simon Property after the outfit hired investment adviser Lazard Ltd. and law firm Lipton, Rosen & Katz to help it formulate a strategy on such a deal.

Both Simon Property and General Growth are shopping mall REITs. General Growth owns 200 malls but filed for Chapter 11 bankruptcy protection in April to reduce and restructure its debt.

At one point the General Growth bonds were in the single digits, and investors including Bill Ackman of Pershing Square were outspoken about what they saw as good General Growth assets but a bad capital structure.

Simon Property has now made a written offer to acquire General Growth in a fully financed transaction valued at more than $10 billion, including about $9 billion in cash, according to a news release.

Full recovery offered

Simon said its offer would provide a 100% cash recovery of par value plus interest and dividends to all General Growth unsecured creditors, the holders of its trust preferred securities, the lenders under its credit facility, the holders of its exchangeable senior notes and the holders of Rouse bonds. This consideration to creditors totals roughly $7 billion.

In addition, General Growth shareholders would receive more than $9.00 per General Growth share, consisting of $6.00 per share in cash and a distribution of General Growth's ownership interest in master planned community assets valued by General Growth at more than $3.00 per share.

Simon said it is also prepared to offer Simon common equity instead of the cash consideration as payment to those General Growth shareholders or creditors who would prefer to participate in the upside of owning stock in Simon.

Under Simon's offer, the existing secured debt on General Growth's portfolio of assets would remain in place.

"Simon's offer provides the best possible outcome for all General Growth stakeholders," Simon chairman and chief executive officer David Simon said in the release.

Michael Stamer, counsel for General Growth's official committee of unsecured creditors, said in the release, "Full cash payment to all unsecured creditors and the substantial recovery for equity holders that Simon has proposed would be a great result."

Simon said the transaction is not subject to a financing condition and would be financed through Simon's cash on hand and through equity co-investments in the acquisition by strategic institutional investors, with the balance coming from Simon's existing credit facilities.

AMR higher in trade

AMR's 6.25% convertibles due 2014 traded at 114.5 versus a share price of $9.00, compared to 110 versus a share price of $8.50 on Friday.

Shares of the Fort Worth-based air carrier gained 34 cents, or 3.9%, to $9.05 on Tuesday.

Airlines are a play on consolidation like the General Growth situation and also on economic recovery. Shares of the sector in general were higher on Tuesday, along with the broader markets.

"The consensus of opinion is that with the characteristics of these companies, if you're going to swim in that pool, you better know what you're doing," a West Coast-based sellside trader said.

"People have to trade with technical and fundamental bias. That will help make this market go forward. In the past, with an overabundance of arbs, you had a lot of instances in which players were vaguely familiar with the fundamentals of the company and they were relying on financial engineering. But you don't have that luxury in this situation. You really have to understand the capital structure," the sellsider said.

Ingersoll-Rand weaker

Ingersoll-Rand's 4.5% senior exchangeables due 2012 traded down to 170 and then bounced back up to about 182.375 in tandem with their underlying shares, which settled higher by 62 cents, or 2%, to $31.88. That followed a nearly 16-point slide on Friday from about 195.

On Friday, the Dublin, Ireland-based company reported earnings that missed estimates and presented a mixed 2010 outlook.

Ingersoll reported profit of 48 cents per share excluding one-time items, below the 53 cents that analysts, on average, had expected, according to Thomson Reuters I/B/E/S.

Fourth-quarter net profit came to $139.4 million, or 42 cents share, compared to a year earlier, when it posted a net loss of $3.29 billion, or $10.27 per share, including a charge of $10.56 per share related to a decline in the value of its air-conditioning business.

The company set a first-quarter profit target of 10 cents to 15 cents per share. Analysts had expected 38 cents excluding one-time items, on revenue of $3.02 billion.

Ingersoll now forecasts 2010 earnings per share of $2.20 to $2.60, up from its October forecast of $2.00 to $2.40. The forecast excludes expected restructuring expenses of 25 cents per share.

Ingersoll Rand's major end markets were showing mixed year-over-year results at the close of 2009, with fourth-quarter orders flat compared with last year.

Based on ongoing weakness in several key markets and the prospect of some added material inflation, the company is operating again with a conservative baseline plan and has developed additional contingency actions if markets perform below expectations.

Intel steady in trade

Intel's 3.25% convertibles due 2039 traded at 112.75 versus a share price of $20.80 on Tuesday, which compared to about 111 on Friday.

The Intel 2.95% convertibles due 2035 were not heard in trade but were seen settling at about 96.33 compared to 95.64, according to a pricing source.

Shares of the Santa Clara, Calif.-based chip maker added 29 cents, or 1.4%, to $20.72 on Tuesday.

Auriga analyst Daniel Berenbaum raised his rating on the chip giant's stock to a "buy" from "hold" and also lifted his price target to $24.00 a share from $20.00.

The analyst said he made the moves because discussions with contacts in the electronics market, "suggest that PCs could well be the strongest growth contributor to semiconductor [sales]" this year.

Kenneth Lim contributed to this article

Mentioned in this article:

AMR Corp. NYSE: AMR

General Growth Properties Inc. Pink Sheets: GGWGQ

Ingersoll-Rand NYSE: IR

Intel Corp. Nasdaq: INTC

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