Alpha Natural merger hurts hedge funds; financials rebound; St. Jude up on results; Trina Solar plans deal

By Kenneth Lim

Boston, July 16 - Alpha Natural Resources Inc. climbed outright on Wednesday but hurt hedge investors after the company said it would merge with Cleveland-Cliffs Inc.

Financials got some respite after two days of declines, with Wachovia Corp. and Bank of America Corp. coming back from drops earlier in the week as their stocks shot up.

St. Jude Medical Inc. was also active and higher outright after the company posted its second quarter results and raised its outlook.

The primary market finally saw some action after a lull in issuance, with Trina Solar Ltd. announcing a $120 million offering of five-year convertible notes set to price Thursday after the market closes.

Alpha Natural reacts to merger

Alpha Natural Resources' 2.375% convertible senior note due 2015 jumped about 15 points outright on Wednesday after it agreed to be acquired by Cleveland-Cliffs in a cash-and-stock deal.

The convertible traded at 205.5 against a stock price of 105.25. Alpha common stock (NYSE: ANR) closed at $104.93, up by 10.55% or $10.01.

"The bonds came in a few points," a sellside desk analyst said. "People are expecting that they'll remain outstanding and convert into the shares of the new company."

Alpha is an Abingdon, Va.-based coal production company. Cleveland-based Cleveland-Cliffs produces iron ore pellets and supplies metallurgical coal to steelmakers.

Alpha shareholders will receive 0.95 Cleveland-Cliffs shares and $22.23 for every Alpha share under the deal. Based on Cleveland-Cliff's closing share price of $104.02 on Wednesday, the deal was valued at $9.01 billion, or about $121.05 per Alpha share.

After the merger, which is expected to close by the end of the year, the new company will be called Cliffs Natural Resources.

The deal was a bonus for outright investors, but some hedge funds took a hit, market sources said.

"The takeover table's not good," one analyst said. "If you were on a hedge, you'd get hurt on the takeover. People on the desk were assuming that you were going to convert and take the takeover deal, and when it closes you would convert and get what the shareholders get...What happens is you might lose some of your premium, depending on your hedge. The table can't compensate everyone for every price, so depending on what your hedge was and when it actually gets done, you might lose something."

The Alpha convertible has a make-whole table that will give an additional 89.93 shares per note if the deal closes on April 15, 2009 at $120 per Alpha share. The convertible has an initial conversion price of $54.66.

Another sellsider said the convertible was down about 7 to 8 points dollar neutral "right off the bat."

Financials find relief

Financial names were mostly better on Wednesday as investors took some pressure off the common stocks.

Bank of America's 7.25% convertible preferred was up about 2 points outright on Wednesday, trading at 80.5 against a stock price of $21.50. Bank of America common stock (NYSE: BAC) jumped 22.41% or $4.15 to close at $22.67.

Bank of America is a Charlotte, N.C.-based consumer bank.

Wachovia's 7.5% convertible preferred also gained about 2 points outright. It traded at 63.5 versus a stock price of $10.50, while Wachovia common stock (NYSE: WB) closed at $10.54, up by 16.08% or $1.46.

Wachovia, a consumer bank, is also based in Charlotte, N.C.

Seattle, Wash.-based Washington Mutual Inc., another bank, also saw its 7.75% convertible preferred improve about 5 points outright to trade at 45 against a $4 stock price. Washington common stock (NYSE: WM) surged 25.48% or $0.92 to close at $4.53.

"Financials were busy again today," a sellside convertible analyst said. "The stocks were a lot better, credits were slower to improve, but they did improve during the day. They were all very active right around the day, but again I thought the stocks saw the bulk of the improvement."

The bank rallies were fueled by bargain hunters, a convertible trader said.

"I think some people were looking for bargains," the trader said. "There's been a lot of panic selling the last few days, people dumping stuff, now there's a bit of calm, guys think there could be value out there. Some people are taking positions ahead of next week's results."

The trader noted that the market remains volatile.

"I'm not 100% convinced that the worst is over," the trader said. "I don't think we've seen the last of the write-offs, I think the economy's outlook is going to keep hanging over the sector. Just watch. One of the banks misses the target, everything's going to crash again."

St. Jude gains on earnings

St. Jude Medical's 2.8% convertible senior debenture due 2035 was unusually active on Wednesday, improving slightly with its stock.

The convertible, which is callable on Aug. 14, traded at 96 against a stock price of $46. St. Jude common stock (NYSE: STJ) rose 7.19% or $3.16 to close at $47.12.

"Healthcare has been the one hiding place [recently]," a sellsider said. "A lot of the names have done well the last week or so. St. Jude Medical was better with the earnings."

St. Jude on Wednesday reported an estimate-beating second-quarter profit of $201.1 million, or 58 cents per share, up almost 50% year-on-year. Analysts were expecting about 55 cents per share. St. Paul, Minn.-based St. Jude, a medical device maker, also raised its 2008 profit outlook to between $2.28 and $2.33 per share, from the previous target of between $2.15 and $2.20 per share.

Trina Solar plans offering

Trina Solar plans to price $120 million of five-year convertible senior notes on Thursday after the market closes with price talk at a coupon of 3.5% to 4% and an initial conversion premium of 21% to 27%.

Trina Solar's American Depositary Receipts (NYSE: TSL) closed at $33.44 on Wednesday, higher by 12.86% or $3.81.

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 N.V., London Branch, and Deutsche Bank Securities Inc. are the joint bookrunners of the registered off-the-shelf offering.

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.

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