ArcelorMittal up outright, slips on swap; Silver Standard seen cheap; Molycorp bid lower

By Rebecca Melvin

New York, Jan. 10 - ArcelorMittal SA's newly priced $2.25 billion of mandatory convertible subordinated notes were the main driver of convertible trading Thursday, with the new paper adding a point or more outright but coming in slightly on a hedged basis, market sources said.

The ArcelorMittal deal was 12 times oversubscribed, according to one trader, and that boosted the deal in the aftermarket. But the underlying shares were also higher, weakening the swap trade.

The new notes "traded very well today and were a great play for the outright community," a New York-based trader said.

Also in the primary market, Silver Standard Resources Inc. launched an offering of $200 million of 20-year convertible senior notes that was expected to price after the market close and was seen as cheap for investors.

Silver Standard Resources' existing 4.5% convertibles, which will be redeemed with most of the proceeds of the new deal, traded at 100.5, according to market sources, which looked unchanged on the day.

Elsewhere, Molycorp Inc.'s two convertible bond issues were seen mostly quiet but bid lower as the underlying shares of the Greenwood Village, Colo.-based rare earth minerals producer took a hit on a revenue warning.

Molycorp said it expects lower-than-expected revenue and cash flow for 2013 and is evaluating its capital needs. Shares of the company plunged 22.7%.

Overall, the new ArcelorMittal and Silver Standard deals were somewhat rejuvenating to the market - representing the first new paper since before Christmas, but players said it is not nearly enough.

"We're still undersupplied any way you slice it," an East Coast-based buysider said.

A second buysider, who said he really liked ArcelorMittal especially given that it's the largest steelmaker in the world and is aiming to reduce leverage, agreed that he didn't' see any end to the decreasing size of the convertible bond market, and that opportunities "will become more difficult."

The buysider cited convertible issues coming out of the market like MetLife Inc.'s $3 billion of 5% convertible equity units. "A third of that came out a couple of months ago, and another $1 billion will come out in October, and another $1 billion the year after that. So you need five deals like Silver Standard to make up for one of these," he said.

ArcelorMittal better outright

ArcelorMittal's newly priced 6% convertible mandatory notes due 2016 traded up to 26.25 during the session, from 25 par value, and was seen 26.25 bid, 25.30 offered at the close, according to a New York-based trader.

The trader said that it came in about 18 cents on swap.

ArcelorMittal shares gained 69 cents, or 4%, to $17.52 on the day.

The paper was very active and one buysider said he liked the fact that the company is reducing its leverage, and that the steel sector is at the bottom of its cycle right now.

He also said he liked the fact that ArcelorMittal is the largest steelmaker in the world.

"So ideally you're going to see steel shipments rise. But ultimately it comes down to a macro call," the buysider said.

ArcelorMittal intends to use the net proceeds from its newly priced convertible mandatory notes and concurrent share offerings for about $4 billion in proceeds to reduce existing debt.

Deleveraging remains a priority, the company said, to retain its strategic flexibility, and these offerings, together with other initiatives, are expected to enable the company to reduce its net debt down to about $17 billion by June 30, and accelerate the achievement of a medium-term net debt target of $15 billion.

In 2011, ArcelorMittal had revenue of $94.0 billion and crude steel production of 91.9 million tons, representing about 6% of world steel output.

The group's mining operations produced 54 million tons of iron ore and 8 million tons of metallurgical coal.

ArcelorMittal launched its dual offerings of convertible mandatory notes and equity early Wednesday for a combined $4 billion in proceeds, after the mandatory portion of the deals was upsized to $2.25 billion from $1.75 billion.

"What I am surprised about is that they didn't do more. They could have," the buysider said, saying that the deal was 12 times oversubscribed.

"That's why it richened in the secondary market," he said.

Given that the convertible market has been shrinking, the buysider did not think that portfolio managers would be having to sell much other paper to make room for the new mandatories. While there was some trading of United States Steel Corp.'s convertibles on Thursday, he didn't think it was due to the new paper of the European steelmaker.

"It's not as much of an impact as when the market was $50 billion larger. There is a lack of stuff to buy," he said.

The new mandatory came at 25 and traded actively at 26, before going a little higher. But the stock had a lift as well, and on a hedged basis they came in 18 cents on swap on a "1.2 points per" delta, a trader said.

The convertible piece was upsized during marketing to $2.25 billion and was viewed as cheap even after talked terms were tightened to a 6% coupon and 25% premium. Initially the deal was talked at a coupon of 5.875% to 6.375% and an initial conversion price of 20% to 25%.

ArcelorMittal is a Luxembourg-based steel producer.

Silver Standard looks cheap

The new Silver Standard convertible, which was talked with a coupon of 2.875% to 3.375% and an initial conversion premium of 37.5% to 42.5%, was seen about 4% cheap at the midpoint, using a credit spread toward 700 basis points over Libor and at a vol. of 40% to 45%.

"They still look fine using 700 [bps] over," an East Coast-based buysider said.

The new paper, with its higher coupon and premium and longer term, was seen as a different animal to the existing Silver Standard 4.5% convertibles.

"It's a very different profile," a West Coast-based trader said, referring in particular to the seven-year term put of the new convertibles.

"These guys don't generate cash, it's about the reserve base," the trader said, referring to Silver Standard's assets.

Nevertheless, he thought the paper would "probably do good out of the gate."

Silver Standard planned to price $200 million of the 20-year convertible senior notes late Thursday.

There is an over-allotment option for a further $30 million of notes.

Citigroup Global Markets Inc. and BMO Capital Markets Corp. are the joint bookrunners of the Rule 144A and Regulation S offering.

Co-managers include Deutsche Bank Securities Inc., RBC Capital Markets LLC, GMP Securities LP, UBS Securities LLC, Scotia Capital (USA) Inc. and Credit Suisse Securities (USA) LLC.

The convertibles will be non-callable for five years and then will be provisionally callable for seven years if the underlying shares are 130% of the conversion price for a certain period. There are puts in years seven, 10 and 15.

The convertibles will have full dividend and takeover protection.

Up to about $138 million of proceeds will be used to repurchase or redeem its existing convertible notes in March, and remaining proceeds are for general corporate purposes, which may include developing or advancing its property portfolio.

Silver Standard is a Vancouver, B.C.-based silver mining company.

Molycorp bid lower

Molycorp's 6% convertibles due 2017 were not seen in significant trade on Thursday, but one source said they were bid down to 66 from 71.5. A second source said they were at 87.

Molycorp's older 3.25% convertibles due 2016 were seen at 66.

Molycorp shares plunged $2.45, or 22.7%, to $8.34.

"It's looking pretty distressed," a trader said, adding that that latest slide was prompted by the company missing again and resetting expectations.

Molycorp cited production delays and weak pricing for its revisions to 2013 guidance.

"...the company anticipates lower-than-expected revenue and cash flow for 2013, and is evaluating its capital needs for 2013," according to the company's release.

Nevertheless, operations at its Mountain Pass, Calif.-based rare earth minerals mining facility have begun and it is expected to produce 19.05 metric tons annually by the end of June. The company originally expected that it would hit that rate by the end of 2012.

Mentioned in this article:

ArcelorMittal SA NYSE: ADR: MT

Molycorp Inc. NYSE: MCP

Silver Standard Resources Inc. Nasdaq: SSRI

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