Convertibles mixed: NetApp adds outright, little changed on swap; Vector launches offering

By Rebecca Melvin

New York, Nov. 14 - Some convertible paper held in on Wednesday, but there was definitely pressure on parts of the market, although trading was generally quiet, market sources said.

Speculative issues were weaker, but most hedged names and in-the-money names were not, sources said. And there were mandatories that improved. Citigroup Inc.'s 7.5% mandatory convertibles were in focus and little changed.

Homebuilding stocks were weak, and D.R. Horton Inc.'s 2% convertibles fell nearly 6 points outright to 148.863, according to Trace data. Toll Brothers Inc.'s 0.5% exchangeables, priced via its finance corporation, was a little weaker. But Lennar Corp.'s convertibles were better, a New York-based trader said.

"Stocks settling off haven't hurt the homebuilders, which are in the money," the trader said.

Elsewhere, NetApp Inc. saw buyers of the 1.75% convertibles due 2013 heading into the company's earnings announcement expected after the market close. But it looked like it was about unchanged on swap from the previous session, according to an East Coast-based buysider.

The convertibles of Central European Distribution Corp. stabilized at levels that were higher than the sharply lower bid-ask spread Tuesday. The CEDC convertibles traded at 74 and were seen 70 bid, 75 offered after that, versus previous trades in the 78 bid, 80 offered range previously, and Tuesday's 55 bid, 75 offered spread.

In the new issue arena, Vector Group Ltd. launched a $150 million issue of six-year convertibles after the market close that was seen pricing early Thursday. The overnight, registered deal was coming concurrently with a borrowed stock offering via bookrunner Jefferies & Co. Inc. and has a full dividend pass through that effectively boosts the yield to 12.5% to 13% with the stock yielding 10%, a New York-based buysider said.

Also in the primary, AK Steel Holding Corp. was expected to price $125 million of seven-year exchangeable senior notes after the market close that were talked to yield 5.25% to 5.75% with an initial conversion premium of 27.5% to 32.5%.

The West Chester, Ohio-based steel maker also planned to offer 25 million shares of common stock and $350 million of senior secured straight notes.

Also Safeguard Scientifics Inc. announced Wednesday that it priced $50.5 million of six-year convertible senior debentures to yield 5.25% with a 21% initial conversion premium.

Safeguard's existing 10.125% convertibles traded at 124.994, according to trace data.

AMR Corp.'s 6.25% convertibles due 2014 traded at 71, which was up 4 points, according to trace data.

Equities dropped again. The S&P 500 stock index fell 19.04 points, or 1.4%, to 1,355.49, which is down 5% since the U.S. elections last week.

The Dow Jones industrial average fell 185.23, or 1.5%, to 12,570.95, and the Nasdaq Stock Market was down 37.08, or 1.3%, to 2,846.81.

"I'm following the technical," a West Coast-based convertibles trader said. "We had 1,380 support and we broke that today, so it's not all that firm today."

The convertibles are not overly valued, he said, noting also that there was a disconnect between what the markets were doing in the past six weeks and where corporate earnings were coming in.

"Companies were cautious and cutting back in general," he said.

"Spreads got too tight, and we're winding out," he said.

Citigroup little changed

Citigroup's convertible mandatory closed around 101.10 on Wednesday, which was little changed on the day, despite a 3% dip in the underlying shares of the New York-based bank.

Shares settled at $35.02 in stronger-than-average volume.

"In general, it's good if the stock sells off," a trader said for these convertibles.

The trader said that market players were focused on the Citigroup shares on Wednesday and monitoring how great the sell-off was. "Selling off some is OK or even good, but moving down too much wouldn't be," the trader said.

The mandatories trade on a pretty light delta.

NetApp up outright

NetApp's 1.75% convertibles due 2013 traded at 105.6 on Wednesday, which was up a point, according to Trace data, while shares were up, ending off their highs at $27.12, which was up 79 cents, or 3%.

After the market close, the Sunnyvale, Calif.-based data storage equipment maker reported fiscal second-quarter earnings that beat estimates. Revenue was in line with expectations.

Net income excluding one-time items was 51 cents per share, which was better than the 48 cents per share that analysts were expecting.

Revenue rose about 2% to $1.54 billion.

The report was watched closely following the better-than-expected report from Cisco Systems Inc.

AK Steel looks cheap

AK Steel's planned $125 million offering of exchangeable notes was said to be going pretty well in terms of marketing, a convertibles trader said, "better than the stock and straight notes offerings."

The deal was seen as cheap by this trader using a credit spread of 1,050 basis points over Libor or something approximate to that.

A second source said that he didn't see them as that cheap.

The registered, off-the-shelf offering has an $18.75 million greenshoe.

One trader said he didn't like the seven year structure, especially for a wide credit.

AK Steel shares on Wednesday fell another 48 cents, or nearly 11%, to $4.02.

"The convert is priced cheap for a reason," the trader said, citing sector concerns and global slowdown concerns.

"This was a $70 stock in 2008," he said.

Joint bookrunners are Credit Suisse Securities (USA) LLC, J.P. Morgan Securities LLC, Citigroup Global Markets Inc., Wells Fargo Securities LLC, Morgan Stanley & Co. LLC and Bank of America Merrill Lynch.

The notes are non-callable.

Proceeds will be used to repay borrowings under the company's credit facility and for general corporate purposes.

Vector plans $150 million

Vector, a Miami-based tobacco holding company, said it plans to price $150 million of six-year "variable interest rate" convertible bonds early Thursday that were talked to yield 2.5% to 3% with an initial conversion premium of 22.5% to 25%.

The paper has a full dividend pass-through that effectively boosts its yield. A buysider said that that could have been the variable rate referred to in the convertibles' name.

The overnight deal is being priced concurrently with an offering of up to 3.5 million borrowed shares.

Under a share lending agreement, bookrunner Jefferies & Co. Inc. has agreed to borrow 7 million shares.

The registered deal has a $22.5 million greenshoe.

The convertibles are non-callable.

Vector plans to use proceeds for general corporate purposes, including in its existing tobacco business and in additional investments in real estate through its subsidiary New Valley LLC. A portion of the proceeds may also be used for upcoming debt maturities.

Mentioned in this article:

AK Steel Holding Corp. NYSE: AKS

AMR Corp. NYSE: AMR

Central European Distribution Corp. Nasdaq: CEDC

Citigroup Inc. NYSE: C

D.R. Horton Inc. NYSE: DHI

Lennar Corp. NYSE: LEN

NetApp Inc. Nasdaq: NTAP

Safeguard Scientifics Inc. NYSE: SFE

Toll Brothers Inc. NYSE: TOL

Vector Group Ltd. NYSE: VGR

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.