AK Steel drops in active trade on debut; Vector adds; NetApp 'comes in' after earnings

By Rebecca Melvin

New York, Nov. 15 - AK Steel Holding Corp.'s newly priced 5% seven-year convertibles fell in active trade on their debut in the secondary market Thursday after the West Chester, Ohio-based steel manufacturer sold an upsized $150 million of the notes at pricing beyond the rich end of talk, according to market sources.

The low print of the new AK Steel bonds looked to be 97.75, a Connecticut-based trader said. The underlying shares of the company opened sharply lower and closed down 10%.

Vector Group Ltd.'s newly priced 2.5% six-year convertibles added on their debut in the secondary market after the Miami-based tobacco holding company sold an upsized $200 million of the notes that priced at the rich end of talk.

Elsewhere, NetApp Inc.'s convertibles were flattish outright, but contracted by about 1 point on swap, after the Sunnyvale, Calif.-based data storage equipment maker reported solid earnings and positive guidance, which sent the underlying shares 11% higher.

DryShips Inc. pushed lower, with its 5% convertibles dropping 7 points outright on a 20% plunge in the underlying shares of the Athens-based drybulk shipping and tanker operator. A trader cited "poor numbers" for the tumble.

Also in the distressed area, Molycorp Inc. continued to slide as the underlying shares of the Greenwood Village, Colo.-based rare earth oxides producer hit a new 52-week low.

The convertibles of bankrupt MF Global Holdings Inc. were little changed in trade amid a stronger stock. The convertibles have been trading up "little by little" for the last several months and now sit in the low 60s.

A congressional report released Thursday on the defunct commodities brokerage firm placed blame for its demise, October 2011 bankruptcy filing and lost $1.6 billion in customer funds on its former chief executive Jon Corzine, but stopped short of accusing Corzine or the firm of wrongdoing.

It called the bankruptcy preventable and said regulators failed to share critical information.

Prior to his tenor as the head of MF Global, Corzine was a former New Jersey governor and Democratic U.S. senator.

U.S. stocks ended down again, but off their session lows. The S&P 500 stock index ended down 2.16 points, or 0.2%, to 1,353.33; the Dow Jones industrial average shed another 28.57 points, or 0.2%, to 12,542.38; and the Nasdaq Stock Market was down 9.87, or 0.4%, to 2,836.94.

The Dow has fallen more than 1,000 points since a high Oct. 5.

New AK Steel falls

AK Steel's new 5% convertibles, which priced beyond the rich end of talk, traded down on their debut to 97.75 and also traded quite a bit at 98.

AK Steel's shares were dropped again to close down 39 cents, or nearly 10% at $3.63. The shares have slid since the convertible bond offering was launched earlier this week.

The stock is tanking, traders noted when asked about the convertibles during the session. Despite the decline, one trader noted, sometimes the bonds on the first day hold up.

The company also priced a downsized offering of 22 million shares at $4.00 each, reduced from 25 million shares, and $350 million of senior secured straight notes due 2018 with an 8.75% coupon at par.

The offerings were announced on the heels of a bigger-than-expected loss for the fourth quarter due to lower steel prices and a large income tax charge.

In addition Standard & Poor's and Moody's Investors Service this week cut their ratings of the company, citing tough steel market conditions.

The new seven-year exchangeable senior notes priced after the market close Wednesday with a 5% coupon and a 35% initial conversion premium.

The terms were richer than talk for a yield of 5.25% to 5.75% and an initial conversion premium of 27.5% to 32.5%.

The size was increased from a planned $125 million.

The off-the-shelf exchangeable notes have a $22.5 million greenshoe, increased from $18.75 million.

Six major banks had a hand in underwriting this issue. It was sold by joint bookrunners Credit Suisse Securities (USA) LLC, J.P. Morgan Securities LLC, Citigroup Global Markets Inc., Wells Fargo Securities LLC, Morgan Stanley & Co. LLC and Bank of America Merrill Lynch.

The notes are non-callable for life. They have change-of-control and dividend protection. They also have net share settlement.

Proceeds will be used to repay borrowings under the company's credit facility and for general corporate purposes.

West Chester, Ohio-based AK Steel makes carbon, stainless and electrical steels.

New Vector adds

Vector Group's new 2.5% convertibles were quoted at 102.85 bid versus an underlying share price of $14.60 during the session, according to a Connecticut-based analyst.

Shares of the Miami-based tobacco holding company shed 66 cents, or 4.3%, ending the day at $14.54.

The new paper, which was upsized by $50 million to $200 million, has a variable interest rate that includes the coupon plus a dividend pass through.

Allocations of the paper looked to have been balanced between hedged and outright players.

The overnight deal was priced concurrently with an offering of 3 million borrowed shares.

Under a share lending agreement, bookrunner Jefferies & Co. Inc. has agreed to borrow 7 million shares.

The registered deal has a $22.5 million greenshoe.

Pricing came at the rich end of talk, which was for a 2.5% to 3% fixed yield and a 22.5% to 25% premium.

The borrowed stock is part of a share lending agreement that is also being used to facilitate hedging transactions.

The convertibles are non-callable.

Vector plans to use proceeds for general corporate purposes, including in its existing tobacco business and in additional investments in real estate through its subsidiary New Valley LLC. A portion of the proceeds may also be used for upcoming debt maturities.

NetApp 'comes in'

NetApp's 1.75% convertibles due 2013 traded at 107.50 bid, 107.875 offered on Thursday, which was about a point lower outright and contracted about a point on swap.

NetApp shares surged $3.08, or 11%, to $30.20 in heavy volume.

Going into the day, the NetApp convertibles were viewed as rich by investors and weren't bid up along with a sharp move up in the shares.

Fiscal second-quarter earnings beat estimates, and revenue was in line with expectations.

Net income excluding one-time items was 51 cents per share, which was better than the 48 cents per share that analysts were expecting.

Revenue rose about 2% to $1.54 billion.

The company also forecast third-quarter profit of 53 cents to 58 cents per share, compared to the average estimate of 54 cents per share.

DryShips drops

DryShips' 5% convertibles due 2014 traded at 73 on Thursday, which was down 7 points on the day.

Shares of the Athens-based dry bulk and tanker operator tumbled 41 cents, or 20%, to $1.67.

A trader said that disappointing earnings sparked the slide.

DryShips reported a third-quarter net loss of $51.3 million, or 13 cents per share, compared to profit of $25 million, or 7 cents per share, in the year-earlier period.

Excluding one-time items, the company lost $33.3 million, or 9 cents a share, which was greater than the 2-cent-a-share loss expected.

Revenue rose 8% to $343.6 million.

The company warned that the shipping market remains severely depressed, with both its tanker and drybulk spot charter rates standing at historic low levels, which are well below cash breakeven, its chairman and chief executive George Economou, commented in a news release.

Economou went on to say, "The deteriorating economic situation in Europe, together with Basel III capital requirements, have led to a number of shipping banks with large portfolios to exit the sector. High profile restructurings and payment defaults have started to take their toll on the few remaining lenders. This comes at a time when we have significant capital expenditures to finance our drybulk and tanker newbuilding programs. The lack of liquidity is further exacerbated by falling assets values, which continued to decline during the quarter."

Mentioned in this article:

AK Steel Holding Corp. NYSE: AKS

DryShips Inc. Nasdaq: DRYS

MF Global Holdings Inc. Pink Sheets: MFGLQ

Molycorp Inc. NYSE: MCP

NetApp Inc. Nasdaq: NTAP

Vector Group Ltd. NYSE: VGR

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