Continental Airlines adds slightly on debut; Transocean firm; Golden Ocean cancels offering

By Rebecca Melvin

New York, Dec. 8 - Continental Airlines Inc.'s newly priced 4.5% convertibles moved slightly above par with the stock price pushing up in the early going Tuesday; but, given sellers in the name, the new issue didn't move up because it was bid up, according to a Connecticut-based sellside analyst.

Continental priced $200 million of five-year convertible senior notes late Monday at par to yield 4.5% with an initial conversion premium of 25%, which was the midpoint of talk.

Airline paper in general moved lower Tuesday, reversing gains notched in the last week.

AMR Corp. convertibles traded below par, compared to 101 on Monday. And UAL Corp.'s 6% convertibles traded at 130 versus a share price of $9.70 on Tuesday compared to 131 versus a share price of $9.85 on Monday.

UAL made headlines Tuesday when it confirmed orders for 50 wide-body planes from Boeing and Airbus. The price tag for such an order was said to be about $10 billion.

The market in general - not just airlines - was pulling back Tuesday, but several investment-grade names, which have been volume leaders of late, remained firm.

Medtronic Inc.'s 1.625% convertibles due 2013 traded up 2.875 points to 106, and Transocean Inc., which is also very liquid, saw its 1.625% series A convertibles due 2037 hold firm at 99-plus, despite an early 3% drop in its underlying shares, according to a New York-based sellside desk analyst. Transocean stock settled even lower, down 4.6%, at $79.15.

Meanwhile, dry bulk shipping company Golden Ocean Group Ltd. cancelled a $100 million offering of five-year convertible bonds in Europe on Tuesday - the same day it launched - citing unattractive "achievable terms."

The deal marked the first cancelled deal in Europe since primary issuance revived last spring, a London-based syndicate source said.

The U.S. convertible market overall was characterized as quiet amid lower stocks. The dollar was higher, and gold and other commodity names were lower.

President Barack Obama outlined additional steps to boost employment, including extending zero capital gains taxes for small businesses, encouraging banks to extend lending, using TARP monies for small business and other measures, including spending $50 billion on infrastructure projects.

Continental up mildly

Continental's newly priced 4.5% convertibles due 2015 traded above par out of the chute and were offered at 101.75 versus a share price of $16.00. But the issue was pretty quiet and not seen as strong, sources said.

Continental's existing 5% convertibles due 2023 traded a little weaker at 104.75 instead of at around 105, which is where they had been previously.

The performance of Continental on its debut wasn't surprising, sources said, given what they had heard upon launch on Monday.

The new deal was seen at only 1% cheap in valuations using a credit spread of 1,400 basis points over Libor and a 45% vol., and was plus 1 bid, plus 2 offered in the gray market.

Nevertheless, the Houston-based commercial airline's registered deal priced at the midpoint of talk, which was 4.25% to 4.75% for the coupon with a 22.5% to 27.5% initial conversion premium.

The deal was sold via joint bookrunners Morgan Stanley & Co., Citigroup Global Markets Inc., Credit Suisse Securities, Goldman Sachs & Co. and UBS Securities LLC.

Independent research firm Credit Sights published a note early Tuesday which said, "Continental cashed in on continuing investor interest in the airline sector by issuing a convert just short of the $200 million before over-allotment."

Although the airline was able to sidestep "the capital infusion Octoberfest," it could not hold out forever, Credit Sights said. CreditSights was referring to other new issuance from the sector in the fall.

"Any time investors want to give airlines money, they should take it at any price. The industry is just too cyclical for capital structure pricing models. It is disingenuous for existing shareholders to complain about dilution - airline investing of all things is exclusively short-term, so existing shareholders are a sunk cost. If anything, access to capital is self fulfilling at least in the short term," the note stated.

Credit Sights titled its note: "Continental Airlines: Show Me the Money."

