Cliffs mandatories slip; gold stocks weak; convertibles quiet; Hologic exchange trades up

By Rebecca Melvin

New York, Feb. 15 - Cliffs Natural Resources Inc.'s newly priced 7% mandatory convertible preferreds traded weak in secondary market action on Friday after the upsized $675 million deal priced at the tight end of premium talk and the cheap end of tightened dividend talk.

"Cliffs fell off a cliff," a New York-based trader said around midsession.

Sources pointed to the underlying shares being down 2% on the day and the fact that the deal's valuation wasn't very good for the weakness. There was selling pressure in the afternoon, and the new paper closed at its lows of the session.

Elsewhere, trading was relatively quiet ahead of the long holiday weekend in observance of Presidents Day.

AMR Corp. remained a top trader one day after the bankrupt airline officially announced its merger with U.S. Airways. The bonds were also continuing to gain strength, ending up about 2 points from Thursday's levels at 106.5 bid, 107 offered.

Gold stocks were notably weak Friday. But the convertibles were quiet, a New York-based trader said.

Goldcorp Inc.'s convertibles didn't trade, he said, after the company reported a revenue miss late Thursday but beat on earnings. AngloGold Ashanti Ltd.'s shares closed down 5%, with the AngloGold 6% mandatory convertibles trading mostly in line at about 33 to 33.07 versus a $26.99 underlying share price, a second New York-based trader said. Newmont Mining Corp.'s 1.625% convertibles due 2017 were down about 2 points on a $1.30, or 3%, move down in the underlying shares.

Hologic Inc. traded actively after the Bedford, Mass.-based diagnostic imaging company announced it did an exchange of $370 million of its 2% convertibles for new 2% convertibles. The new paper traded up 3 points to 3.5 points from issue to 103 bid, 103.5 offered. The exchanged paper matures in 2043 compared to the older notes that mature in 2037.

Overall, the convertibles market was seen softer in recent sessions, but the week's $1.75 billion in new issuance wasn't viewed as the culprit. Several sources said lower volatility and rates were more to blame than an abundance of new supply.

In addition to the new Cliffs deal on Friday, three other new deals priced this past week.

The star performer in the convertible secondary market was Starwood Property Trust Inc.'s 4.55% convertibles - an upsized $525 million deal that debuted Tuesday. The issue was seen up around 104 on Friday and better from issue by 2.5 points on a dollar-neutral, or hedged, basis.

Molina Healthcare Inc.'s 1.125% convertible notes due 2020, an upsized $450 million deal that also debuted on Tuesday, "held up OK," a New York-based trader said Friday, quoting the paper up from issue by about a point or so on a dollar-neutral basis.

And BlackRock Kelso Capital Corp. priced $100 million of 5.5% convertible senior notes, which essentially treaded water in secondary dealings on their debut.

Cliffs weak on debut

Cliffs' newly priced 7% mandatory convertibles due 2016 closed near their lows of the day at $24.45 to $24.50 versus the underlying shares that closed at $28.85, according to a syndicate source.

Shares of the Cleveland-based mining and natural resources company closed down 63 cents, or 2.1%.

The new mandatory traded actively on its debut in the secondary market, and selling pressure intensified in the afternoon.

"It didn't do so well," a trader said.

The paper was seen lower on a dollar-neutral basis by about $0.50.

The deal came concurrently with an offering of stock at $29.00 per share, and when share trading broke below that level, there was little left to support the mandatory, a trader said.

The 2% decline in the underlying shares came on top of a 20% slide earlier in the week when the company cut its dividend.

"There was some residual pressure. It's a tough time for the stock," the trader said.

Early Friday the new deal was seen at 24.50 bid, 25.50 offered.

A second trader said, "It's not doing very well either on swap or outright." He cited the weaker shares and a valuation that "wasn't very good."

The $4.2 billion market cap company priced $675 million of class A mandatory convertible preferred stock late Thursday. And there is a $101.25 million over-allotment option.

J.P. Morgan Securities LLC, BofA Merrill Lynch and Citigroup Global Markets Inc. are joint bookrunners. The lead co-managers are Wells Fargo Securities LLC and BMO Capital Markets, with co-managers Credit Agricole Securities (USA) Inc., Mizuho Securities USA Inc., Scotia Capital (USA) Inc. and TD Securities (USA) LLC.

The deal was upsized from an initially talked $500 million base deal and $75 million greenshoe. Pricing came at the cheap end of dividend talk and at the rich end of premium talk.

Price talk was tightened during marketing to a 6.75% to 7% yield with a 20% to 22.5% initial conversion premium, from a 6.75% to 7.25% dividend and a 17.5% to 22.5% premium.

Unless converted earlier at the option of the holders, each preferred will automatically convert into between 28.148 and 34.484 common shares on or around Feb. 1, 2016.

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.

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

The company plans to list the new mandatories on the New York Stock Exchange under the symbol "CLV."

The Cleveland-based mining and natural resources company's concurrent stock offering was for 9 million shares for $261 million in proceeds. There is a $39.15 million greenshoe.

Starwood is week's star

Starwood's 4.55% convertibles were seen trading around 104. They have extended gains and are seen better from issue by2.5 points on a dollar-neutral basis.

"It's been up every day," a New York-based trader said.

He thought the secret to its success was the market's "mispricing of the credit and the fact that it's a fairly good levered play on the equity."

The new issue was trading in the gray market ahead of final terms being fixed at only plus 0.25 point.

Mentioned in this article:

AMR Corp. Pink Sheets: AAMRQ

AngloGold Ashanti Ltd. NYSE ADS: AU

BlackRock Kelso Capital Corp. Nasdaq: BKCC

Cliffs Natural Resources Inc. NYSE: CLF

Goldcorp Inc. NYSE: GG

Hologic Inc. Nasdaq: HOLX

Molina Healthcare Inc. NYSE: MOH

Newmont Mining Corp. NYSE: NEM

Starwood Property Trust Inc. Nasdaq: STWD

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