Alpha Natural's 3.25% issue pushes toward discounted tender offer price; sister paper pops

By Rebecca Melvin

New York, Sept. 27 - Alpha Natural Resources Inc.'s 3.25% convertibles moved up in active trade Thursday but didn't rise to the level of the discounted tender offer price that the Abingdon, Va.-based coal producer announced early in the day for up to $350 million, or 53%, of the issue outstanding.

Alpha Natural's 3.25% convertibles, which mature in 2015, lifted about 4 points to 92, which was below the 94 offer price for the bonds if they are tendered by Oct. 11.

Alpha Natural's sister issue, a 2.375% convertible due 2015, was also active and moved up a couple of points higher on the day.

Also in the coal sector, Peabody Energy Corp. traded higher in active trade on both an outright and hedged basis, but whether that action was coat tails action sparked by the Alpha Natural tender news or related to a commodities-based trade was unclear.

Also changing hands in the convertible secondary market on Thursday were issues of companies like, Affiliated Managers Group Inc., Brookdale Senior Living Inc., Ryland Group Inc. and Teleflex Inc., names not typically seen in top volume trade, and adding much valued breadth to the marketplace.

But while it was good to see the additional names, which was likely generated by window dressing ahead of quarter end, a handful of larger, investment-grade issues still accounted for the majority of trading action, a New York-based trader said.

"It's quarter end, not just month end, so you get some realigning of portfolios," a New York-based trader said, noting that the pricing action was mixed.

As for the added breadth, another trader said, "The first page of volume was still 25% to 30% investment grade issues like EMC Corp. and Medtronic Inc."

Alpha Natural adds to 92-93

Alpha Natural's 3.25% convertibles due 2015 traded up to 92 Thursday from around 88.25 on Wednesday. Last week those bonds had touched 91 bid, 91.5 offered on news that the coal producer was shuttering some capacity and cutting jobs.

Shares of the Abingdon, Va.-based coal producer moved up 16 cents, or 2.4% to $6.75.

The company announced the tender and also said it is issuing $500 million of new straight notes to fund the tender.

The company announced that it is making a tender offer for up to $350 million of the outstanding 3.25% convertibles. Holders must tender their notes by Oct. 11 to be eligible to receive $940 per $1,000 principal amount, which includes a $20 early tender payment.

If the tender cap is not exceeded at the early expiration date, holders can tender their notes until Oct. 25 and receive $920 per $1,000 of bonds.

"The tender price is 92 with a 2-point kiss," a New York-based trader said. On an outright basis, the kiss is 6 points, he said, but since not everyone will tender and the whole issue is not being tendered, the value can be prorated.

Even those bonds were trading at 88.25 on Wednesday, it's more like "91 is the economic price," he said.

He estimated that 85% to 90% of holders would tender.

Partial tender strategies

Even though the company's tender price is 94, the bonds moved up only to 92 to 93, market players said. They thought the reason the bonds didn't move up the whole way was because it is a partial tender.

"So you could buy some at 92 today, and then tender half at 94, and own the rest at 90," a New York-based trader said. He thought most people would put them in for the tender at this price.

A second source said that at 94, the tender price did seem like that of a distressed type of situation.

"Things aren't looking any brighter in the coal sector; the company knows they can bid cheaply and some investors may just want to get out," the source said.

A third source, a New York-based trader, said, "You don't want to pay more than you have to, but you want to make it a kiss that will get holders' attention."

Alpha sister adds

Alpha Natural's 2.375% convertibles popped about 2 points to 2.5 points to 89.

The sister issue typically trails the 3.25% issue by 3 points or 4 points.

The gain in the 2.375% convertibles was presumably on the news, a trader said, explaining that the 3.25% issue was priced by an operating company, while the 3.275% convertibles were priced by a holding company.

The coupon difference wasn't enough to make the company tender for the 3.25% convertibles over the 2.375% convertibles, the trader said. But it does "free up the company to issue more out of the opco. And it could issue debt that is longer-dated," he said.

The new tender offer is conditional on completion of the offering of straight notes.

Last week, the Alpha Natural convertibles were active after the company said it is cutting about 1,200 jobs, or 9% of its work force, due to flagging demand for its thermal coal output.

The company is closing mines in Virginia, West Virginia and Pennsylvania in its shift away from thermal coal to focus on metallurgical, or steelmaking, coal.

That followed new in June that Alpha would stop production at four mines in Kentucky, reduce thermal coal production and cut 150 jobs.

Peabody adds on hedge

Peabody's 4.75% convertibles due 2066 traded up 0.75 point outright to 85, and that move was about a 0.375 point improvement in the bonds on a swap, or hedged, basis.

Shares of the St. Louis-based coal producer closed up 33 cents, or 1.5%, to $22.63 in light volume.

"It could have been a commodity move - oil was up, or coat tails; it's hard to say. But these are long-duration bonds, and when the equity goes up these move on a 60% delta," a trader said.

Mentioned in this article:

Affiliated Managers Group Inc. NYSE: AMG

Alpha Natural Resources Inc. NYSE: ANR

Brookdale Senior Living Inc. NYSE: BKD

Peabody Energy Corp. NYSE: BTU

Ryland Group Inc. NYSE: RYL

Teleflex Inc. NYSE: TFX

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