Airlines turn lower

AMR's 6.25% convertibles due 2014 traded at 99.75 versus a share price of $7.25 on Tuesday, compared with 101 versus a share price of $7.35 on Monday and at 100.25 bid, 100.50 offered versus a share price of $7.37 on Friday.

Shares of the Fort Worth-based airline closed down 27 cents, or 3.7%, to $6.98 on Tuesday, extending a 1.6% decline on Monday.

UAL's 6% convertibles due 2029 traded at 131 versus a share price of $9.85 early Tuesday, compared to 130 versus a share price of $9.70 on Monday.

UAL said early Tuesday that the new aircraft it is ordering have delivery dates in 2016 and 2019, which allows it to retire its international Boeing 747 and Boeing 767 planes. The new aircraft will reduce United's seat count by 19% and its international seat count by 10%.

Meanwhile, fuel costs for the new aircraft will be 33% less than for the existing planes, and maintenance is predicted to be 40% less.

The weakness Tuesday in the convertibles airline space reversed moves to the upside since last week, in particular amid some positive economic news and after Morgan Stanley upgraded AMR and UAL.

Golden Ocean cancels deal

Golden Ocean launched an offering of $100 million of convertible bonds early Tuesday, which were talked to yield 4.375% to 4.875% with an initial conversion premium of 27.5% to 32.5% over the volume weighted average price of shares on the Oslo Stock Exchange, according to a news release.

One syndicate source called the deal and subsequent cancellation "a major misreading of the market."

The company had another convertible that it paid out at 35 cents earlier in the year, so convertible players didn't have much positive feeling toward this company and were unwilling to risk a position, especially at this point in the year, the source said.

Golden Ocean had a convertible outstanding, issued in 2007, which it restructured. One large buyer bought them in the 20s, and then there was an offer in the mid 30s, the syndicate source said.

"The company restructured and convert investors were paid out at 35 cents on the deal; so their last experience was not that good," the syndicate source said.

There were also question marks surrounding the credit, although there was borrow available in the name, he said.

"My guess is that there were initial indications of interest among Norwegian investors, but not enough demand in the broader market," he said, adding that the deal looked expensive to him upon launch.

European sentiment a factor

Another factor for the failed deal is that sentiment among European investors isn't great following the Dubai World situation, the syndicate source said.

Dubai World has an equity-linked bond that will be paying out 50% of par. Convert players lost a couple of billion dollars, he said.

The Golden Ocean deal was to be marketed primarily to European investors, but there was a Rule 144A tranche for U.S. investors as well.

"The market is definitely open, and we've had a great year. But none of my clients are going to risk it the last month," the syndicate said.

The deal's sector in shipping wasn't seen as part of the problem, and DryShips Inc. recently priced a new convertible, attesting to that fact.

"It's just that going out with a 4% coupon when eight months ago it was gasping for life was a problem," he said. "It's not a great year to end the year, but who knows, maybe we'll still get a good deal or two."

The Golden Ocean deal was being sold by ABG Sundal Collier Norge ASA as bookrunner, with First Securities AS as joint lead manager.

The company said the cancellation would not impinge on the company financially. It said it has "favorable financing alternatives in place and solid cash flow from operations and a strong liquidity position," and that proceeds were "purely to finance opportunistic investment and further expansion of the company."

Upon launching the offering earlier Tuesday, the company had said that proceeds would be used for financing an existing ship building program, to improve the company's ability to react to market opportunities and for general corporate purposes.

The bonds were expected to settle by Dec. 22, and Golden Ocean was contemplating listing the bonds on an exchange at a later stage.

Incorporated in Hamilton, Bermuda, Golden Ocean is a dry bulk shipping company.

Mentioned in this article:

AMR Corp. NYSE: AMR

Continental Airlines Inc. NYSE: CAL

Golden Ocean Group Ltd. Oslo: GOGL

Medtronic Inc. NYSE: MDT

Transocean Inc. NYSE: RIG

UAL Corp. Nasdaq: UAUA

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