Cemex lifts on debut; SunPower launches new deal; old SunPower contracts; Best Buy adds

By Rebecca Melvin

New York, March 24 - Cemex SAB de CV's newly priced 4.875%.convertibles jumped early Thursday on their debut in the secondary market. But they pulled back later to about 103 bid, 103.5 offered and closed at 102 bid, 102.5 offered as the underlying shares nosed lower, according to a syndicate source.

Cemex priced an upsized $650 million of five-year convertibles at the rich end of revised talk late Wednesday. The deal was upsized from an initially talked $500 million of notes.

Convertible players' attention was diverted in the afternoon to SunPower Corp., which launched a $200 million offering during the session that was expected to price after the close. The new SunPower convertibles were last offered 101.5 in the gray market, no bid.

"Cemex dominated the morning," a Connecticut-based sellside trader said. "People didn't look at Sunpower until the afternoon."

The new SunPower deal was seen a little cheap initially, with a 103 offer, but in the face of borrow problems the paper seemed to fade later.

SunPower's existing 4.75% convertibles due 2014 contracted, trading down to the mid 90s from about par as players swapped into the new paper because it looked cheaper than the old, a Connecticut-based sellsider said.

Meanwhile, Best Buy Co. Inc. was pulled into trade and higher outright after the electronics retailer posted better-than-expected fourth-quarter and full-year results.

Also in trade Thursday were a few recent new issues of the financial stripe. Annaly Capital Management Inc. slipped to par or just under from about 101 as its underlying shares fell 34 cents, or nearly 2%, to $17.79.

Sterne Agee downgraded the Annaly equity early Thursday to "neutral" from "buy," citing lower earnings and a dividend cut from prepays rising, a sellside source said.

"It was pretty clear that it might trigger some activity," the source said.

Knight Capital Group Inc. saw its 3.5% convertibles due 2015, which priced mid March, trade at 101.5 versus a share price of $16.25 during the session. Those shares closed up 22 cents, or 1.4%, at $15.96.

Cemex jumps, pulls back

Cemex's new 4.875%.convertibles jumped to as high as 105 early in the session but pulled back to the 103 bid, 103.5 offered context by mid-session, as the underlying shares began to "come in," a syndicate source said.

The new Cemex paper closed at 102 bid, 102.5 offered against shares of the Monterrey, Mexico-based cement producer that closed at $10.06.

The shares traded steadily for most of the session right around unchanged from Wednesday. But they nosed down around mid-session to close down by 41 cents, or nearly 4%. That decline was on top of a nearly 5% loss on Wednesday.

"The whole market got crappy [later]. I think people were riding it up [the Cemex shares] before they put on their full hedge and then shorting got worse," a New York-based sellsider said regarding why the Cemex shares turned down.

"I've got hedge guys that stay naked on these things for awhile, and then sell the stock when they think it isn't going up anymore. They can get pretty directional," he said.

Everybody wanted in on Cemex, he said.

The paper had been around 103.5 in the gray market ahead of pricing.

Citigroup, BBVA, BNP, HSBC, JPMorgan and RBS Securities were the joint bookrunners of the Rule 144A offering.

The bonds will convert into the Mexican company's American Depositary Receipts that trade on the New York Stock Exchange.

SunPower faces borrow challenge

Early in the session, the SunPower deal was offered at 103, but that moved down to 101.5 offered later in the day after the San Jose, Calif.-based solar company launched a $200 million offering of five-year convertible debentures. The deal was being sold via Deutsche Bank, Credit Suisse, Bank of America Merrill Lynch and Citigroup.

Convertibles players weighed the merits of the deal, with valuation credit spreads put on ranging from 1,150 basis points over Treasuries to 925 bps over Treasuries. There was also an outlier at 700 bps over.

"You're going out pretty far on a weak credit, with a lot of debt in front of you," one sellsider said, in defense of his wider spread.

What players were really watching was how Deutsche Bank was going to handle the borrow facility. The SunPower deal - seen pricing after the close of markets Thursday - had no borrow to speak of, and that was a deterrent to the hedge players that were needed to participate in the deal to get it done.

The terms were talked at 4.25% to 4.75% for the coupon, with an initial conversion premium of 22.5% to 27.5%.

