Kodak, Sonic issues gain on debuts; older paper higher; Newmont rises; D.R. Horton strong

By Rebecca Melvin

New York, Sept. 18 - Eastman Kodak Co.'s newly priced 7% convertibles jumped Friday on their release for secondary trading to as high as 112, but they came off that level to 108 bid, 109 offered as the company's shares extended losses during the session.

Kodak's existing 3.375% convertibles due 2033 - which are expected to be bought back with proceeds of the new issue - were trading near par, having jumped 5 or 6 points Thursday after the financing was announced.

Kodak's upsized $400 million new issue will be supplemented with proceeds from a large financing commitment from Kohlberg Kravis Roberts to pay for the $525 million of 3.375% bonds outstanding.

Sonic Automotive Inc.'s newly priced 5% convertibles traded up as well, standing at 105.75 bid, 106.25 offered versus a share price of $10.25 near the end of the session, according to a syndicate source.

Along with the new Sonic and Kodak convertibles, big-volume names Friday included Transocean Ltd., Amgen Corp. and Medtronic Inc.

Also mentioned in trade were Newmont Mining Corp., with the Newmont 3% convertibles trading at 123.25 versus a share price of $45.80 on Friday, compared with 122.75 versus a share price of $45.75 on Monday; International Game Technology, which saw its 3.25% convertible trade at 134.5 versus a share price of $22.25 on Friday, compared with the same price on Thursday; and D.R. Horton Inc.

D.R. Horton convertibles were pointed to as being rich by Bank of America Merrill Lynch analysts, who recommended that hedge players not hold them.

But richness isn't limited to only a few names in the convert universe at this point, players say. "If you substituted 'DHI' and 'housing' for any one of a number of other converts and industries, it would read the same way," a New York-based sellside desk analyst said.

Still, the Bank of America Merrill Lynch analysts held that while 1% to 2% rich is common in other popular outright holdings, D.R. Horton is more than 4% rich based on their model, so it doesn't make sense for hedged investors.

Separately, Johnson Controls, Inc. announced receipt and acceptance of tenders for exchange from holders of about 99.5%, or $400.4 million, of its 6.5% convertible senior notes due 2012.

Kodak smiles

Kodak's newly priced 7% convertibles due 2017 were 108 bid, 109 offered with the stock at $5.70, according to a syndicate source.

One sellsider said he had a bid on the paper at 110.25 with the shares down 30 cents.

Shares of the Rochester, N.Y.-based photography and imaging technology products and services provider ended the session lower than that at $5.54, which represented a fall of 39 cents, or nearly 7%. And that was on top of an 11% drop in the common on Thursday.

Shareholders don't seem to like the dilution represented in the financing package that the company has cobbled together, which will afford private equity firm KKR a nearly 20% stake in the company and two board seats.

The credit picture however is improved. The Kodak 3.375% convertibles, which are being tendered, have been drifting up since July, when they were around 80. On Friday, they were right around par.

Kodak began its tender offer of up to $575 million principal amount of its 3.375% convertible senior notes due 2033 on Friday. It is offering to purchase the notes at par plus accrued interest to the purchase date.

The tender offer is scheduled to expire at 5 p.m. ET on Oct. 19.

Morgan Stanley & Co. Inc. is the dealer manager.

Sonic booms higher

Sonic's newly priced 5% convertibles due 2029 gained on their debut to as high as 107.5, according to one sellsider, but came off that level to 105.75 bid, 106.25 offered versus a share price of $10.25.

Shares of the Charlotte, N.C.-based auto retailer added about 2% during the session to $10.37.

Like Kodak's deal, Sonic's was upsized. It moved up to $150 million from $125 million. Sonic also priced 9 million shares of common equity at $10.10 per share for a total capital raise of $241 million.

And similarly to Kodak, the terms were revised. Talk was tightened to 5% to 5.5% for the coupon and 27.5% to 32.5% for the initial conversion premium, from 5.5% to 6% for the coupon and 22.5% to 27.5% with an initial conversion premium. The final terms were on the rich end of revised talk.

