AIG gains on Morgan Stanley comments, other financials edge up; Transocean down; Penn Virginia jumps

By Rebecca Melvin

New York, May 30 - American International Group Inc. jumped Friday after Morgan Stanley raised its rating on the insurance giant's shares to "overweight" from "equal weight," saying the stock's pummeling was overdone.

Other financial convertibles improved by 0.25 point to 0.50 point on the day after slipping in recent sessions, according to a Boston-based buyside trader.

Legg Mason Inc.'s mandatory convertible preferred stock traded early at 49.50 versus a share price of $54.25, according to a New York-based sellsider.

Energy convertible names were mixed, with the convertibles of heavyweight Transocean Inc. down in line with their underlying shares, but natural gas producer Penn Virginia Corp. jumped and coal producer Alpha Natural Resources Inc. was higher.

Amylin Pharmaceuticals Inc. was up for a second day amid rumors of a possible buyout by Eli Lilly & Co.

Overall the market was less active on Friday, with most trading seen dying off by mid-session.

"Yeah, it seems a lot quieter," a sellsider said, calling it the first summer Friday.

In the primary market, JetBlue Airways Corp. priced an upsized $175 million of 30-year convertible senior debentures in two tranches to yield 5.5%, with an initial conversion premium of 22.5% for the series A tranche and 20% for the series B tranche.

The deal, which came to market with a share lending agreement, wasn't seen in trade, but a syndicate source said the convertibles were higher on a hedged basis, despite a drop in their underlying shares.

AIG grabs ground

AIG's 8.5% mandatory convertibles were about 2 points higher at 74.5 versus $36.50 midsession Friday, compared to 72.78, versus a share price of $35.34 at the close on Thursday.

Morgan Stanley upgraded the shares before the open. "While it is clear that AIG continues to face several challenges, the recent severe stock price decline looks overdone," analyst Nigel Dally wrote in a research note.

Morgan Stanley's opinion is also that AIG won't need to raise more capital in the near future. "Regardless of how we analyze capital or liquidity, we estimate AIG has surplus capital in the range of $5 billion to $12 billion, which includes a sizable capital buffer," Dally wrote.

"In our view, the financial services crisis would need to significantly deepen before it would be looking to raise more capital."

A convertibles buysider said that although he is underweight financials currently due to uncertainties related to possible additional write downs, he believes that in the long term, convertibles players will be handsomely rewarded for helping the financial sector de-lever their balance sheets during this crisis.

"If you can wait, you'll do really well and you get paid well in the meantime," he said, referring to the higher coupons attached to many of the large, convertible preferred and convertible mandatory offerings that financial companies have priced in the last several months to raise capital.

Financials have been affected by recent bad headlines, including those dogging Lehman Brothers Holdings, which has the likes of David Einhorn, manager of Greenlight Capital, persisting with confidence-crushing questions about accounting practices.

"I can see both sides," a convertibles buysider said, of the sparring between Einhorn and Lehman. "Do you market your assets based on historical numbers, or your models, or what you could sell them for in the market, which is nothing."

"As we saw with the Bear Stearns situation, it's all about confidence," he added.

Shares of New York based AIG (NYSE: AIG) closed higher by 66 cents, or 1.87%, at $36.00.

Legg Mason mostly sideways

The Legg Mason 7% mandatory convertibles due 2011 traded up intraday at 49.25 versus a share price of $54.25. The preferred shares were closed lower however at about 48.8, versus a share price of $53.81, according to one source.

The Baltimore-based asset manager's shares (NYSE: LM) closed not far off their low mark for the year. In January and early February, the shares were as high as $74 to $75.

Transocean lower, but Penn, Alpha higher

The convertibles of Houston-based oil services company Transocean traded Friday at 112 for the series A tranche, 113 for series B, and 114 for series C, versus a share price of $151.75. A week ago, the convertibles were called a point higher at 113, 114 and 115, for the As, Bs, and Cs, respectively.

"The stock is down a dollar, and for this stock, that's about 0.50%," a New York-based sellsider said.

There doesn't seem to be that much concern for this titan of the convertible market despite questions surrounding the oil market. Even if oil prices go down, or up, or more likely, if they consolidate around $125 a barrel, there doesn't seem to be uncertainty that the contract drilling services company, with deepwater drilling capabilities, will come out satisfactorily, sources said.

Transocean shares (NYSE: RIG) closed down $1.89, or 1.2%, at $150.19.

Penn Virginia, Alpha Natural higher

Penn Virginia's 4.5% convertibles due 2012 jumped to 123.59, versus a closing share price of $63.02 Friday. The convertibles were initially issued Nov. 29.

The Radnor, Pa.-based natural gas producer's underlying shares (NYSE: PVA) surged 18.9% after it said that one of its natural gas wells has more capacity than originally expected.

The company's East Texas Fogle 5-H had an initial production rate of about eight million cubic feet of natural gas per day. Pipeline capacity constraints currently limit production to about five million cubic feet per day. But increased pipeline capacity, expected in July, will enable an initial production rate of 10 million to 15 million cubic feet per day, the company said

Meanwhile, Alpha Natural's 2.375% convertibles due 2015 traded Friday at 165 versus $80, compared to a close of 161.265, versus a share price of $78.33.

Shares of the Abingdon, Va.-based coal company (NYSE: ANR) jumped $3.35, or 4.3%, on Friday.

Amylin adds on buyout rumor

Amylin's 3% convertibles due 2014 traded at 90, versus a share price of 32.375 on Friday, up about 2 points.

The San Diego-based biopharmaceutical company's convertibles and stock had risen on Thursday amid rumors that the company may be bought out by Indianapolis-based drug company Eli Lilly. But on Friday shares of the company (Nasdaq: AMLN) closed lower by 61 cents, or nearly 2%, at $31.77.

JetBlue stock drags, but convertibles add on hedge

JetBlue's new 5.5% five-year and seven-year convertibles gained on a dollar neutral basis early Friday to about 101 and 103, respectively, a syndicate source said.

Those levels were from the morning, and no closing level was available, the source said. But the deal a called a success despite the heavy weight of the underlying shares. The stock (Nasdaq: JBLU) closed down 18 cents, or 4.3%, at $3.97.

Concurrently with the debentures, JetBlue loaned $44.9 million common shares to a share borrower who was subsequently going to sell them at about $3.70 per share.

The share borrower's resulting sort position from the sale was to help investors create hedge positions in the convertibles offering. No trades outside of bookrunner Morgan Stanley affiliates were expected in the market. Merrill Lynch was also an underwriter in the deal.

The registered offering size was increased from $160 million, and the deal priced at the cheap end of talk for the coupon which was 5% to 5.5%.

For the premium, the series A tranche priced at the midpoint of talk, which was 20% to 25%; while the series B tranche, with a premium of 20%, priced at the cheap end of talk.

Series A will be non-callable for five years. There are puts in years 2013, 2018, 2023, 2028 and 2033.

Series B and will be non-callable for seven years, with puts in years 2015, 2020, 2025, 2030 and 2035.

The debentures will be secured by two escrow accounts, which will hold proceeds equal to the sum of the first six scheduled interest payments.

JetBlue intends to use remaining proceeds to repay up to $175 million of its 3.5% convertible notes due 2033, which are putable July 15. Any additional proceeds will be allocated to general corporate purposes.

New York-based JetBlue is a discount air carrier.

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