There's "not much interest," a Connecticut-based sellsider said of hedge participation. "It will be the type of deal people play to help the underwriter out, and they flip it."

Another source - a New York-based sellside analyst - said that interest would be primarily from outright investors.

"If the hedge guys avoid the issue because of borrow problems and Deutsche Bank needs to rely on outright guys who are noncommittal on the sector, the bonds could fade, which seems to be happening," the analyst said.

Nevertheless even though the size of the deal at $200 million was relatively small, others didn't think that it would be possible to place it all solely with outrights.

Lack of supply eyed

"If the market wasn't so starved for paper, this deal would never get done," said a Connecticut-based sellsider, who stressed that "the borrow was tough and getting tougher."

The deal did look cheap, however.

At the midpoint of price talk, using a 45% vol. and a spread of 925 bps over Treasuries, they looked to be 106 not accounting for borrow problems.

"If the tough borrow was incorporated, depending on the rebate, fair value could be a couple of points lower at 104 maybe even 103," the analyst said.

Another source said a "handful of hedgies were brought over the wall with total return swaps with Deutsche Bank to hedge out their piece of it. There was no stock borrow for anybody even at Deutsche. I'm sure the bulk of it was done with outrights."

In fact, the majority of deals are placed with a bulk of 50% to 60% outright participation, as is preferred given that it puts less pressure on the stock that way. But hedge participation is required for the balance, and in this case hedge participation was expected to be about 30% or 40%, which meant about $60 million in hedge hands.

SunPower stock near lows

The solar sector is also a tough sell, sources said. SunPower's shares currently are about $1 over their 52-week low.

"It hasn't done well," a sellsider said. "But that said, there are also people that like it."

SunPower's existing 4.75% convertibles due 2014 were at about 95 having been as high as 142, 143 in October.

Still the SunPower deal offers a relatively good risk-reward, versus the common, with upside versus downside participation a good trade off.

"If Deutsche is not able to provide a borrow facility, which they would need to keep in place for an extended period if they did establish one, the hedge guys will shy away and the book would need to be dominated by outright players. However, I think many investors are not thrilled about the solar space; so, if DB is relying on outright investors, the deal may not have legs following the pricing," a sellside analyst said.

"The only saving grace could be the fact that the convertible market is starving for paper to where the scarcity value could support the deal - at least a little," the analyst said.

Proceeds are intended to replenish cash reserves to be used in its acquisition of SunRay Renewable Energy, for working capital, for capital expenditures and for general corporate purposes, to pay the cost of the cash convertible debenture hedge and warrant transactions and, potentially, for the repayment of debt.

The debentures are non-callable with no puts. They will not be convertible upon the satisfaction of customary market price trigger conditions until the first quarter of 2011.

SunPower is a provider of high-efficiency solar cells, solar panels and solar systems.

Best Buy higher outright

Best Buy's 2.25% convertibles due 2022 traded at 112.25 versus a share price of $43.35, according to a New York-based sellside desk analyst. That compared to Wednesday when the paper was 107.562, according to Trace data.

Shares of the Richfield, Minn.-based electronics retailer gained $1.48, or 3.6%, to $42.66 in heavy volume for the session.

Best Buy's fourth-quarter earnings rose 37% amid better sales of notebook computers and flat panel TVs, the company said in a news release.

For the three months ended Feb. 27, earnings were $779 million, or $1.82 per share, up from $570 million, or $1.35 per share, in the year-earlier period, which was better than the $1.79-per-share result that analysts were expecting.

Revenue jumped 12% to $16.65 billion, which was better than the $16.08 billion that analysts were expecting.

For the year, profit rose 35% to $1.32 billion, or $3.10 per share. Revenue rose 10% to $49.69 billion.

The company says it expects a profit of $3.45 to $3.60 per share in the fiscal year ending in February 2011. That is better than the $3.37 per share that analysts had been predicting.

Best Buy is based in Richfield. Minn.

Mentioned in this article:

Annaly Capital Management Inc. NYSE: NLY

Best Buy Co. Inc. NYSE: BBY

Cemex SAB de CV NYSE: ADRs: CX

Knight Capital Group Inc. Nasdaq: NITE

SunPower Corp. Nasdaq: SPWRA

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