AMR rallies on merger agreement; Coinstar 'comes in;' planned Cliffs upsized, talk tightened

By Rebecca Melvin

New York, Feb. 14 - AMR Corp., the bankrupt parent of American Airlines, jumped Thursday to 106 or 107 on news that the Fort Worth, Texas-based carrier and U.S. Airways Group Inc. have approved a merger that will form a new airline with a market value of about $11 billion. The deal is expected to close by the end of September as part of American's emergence from Chapter 11 bankruptcy protection.

After topping out at 106 or 107, the AMR convertibles slipped back to about 104 bid, 104.5 offered, up from about par.

The AMR convertibles traded actively. One trader said having an official deal on the table brought new kinds of buyers such as different types of arbitrage players to the market.

AMR was definitely the name of the day, sources said.

Elsewhere, Coinstar Inc.'s convertibles came in more than 2 points on a dollar-neutral, or hedged, basis as stock borrow availability in the name dried up.

"The borrow hasn't been great for a while and today it got worse," a New York-based trader said of Coinstar.

Overall volatility came in a little bit on the day, and vol. names were said to be for sale.

Equinix Inc. saw a 7% share gain after the $11 billion market cap data center company reported earnings that beat estimates and revenue that was in line. It also guided first-quarter revenues below estimates but reaffirmed full-year revenue guidance.

Meanwhile, United Therapeutics Corp. convertibles were up along with the underlying shares after the Silver Springs, Md.-based biotechnology company announced that the U.S. Food and Drug Administration has accepted resubmission of its new drug application for treprostinil diolamine extended release tablets to treat pulmonary arterial hypertension.

In the primary market, Cliffs Natural Resources Inc.'s planned offering of class A mandatory convertible preferred stock was upsized to $675 million in size, up from $500 million initially talked, and price talk was tightened to 6.75% to 7% for the yield, with a 20% to 22.5% initial conversion premium, according to a syndicate source.

Price talk was originally for a yield of 6.75% to 7.25%, and a premium of 17.5% to 22.5%.

AMR surges on 'official deal'

AMR's 6.25% convertibles due 2014 were last seen at 104 bid, 104.5 offered, which was up 4 points on the day, after earlier trading as much as 5 to 7 points higher, sources said.

AMR shares, which trade over-the-counter, rose 82 cents, or 63%, to $2.12.

The combination of American and US Airways will create the world's largest airline. The carrier will keep the American Airlines name, but will be run by US Airways chief executive Doug Parker. American's chief executive Tom Horton will become executive chairman of the new company.

AMR creditors will own 72% of the new company, with the remaining 28% going to US Airways shareholders. AMR bondholders are expected to be made whole.

The creditors' portion includes a 23.6% share for American employees and unions, plus a small stake for existing shareholders of American's parent AMR Corp.

"The fact that they have a deal "coupled with people have a better handle on what you're going to get when the company emerges from bankruptcy" created the buzz, a Connecticut-based trader said.

The airlines said they expect $1.05 billion in combined benefits from the merger. They also anticipate costs savings of about $150 million. The savings would have been higher, but the company expects to pay out $400 million in raises to workers per year.

"There's more clarity," another trader said, adding that he thought there was more room for the bonds to "grind higher," and they will be following the stock and two airline valuations.

But a third trader was skeptical: "They are still pretty busted."

It was "a big move," the trader said. "But there is talk about the accrued interest in arrears for about 15 months, which amounts to about 8 points right there. How are you going to get compensated in a situation like this? I don't know."

The combined airline also expects to spend $1.2 billion on one-time transition costs over the next three years.

The new board will have 12 members, including three from American including Horton; four from US Airways, including Parker and five appointed by American's creditors.

AMR shareholders are poised to get a 3.5% stake in the new airline, which is unusual since stockholders are typically wiped out in a Chapter 11 proceeding.

The bankruptcy court overseeing AMR's case still needs to approve the deal, as do U.S. Airways' shareholders. AMR filed for bankruptcy in November 2011.

Gimme Credit LLC upgraded AMR to stable from deteriorating on the news.

"Under CEO Doug Parker, we expect American will 'straighten up and fly right,'" wrote Gimme Credit analyst Vicki Bryan in a note released Thursday.

Coinstar 'comes in'

Coinstar's 4% convertibles due 2014 traded at 139.5 versus $55.25 for a sale earlier in the session, which represented a contraction on a hedged basis of about 2.25 points, a trader said.

Coinstar shares closed up $2.97, or 5.6%, at $55.95.

Constar trades on about an 82% delta and is an equity-sensitive name. But the prints didn't appear to have stock trades along with them, a New York-based trader said.

Limited borrow was cited for the contraction.

"Hedged investors out there were finding it expensive to hold it. If you can't hedge it, or your short is being called, then you're taking a risk, so you sell it," he said.

Cliffs upsizes, tightens talk

Cliffs Natural Resources' planned preferred stock deal was seen pricing late Thursday at an upsized $675 million and tighter talk at just shy of a 7% coupon and around a 21% initial conversion premium, at the midpoint of revised talk.

Price talk was originally talked at $500 million in size, with pricing at 6.75% to 7.25% coupon, 17.5% to 22.5% premium.

The mining company also plans to price a concurrent add-on offering of common stock.

As previously reported, J.P. Morgan Securities LLC and BofA Merrill Lynch are joint bookrunners.

In terms of takeover protection, if a cash acquisition occurs, holders will be entitled to convert at a specified conversion rate and there is a coupon make whole. The mandatories also have standard dividend protection for dividends above $0.15 per quarter.

The mandatories will automatically convert to common stock on Feb. 15, 2016.

Proceeds will be used to repay borrowings under a term loan facility. Any remaining funds will be used for general corporate purposes.

Stephanie N. Rotondo contributed to this report

Mentioned in this article:

AMR Corp. Pink Sheets: AAMRQ

Cliffs Natural Resources Inc. NYSE: CLF

Coinstar Inc. Nasdaq: CSTR

Equinix Inc. Nasdaq: EQIX

United Therapeutics Corp Nasdaq: USTR

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