Convertibles strengthen: U.S. Steel, Navistar add on hedge; NuVasive up outright, new Gevo quiet

By Rebecca Melvin

New York, June 29 - Convertibles were stronger on decent volume Friday - the last session of the first half of 2012 - and moving in tandem with a rally in the broader markets on the hopeful development of a euro zone pact to buoy the region's banks.

"I'm seeing many names get better. Balanced names are better to buy," a West Coast-based convertibles trader said, describing many names as "gapping back" with the positive news out of Europe.

United States Steel Corp.'s convertibles were better by 0.25 point on a dollar-neutral, or hedged, basis on Friday and up a point in the last week and a half, even though a few-days-old rally in the underlying shares of the Pittsburgh-based steelmaker ran out of steam Friday despite the broad run in equity markets.

Meanwhile, Navistar International Corp., which has been a feature of convertibles trade in the past week, was active and up about 0.5 point dollar neutral from Thursday as takeout speculation persists.

NuVasive Inc.'s 2.75% convertibles due 2017 jumped about 2 points outright to 98 during the session. Earlier in the week, there were bids in the Street for the convertibles of the San Diego-based medical device maker at 95, a New York-based trader said.

A Piper Jaffray & Co. analyst, who believes the Medtronic litigation involving NuVasive will not be a significant drag on the name, and that the spinal segment of medical device makers is poised for growth, put out a note on the health care sector Thursday, saying that it is an area to keep in focus in the coming months.

Some health care names have slipped, but others moved higher in the aftermath of the U.S. Supreme Court decision Thursday to uphold most of the provisions of the government's health care overhaul.

"Keep your eye on biotech, pharmaceuticals, and medical device companies; these are the names to watch for the rest of the summer," a trader said.

"Because of the whole Obamacare thing coming out, some are up, some are down. There are about 70 different names in this space in the convert market, and the companies are going to be affected in different ways," he said.

There was not a big focus on coal convertibles Friday, but James River Coal Co.'s 3.125% convertibles traded at 28.25 to 28.5 Friday, compared to the last real print two weeks ago around 26.5, a New York-based trader said. Earlier in the week, Standard & Poor's dropped the company's corporate credit rating a notch to CCC+.

Gevo Inc.'s newly priced 7.5% convertibles were quiet and steady on their debut in the secondary market Friday after the upsized $40 million deal priced at the midpoint of coupon talk and cheap end of premium talk late Thursday.

U.S. Steel, Navistar add

U.S. Steel's 4% convertibles due May 2014 traded at 102 versus an underlying share price of $20.79 on Friday, which was up about 0.25 point from Thursday on a dollar-neutral basis. Late in the session the paper was offered at 102.25.

The convertibles were higher with the rest of the market, a trader said.

U.S. Steel shares slipped during the session, ending down 19 cents, or nearly 1%, to $20.60. But the stock had tracked higher Tuesday to Thursday.

Navistar's 3% convertibles due 2014 traded at 92.75 versus an underlying share price of $28.00 on Friday. The level was deemed higher by about 0.5 point on a dollar-neutral basis from Thursday, when the middle of that market was about 90.75.

Shares of the Lisle, Ill.-based engine and heavy duty truck maker surged $2.81, or 11%, to $28.37.

"It's a stock in play, and stocks in play very often get a big bump on Friday since many deals are announced on Mondays," a New York-based trader said.

Earlier in the week several sources saw Navistar's 3% convertibles trading lower in strong volume to 90.5, which was seen 0.5 point to a point lower on a hedged basis.

Until Friday, the stock and bonds had been weak, falling initially on a decision by the U.S. Court of Appeals for the District of Columbia Circuit to vacate a ruling by the Environmental Protection Agency that allowed Navistar to sell heavy-duty diesel truck engines that don't meet the latest anti-pollution standards.

Gevo steady

Gevo's small, $40 million deal, which was upsized from $30 million, priced despite a nearly 50% slide in the underlying shares Wednesday through Thursday. Shares were a little lower again early Friday, but ended up slightly at $4.97.

The newly priced Gevo 7.5% convertibles due 2022 traded between 100 and 101 on their debut in secondary dealings Friday, a syndicate source said. He said there was not a lot of trade in the new convert as investors were mainly of the buy-and-hold variety.

"It's not going to trade for six months until someone decides they want to add more or don't want it anymore," the syndicate source said.

The six-month mark, or Jan. 1, is when the coupon make-whole feature kicks in, and at that point holders can convert into shares and still collect four years of coupons, a value of about 29 points, the syndicate source said.

"You wouldn't do it [convert] if you thought the bond was going to explode; if you thought it was going to get a lot better, then you would hold the bond," the syndicate source said.

Gevo sold the 10-year convertible senior notes at par to yield 7.5% with an initial conversion premium of 15%.

Gevo also sold $61,875,000 in common stock, or 12.5 million shares at $4.95 each.

The convertibles, which were originally talked at a base size of $30 million, have a $5 million greenshoe. The secondary stock offering has a $9.28 million greenshoe.

The registered, off-the-shelf notes came at the midpoint of coupon talk, which was 7.25% to 7.75%, and at the cheap end of 15% to 20% premium talk.

The bonds are non-callable for three years and then provisionally callable for two years at a price hurdle of 150%. After that they are freely callable. There is an investor put in year five.

Proceeds from the offerings are earmarked to repay a portion of its outstanding long-term debt, to fund the cash consideration payable to complete a retrofit of its Luverne, Minn., plant and to fund partially its Redfield Energy retrofit.

Remaining proceeds will be for working capital and for other general corporate purposes.

UBS Securities LLC and Piper Jaffray & Co. are acting as joint bookrunners for the offerings, with Robert W. Baird serving as co-manager for the common stock offering.

Gevo is an Englewood, Colo., renewable chemicals and advanced biofuels company.

Mentioned in this article:

Gevo Inc. Nasdaq: GEVO

James River Coal Co. Nasdaq: JRCC

Navistar International Corp. NYSE: NAV

NuVasive Inc. Nasdaq: NUVA

United States Steel Corp. NYSE: X

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