New PPL mandatory trades up; market mostly quiet; Transocean steady to lower; Rite Aid up

By Rebecca Melvin

New York, June 23 - PPL Corp., which priced $1 billion of mandatory convertibles a day earlier than expected, traded well upon release to the secondary market Wednesday, moving up and trading above par for the whole session, market sources said.

The new PPL 9.5% mandatory convertibles priced at the midpoint of talk.

Transocean Ltd. was mostly steady Wednesday as the oil-services company's securities track with headlines about the status of the Gulf of Mexico oil leak and liability issues related to the leak.

Rite Aid Corp. was higher pretty much in line with underlying shares after the drugstore chain posted a narrower first-quarter loss on revenue that met expectations.

Overall the convertible bond market was quiet, however, with market participants finding little by way of catalysts to spark trading action.

"The morning was taken up with soccer, and in the afternoon, everyone was waiting on the Fed," a New York-based trader said.

In World Cup soccer action, the U.S. team clipped Algeria 1-0, with an 11th-hour goal by American Landon Donovan, which allows his team to advance to the next round of the tournament.

Fed leaves rates alone

Later the Federal Open Market Committee announced that it left the key Federal Funds interest rate unchanged at 0% to 0.25%, which was what Fed watchers had expected.

However, the FOMC statement accompanying the decision was more circumspect about economic recovery, saying that "financial conditions have become less supportive of economic growth," and referring to the potential drag from Europe's debt problems.

Markets were choppy before and after the FOMC news.

"Maybe it takes one uncertain data point out of the picture," a New York-based trader said of the FOMC decision, "but it was another light trading day, and it's been light all week."

Back and forth market action has not galvanized investor interest, he said.

"If anything, it was stock trading today," the trader said. "Volatility is creeping back in, and that's making optionality a little more expensive again. But I don't really see a lot of impetus to do any real trading. There's no sustained rally, and credit is 'in' a few basis points one day and 'out' a few basis points the next; we're just going back and forth."

PPL trades up

PPL's newly priced 9.5% mandatory convertible, with a $50 par, traded at 51.45 versus a common share price of $24.75, according to one sellsider.

Another sellsider said the paper traded up to about 51.375.

Shares of the Allentown, Pa.-based utility gained 66 cents, or 2.7%, to $24.90 on Wednesday.

Sources commented on the fact that the mandatory convertible issue traded up, and the common stock did well. "On a dollar-neutral basis, it was probably half a point better, or a little more than that," one trader said.

The fact that the deal got done a day ahead of schedule indicated that placement had gone well, and it priced at the midpoint of talk and at the size initially planned.

It was not a "barn burner," but it was somewhat oversubscribed and priced as planned, a trader said.

"A couple of people were not happy with their allocations. They thought they were stingy. Some hedge people got some pretty small pieces," the trader said.

The electricity company priced 20 million equity units at $50 each. There is a $150 million over-allotment option.

The threshold appreciation price is $28.80, which represents a premium of 20% over the $24 reference price.

The registered off-the-shelf securities were talked to yield 9.25% to 9.75% with an initial conversion premium of 17.5% to 22.5%.

The company also priced $1.14 billion of common stock.

The proceeds will fund a portion of the purchase price of the company's $7.6 billion acquisition of E.ON U.S., LLC, the parent company of Louisville Gas and Electric Co. and Kentucky Utilities Co.

The acquisition is subject to regulatory approvals and is expected to close later this year.

Transocean steady to lower

Transocean's 1.625% series A convertibles due 2037 were seen closing at 97 on Wednesday, which was a tad lower compared with 97.3 on Tuesday and 97.4 on Monday.

Transocean's 1.5% series B convertibles due 2037 were seen settling at 90.5, which compared to 91.1 on Tuesday and 91.6 on Monday.

The Transocean 1.5% series C convertibles due 2037 were seen settling at 85.33 on Wednesday, compared to 85.5 on Tuesday.

Shares of the Vernier, Switzerland-based company settled up 27 cents, or 0.5%, at $52.76 on Wednesday.

Action in Transocean is pretty much driven by liability and the flow of the oil leak.

One good thing that comes out of Tuesday's news that a federal judge had ruled against a six-month drilling moratorium and that the Obama administration planned to appeal, is that it should lead to more clarity regarding the length of the moratorium and regarding new regulation.

"Even though the decision is going to be appealed, ultimately this ban gets more clarity as far as how long it will last and what kind of regulation is going to be imposed," a New York-based trader said.

This situation is now less open ended, the trader believes, and the administration will have to be more careful how it handles it going forward.

Rite Aid adds

Rite Aid's 8.5% convertibles due 2015 were indicated to settle at 95, which was up compared to a previous close of 87, according to a pricing source.

Shares of the Camp Hill, Pa.-based drugstore chain gained 6 cents, or 6%, to $1.07 on Wednesday.

Rite Aid's fiscal first-quarter results were better than expected.

According to Gimme Credit, an independent corporate bond research firm, the EBITDA line, at least, was better.

EBITDA in the quarter was $250 million, compared to $249 million in the year-earlier quarter.

Although Rite Aid's June was looking better in terms of same-store sales compared to May, and the company affirmed full-year guidance of $875 million to $975 million EBITDA, the company's full-year forecast is still tepid, with minus 1% to plus 1% estimated for comparable-store sales, Gimme Credit's director of high-yield research, Kim Noland, wrote in a note published Wednesday.

Rite Aid's same-store sales were down 1.7% in May and down 1% year over year for the first fiscal quarter ended May 29.

Management continues to try to cut costs, but it needs to improve both front end and pharmacy and it continues to cite the weak economy as affecting its performance, Noland noted.

Rite Aid's reasonable liquidity of $1.25 billion "gives some comfort to the junior bondholders in the overleveraged (over 7x) capital structure," Noland wrote.

And Rite Aid appears confident that its acquisition of the Eckerd and Brooks drugstore chains will help it improve the sales and profitability of the acquired stores by leveraging its existing infrastructure.

But the company expects cash flow from operations less capital spending to be negative in the first 12 months post acquisition before turning positive in the second 12 months.

"We view turning around both the Rite Aid and Eckerd stores while at the same time integrating a large acquisition and executing a stepped-up capital program a huge undertaking," Noland wrote. "While Rite Aid management has a good track record, we believe there will be speed bumps along the way."

Mentioned in this article:

Allergan Inc. NYSE: AGN

PPL Corp. NYSE: PPL

Rite Aid Corp. NYSE: RAD

Transocean Ltd. NYSE: RIG

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