Convertibles secondary market mostly quiet as equities surge; Covanta, AngloGold to price

By Rebecca Melvin

New York, May 18 - Convertibles were mostly quiet on Monday as equities surged, with mild activity reported in a few names that saw their underlying convertibles jump, market players said.

Digital Realty Trust 5.5% convertibles, which priced a month ago, traded at 95 versus a share price of $33.75. The company's shares surged 9% in heavy volume.

Valeant Pharmaceuticals International's convertibles were quoted up in a tight market, but not much was trading, even as its shares gained in heavy volume, ending up 10% by the close.

Meanwhile, Scientific Games Corp.'s convertibles were indicated higher and sold in a small amount in that range as the New York-based gaming company announced pricing of $225 million of 9.25% senior straight notes.

"Mondays are typically dead nowadays. Nothing seems to happen anymore," a New York-based sellside analyst said, adding, "I've heard people say Monday is the new Friday."

The recent trend held true despite gains in stock markets, which were up sharply despite a lack of significant economic news, the sellsider said.

In the primary market, there was no gray market reported in two issues that emerged for pricing after the close. Both issues were seen slightly cheap.

Covanta Holding Corp. planned to price $300 million of convertible senior notes after the close Monday, which were talked to yield 3% to 3.5% with an initial conversion premium of 20% to 25%.

Covanta's existing convertibles were seen higher as investors were cheered by the prospect of additional debt financing set to mature after the 2012 put for the existing convertibles.

AngloGold Ashanti Holdings Finance plc, a subsidiary of AngloGold Ashanti Ltd., planned to price $575 million of five-year convertibles in both Rule 144A and Regulation S distribution after the close Monday to yield 3.5% to 4%, with an initial conversion premium of 32.5% to 37.5%.

Digital Realty in trade

Digital Realty's recently priced 5.5% convertibles due 2029 traded at 95 versus a stock price of $33.75, which was lower compared to 103 versus a stock price of $36.80 a month ago after their debut in the secondary market.

The San Francisco-based technology-related real estate investment trust wasn't among the issuers that were most warmly received among investors in recent months.

Valeant Pharmaceuticals' 3% convertibles due 2010 were quoted at a tight 97.625 bid, 97.875 offered, compared to trades at 95 at the beginning of May.

The Valeant 4% convertibles of 2013, which have four-and-a-half years to go, were seen at about 90.

"VRX is up on no news," a sellsider said.

Scientific Games' 0.75% convertibles due 2024 were seen at 95 bid, 96 offered, which was up compared to 92.375 on Friday, according to a sellside source.

The convertibles are putable in 2010, and the straight debt matures in 2019, so the additional debt funding provided additional comfort that the convertible paper would be paid out.

In addition, the company has $109 millions in cash. "While it doesn't have any short-term liquidity issues, it's nice to get the incremental cash," the sellsider said.

"Things are moving upward but not trading," he said.

An odd lot of about 700,000 bonds was bought at 95 by a broker-dealer, he said.

Covanta looks cheap

Covanta's $300 million of convertible senior notes were talked to yield 3% to 3.5% with an initial conversion premium of 20% to 25%. They were seen 1% cheap by one sellsider and even more cheap depending on what vol. and credit spread figures were applied to valuation.

Covanta's existing 1% convertibles due 2027 traded at 85.535, which was up about 3.5 points to 4 points. They traded May 13 at 83.723.

On average, valuations put them 800 basis points to 900 bps over Libor.

Vol attached to the name was 30%, which moves away from the trend of capping vol at 45% for new issues.

"Things should settle back down; overall vol is dropping back to more normal ranges," a sellside analyst said.

"Stock vol dropped down to 50 from the high 80s," he said.

The Fairfield, N.J.-based company collects waste, and instead of putting it into landfills, it burns it to produce electricity. Its customers are municipalities, and it is doing well in Europe, where there are a lot of restrictions on landfills.

There is some equity sensitivity to the existing convertibles.

The new Rule 144A offering, for which there is a $45 million greenshoe, is being sold via Barclays Capital, JPMorgan and Citigroup.

The paper is a five-year bullet.

Covanta intends to enter into convertible note hedge and warrant transactions with affiliates of one or more of the initial purchasers.

Proceeds will be for working capital and general corporate purposes, which may include funding a portion of the construction cost of a 1,700 metric tons per day energy-from-waste facility in Dublin, Ireland, other capital expenditures, potential permitted investments or acquisitions.

AngloGold seen 1% cheap

While there was no consensus among analysts, who put forward a wide range of spreads, a London-based sellside analyst said the paper was offered in the gray market at par plus 1 point.

"At mid terms we calculate a fair value of 106.2% of par, assuming 45% volatility on the underlying ADSs, borrow costs of 50 bp and a credit spread of 600 bp," the analyst said.

AngloGold also has existing paper, but sources didn't see any quotes in the existing AngloGold 2.375% convertibles due 2009.

Last October, the company said its plans to refinance its $1 billion 2.375% convertible bonds due 2009 with the proceeds of a new equity-linked instrument were upset by volatility in global capital markets.

AngloGold Ashanti Holdings Finance plc, a subsidiary of AngloGold Ashanti, planned to price $575 million of five-year convertibles after the close Monday to yield 3.5% to 4% with an initial conversion premium of 32.5% to 37.5%, according to a syndicate source.

There is a greenshoe of $85 million.

The Regulation S and Rule 144A bonds will be convertible into American Depositary Shares of AngloGold.

Standard Chartered Bank is lead manager, with Barclays Capital and Morgan Stanley also involved in the deal.

Proceeds from the offering will be used to refinance AngloGold Ashanti's debt facilities and for general corporate purposes.

The bonds are non-callable for three years and then are provisionally callable at a 130% stock price trigger.

The bonds have been approved-in-principle for listing on the Singapore Exchange Securities Trading Ltd.

AngloGold Ashanti is a gold producer based in Johannesburg.

Mentioned in this article:

AngloGold Ashanti Ltd. NYSE ADRs: AU

Covanta Holding Corp. NYSE: CVA

Digital Realty Trust NYSE: DLR

Scientific Games Corp. NYSE: SGMS

Valeant Pharmaceuticals International NYSE: VRX

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