Sonic paper modeled cheap using a credit spread of 1,200 basis points over and a vol. of 45%, according to one sellside analyst.

The new convertible will be used to pay down debt, including two existing convertible issues and a credit facility.

Sonic's 4.25% convertibles - which are expected to be bought back with proceeds of the new deal - traded near par on Friday, up from a recent 78.

"It worked out well," a syndicate source said of the successful refinancing.

The company's 2006 credit facility matures in February 2010. As of June 30, the company had $80 million outstanding on the credit facility, along with a $206.4 million borrowing base, $77.5 million of letters of credit, and additional borrowing of $48.9 million, the sellside analyst pointed out.

Bank of America and JPMorgan are both participants in the credit facility, along with others, and the new convertible offering, the analyst pointed out.

Of Sonic Automotive's existing convertibles, the 4.25% convertible senior subordinated notes due 2015 have about $160 million outstanding and holders can put in November 2010.

D.R. Horton considered rich

D.R. Horton's 2% convertibles due 2014 traded at 125 versus a share price of $13.30 on Friday, compared to 123.5 versus a stock price of $13.00 on Thursday and 126.5 versus a stock price of $13.60 on Wednesday.

The bonds' valuation was considered overly rich following the recent rally, according to Bank of America Merrill Lynch research analysts.

"At its current level, we are struggling to see upside in the credit and are concerned about a volatility drop should the housing fundamentals finally turn the corner," the analysts including Alan Yu wrote in a research note.

"While outright investors may still consider it an equity surrogate, we believe it is too risky for hedged investors to change this issue and recommend staying on the sidelines and, or closing out existing hedged positions," the analyst wrote.

The D.R. Horton 2% at 126 versus a share price of $13.55 doesn't provide much yield advantage over the common stock since its 1.6% yield compared to 1.1% for the stock, the analyst said.

Using a volatility assumption of 35% and a credit spread assumption of Treasuries plus 450 bps to reach a theoretical value of 120.9, the convert's trading price is at a 4.2% premium to its theoretical value.

"Since its issuance in May 2009, the convertible has returned +26% versus an underlying stock return of +36%, which is also beyond expectation because the delta would suggest a lower return on the convert side," Yu wrote.

The analyst's negative view is mainly based on the risk of a decline in volatility and lack of upside for hedged investors to balance risk/reward. He expects volatility to revert to about 35% once the housing market stabilizes, which compares to almost 43% of implied volatility currently commanded by the convertible.

The analysts went on to say that the negative view is not based on fundamental credit quality. On the contrary, they are "encouraged" by the company's moves in the past to focus on generating cash from inventory reduction, to opportunistically buy back debt at a discount and to raise additional liquidity when capital markets started to function.

Johnson Controls

Johnson Controls has successfully tendered nearly all of its 6% convertible bonds, and as a result, it will issue about 35.8 million shares and pay about $61.2 million in cash.

On Sept. 11, the company announced the extension of the exchange offer for up to 8.55 million of its equity units in the form of corporate units to 5 p.m. ET on Sept. 25 from 11:59 p.m. ET on Sept. 17.

For each $1,000 principal amount of convertibles, the company was offering 89.3855 shares of common stock, $120 in cash and accrued interest up to but excluding the settlement date.

For each equity unit, Johnson Controls is offering 4.8579 shares of common stock and $6.50 in cash.

The company originally issued $402.5 million principal amount of the convertibles and 9 million corporate units in March.

The notes are convertible at an initial conversion rate of 89.3855 shares per $1,000 principal amount.

Milwaukee-based Johnson Controls is an automotive and commercial building supplier.

Mentioned in this article:

Amgen Inc. Nasdaq: AMGN

D.R. Horton Inc. NYSE: DHI

Eastman Kodak Co. NYSE: EK

International Game Technology NYSE: IGT

Johnson Controls Inc. NYSE: JCI

Medtronic Inc. NYSE: MDT

Newmont Mining Corp. NYSE: NEM

Sonic Automotive Inc. NYSE: SAH

Transocean Ltd. NYSE: RIG

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