AMR, UAL gain with airlines; ON higher on deal; Chesapeake slips; Trina, Sino-Forest quiet in gray

By Kenneth Lim

Boston, July 17 - Earnings reports and a drop in oil prices drove activity as the convertible market finished mostly better on Thursday.

Airlines got a boost amid a flurry of better than expected earnings, while another day of lower oil prices gave hope that clearer skies were ahead for the sector. Carriers AMR Corp. and UAL Corp. both saw their convertibles improve outright, although the gains may have hurt some hedge funds.

ON Semiconductor Corp. also improved after the company said it was acquiring a rival for $115 million in stock.

The oil and gas sector did not do as well as Chesapeake Energy Corp. gave up some points on weaker oil prices.

In the gray market, Trina Solar Ltd. and Sino-Forest Corp. were quiet as observers reported cautious interest in the China-based issuers.

Volumes still thin

Activity remained hesitant in the overall market, despite volatility in the underlying shares, a sellside trader said.

"Liquidity is down," the trader said. "I don't get it. I think a lot of people are just not understanding the market and therefore doing nothing. A few days ago financials were getting crushed, energy were ripping it. Today you've got a complete flip-flop. Financials are ripping and energy is getting crushed."

"We're in that weird kind of market," the trader added. "Take as an example, the energy names. The volatility on those underlying common shares are just moving. Like Carrizo [Oil & Gas, Inc.]. The stock was down maybe 10%, but there really wasn't a whole lot trading today. It [the stock] was down 10% at the low from yesterday's close I would think a lot more should be trading."

Airlines improve

American Airlines parent AMR saw its 4.5% convertible due 2024 gain 5 points outright to trade at 82 against a stock price of $6.75. Shares of Fort Worth, Texas-based AMR (NYSE: AMR) closed at $6.79, up by 16.67% or $0.97.

The AMR 4.25% convertible due 2023 also added about half a point outright at 97 versus the same stock price.

Also climbing on Thursday was UAL Corp.'s 4.5% convertible due 2021, which was seen at 36.5 versus a stock price of $4.70 early in the day.

Shares of Chicago-based UAL (Nasdaq: UAUA), the parent company of United Airlines, jumped 14.45% or $0.64 to close at $5.07.

The airlines were rallying after results appeared to beat estimates, a sellside convertible analyst said.

"Earnings have so far beat estimates, so the stocks are going up because of that," the analyst said. "And fuel prices have come down a little the past couple of days, so there's a little bit more optimism right now about the sector."

The earnings have been a pleasant surprise for investors, the analyst said.

"I think the fact that they've been beating estimates means that they're not doing as bad as people thought," the analyst said. "It looks like some of the measures that the airlines have been taking to cut costs and basically become profitable have had a little bit of success. But I don't want to sound like I'm an advocate for the sector. I mean, they're still bleeding like crazy.

The analyst said airlines remain a risky sector to be in.

"I don't think they're out of the woods yet," the analyst said. "The airlines have mostly stayed afloat because they're cutting costs, cutting staff, reducing capacity, charging more, and all that should be good, except that right now what's frustrating a lot of these efforts is fuel prices keep going up.

"I think what's going on with fuel prices now might only be a temporary relief, so there's still going to be a lot of pain ahead for the industry. I think the airlines themselves want to see more consolidation, but that's easier said than done. United's been shopping around since last year, look how far they've gotten."

ON higher on deal

ON Semiconductor's 2.625% convertible due 2026 rose about 2 points outright on Thursday as its stock climbed in response to an acquisition.

The convertible was quoted at 109 bid, 110 offered against a stock price of $9.20. ON common stock (Nasdaq: ONNN) closed at $9.26, up by 4.75% or $0.42.

Phoenix-based ON, a semiconductor component maker, said it agreed to acquire chipmaker Catalyst Semiconductor Inc. in an all-stock deal. Catalyst shareholders will receive 0.706 shares of ON for each share held.

The deal was generally better for the company's credit, a convertible trader said.

"It's all stock, so it's not going to affect really ON's credit because they're not using cash," the trader said. "And this company generates cash, so it's not going to hurt ON's credit, it'll help it."

Chesapeake slips

Chesapeake Energy's 2.25% convertible due 2038 slipped about 4 points outright as the oil and gas sector had an overall poor session as oil prices fell.

The convertible was seen at 99.75 against a stock price of $53, as Chesapeake common stock (NYSE: CHK) slipped 3.41% or $1.93 to close at $54.74.

Oklahoma City-based Chesapeake said Thursday that it was selling natural gas properties in Oklahoma to BP plc for $1.75 billion. The sale is part of the company's plans to raise funds for exploration in 2008 and 2009 through asset sales instead of debt or equity, the company said in a regulatory filing.

A sellside convertible analyst said the move did not significantly affect Chesapeake's credit quality.

"I don't think changes very much," the analyst said. "If they sell equity, that would be good for the credit. If they raised debt, that would be bad for credit. This is kind of credit neutral. I think what's happening with the stock as more to do with oil prices than anything. The whole sector's down today."

Oil prices continued to ease on Thursday, with a barrel of crude for August delivery falling to $129.29 in New York, down $5.31.

Trina, Sino-Forest quiet in gray

Two new convertible deals expected to price Thursday evening were quiet in the gray market as observers said interest was limited because the issuers' businesses were based in China.

Trina Solar planned to price $120 million of five-year convertible senior notes with price talk at a coupon of 3.5% to 4% and an initial conversion premium of 21% to 27%.

The notes will be offered at par.

There is an over-allotment option for a further $18 million.

Credit Suisse Securities (USA) LLC, ABN Amro Bank NV, London Branch, and Deutsche Bank Securities Inc. are the joint bookrunners of the registered off-the-shelf offering.

There will be a concurrent ADS lending facility covering 100% of the underlying shares.

Trina Solar, a Changzhou, China-based maker of solar-power products, said it will use about $90 million of the proceeds to expand its manufacturing lines for silicon ingots, wafers, solar cells and solar modules. It will use another $20 million to buy raw materials, and the remaining proceeds will be used for research and development and general corporate purposes.

A sellside trader said interest in the deal was affected by concern about the borrow rate as well as the fact that the company was based in China.

"Nothing," the trader said of activity in the gray market. "No surprise. You wouldn't see anything in the streets for something like that."

A convertible analyst said the deal modeled about 4% cheap at the midpoint of talk using a credit spread of about Libor plus 1,500 basis points and a volatility around 50%.

"We took it back from where we're assuming Evergreen [Solar Inc.] should be at," the analyst said. "It's half the size of Evergreen plus it's from China, so there are some questions about their financial reporting and so on, and people usually discount a little because of that."

The deal looks like it could do well on the first day of trading because of the cheapness, the analyst said.

"I think all the solar names that have come recently have done well, at least on the first day of trading," the analyst said. "Some of them are down at this point, but I think they've all been decently priced."

Concerns about a poor borrow rate could be addressed by the lending facility, the analyst said.

"I'm actually modeling it with decent borrow, because everybody who's going to indicate on this is going to get a good rate," the analyst said. "The secondary market is probably going to only trade through the underwriters to get the borrow."

Sino-Forest's planned $300 million of five-year convertible senior notes was also quiet on Thursday.

The deal was talked at a coupon of 4.75% to 5.25% and an initial conversion premium of 32.5% to 37.5%.

The company gave underwriters Merrill Lynch and Credit Suisse an over-allotment option for an additional $45 million in the Rule 144A and Regulation S offering.

Sino-Forest, a Mississauga, Ont.-based commercial forestry operator in China, said it will use about $230 million of the proceeds as initial capital to acquire plantation forests in the Fujian province. It will use about $15 million to lease land for planting jatropha trees, and any remaining proceeds will be used for working capital.

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