Investors eye Transocean put; Tyson slips on hedge after positive earnings; Encore on tap

By Rebecca Melvin

New York, Nov. 19 - Convertibles were mostly higher outright but quiet on Monday as U.S. equities rallied on the first session of the shortened Thanksgiving week.

Transocean Ltd.'s large, $1.7 billion issue of 1.5% convertibles were flat at about par in active trade ahead of the paper's upcoming investor put Dec. 15, traders said.

Tyson Foods Inc.'s convertibles were higher outright, but slipped on a hedged basis, as the underlying shares of the Springdale, Ark.-based meat company jumped on fiscal fourth-quarter earnings that beat estimates, and better guidance.

AK Steel Holding Corp.'s new 5% convertibles remained weak in quiet trade. The paper, which debuted Thursday, traded around 97.5 versus a share price of $3.65.

But DryShips Inc.'s 5% convertibles due 2014 bounced back some to trade at 70.375, according to Trace data, after dropping to 68 bid, 69 offered on Friday. That was still down compared to 73 on Thursday and 79 to 80 on Wednesday. The Athens-based dry bulk ship and tanker operator reported poor quarterly results late Wednesday.

In the new issue market, Encore Capital Group Inc. launched a $100 million private offering of five-year convertibles that were expected to price after the market close Tuesday and were talked to yield 2% to 2.5% with an initial conversion premium of 25% to 30%.

Overall, the convertibles market was described as quiet with not a lot of action. One analyst said that some market players were already off from work for the Thanksgiving holiday Thursday.

Equity markets were in full rally mode amid improved expectations about whether U.S. politicians can prevent the economy from going over the fiscal cliff Jan. 1 when a punishing package of spending cuts and tax increases is slated to go into effect.

The Dow Jones industrial average jumped 207.65 points, or 1.7%, to 12,795.96; the Nasdaq stock market surged 62.94, or 2.2%, to 2,916.07; and the S&P 500 stock index rose 27.01, or 2%, to 1,386.89.

Transocean active

Transocean's 1.5% convertibles due 2037 traded unchanged at near par in active trade Monday.

Transocean priced this series of 1.5% convertibles in December 2007, and the convertibles have their first put on Dec. 15.

Given the paper's low interest rate and its way out-of-the-money strike, it was believed that holders would put the paper.

The convertibles' strike price is $168.61, and Transocean shares closed up $1.08, or 2.4%, to $45.46 on Monday.

"There's really no optionality left," a New York-based analyst said. He noted that the paper is also callable, but he believed the company would not call them given the low interest rate, the issue size and unlikely strike.

As for why the convertibles were trading, there was no real way of knowing for sure. But one sellsider suggested that sellers were likely funds that don't want to deal with the transaction process with the transfer agent.

These players would rather sell to a large dealer at a small discount to what they are worth to avoid the headache of putting the bonds, he said. On the other side of the deal would be "money market guys looking for short paper that has better yield than government paper or to hold it internally for that reason."

Tyson slips on hedge

Tyson's 3.25% convertibles due 2013 traded at 115 bid, 116 offered on Monday. Trace recorded a trade at 116.45.

The bonds were said to be "down small" by about 0.25 point to 0.375 point on a dollar-neutral basis, depending on delta, a New York-based analyst said.

"There's big change of delta; there's a lot of gamma there," he said.

The bonds have about a 65% to 70% delta, and parity is at about 107, a New York-based trader said.

Tyson shares surged $1.84, or 11%, to $18.72 on Monday.

The company reported net income of $185 million, or 51 cents per share, which was up from $97 million, or 26 cents a share in the year-earlier quarter.

Excluding a one-time item, earnings were 55 cents per share, which was well above the 46 cents per share expected.

Revenue dipped to $8.37 billion from $8.4 billion, which was lower than the $8.48 billion predicted.

The company cited higher chicken prices for the improved results. Tyson's chicken volume dipped 3.5% in the quarter, but sales rose due to higher prices. The company also boosted beef prices, but the increases could not offset a 12.5% drop in volume. Pork sales slipped despite a 5% volume increase.

For the full year, Tyson earned $583 million, or $1.58 per share. That compared with $750 million, or $1.97 per share, in the previous year. Adjusted earnings were $1.91 per share. Annual revenue increased 3% to $33.28 billion from $32.27 billion.

Going forward, Tyson cautioned that severe drought in the U.S. Midwest earlier this year lowered grain supplies, which will lead to increased costs for livestock producers.

It also cited government statistics that overall domestic protein production is expected to drop 2% in the new fiscal years. Nevertheless, it still predicted fiscal 2013 revenue rising to about $35 billion.

Encore Capital on tap

Encore, the San Diego-based consumer accounts receivable management firm, plans to sell $100 million five-year convertibles after the market close Tuesday that were talked to yield 2% to 2.5% with an initial conversion premium of 25% to 30%, according to a syndicate source.

The five-year convertibles, which have a $15 million greenshoe, are non-callable with no puts.

The private deal was being marketed via joint bookrunners Morgan Stanley & Co. LLC as the left lead, Barclays and Bank of America Merrill Lynch.

Encore will also enter into convertible note hedge and warrant transactions with initial purchasers of the bonds. The transactions will raise the effective initial conversion premium for the company.

Up to $25 million of the proceeds will be used to buy back shares from purchasers of the notes; about $61.5 million of the proceeds will be used to repay borrowings under the company's revolving credit facility; a portion of the proceeds will be used to pay for the convertible note hedge transaction, and the remainder of the proceeds will be for general corporate purposes.

Mentioned in this article:

AK Steel Holding Corp. NYSE: AKS

DryShips Inc. Nasdaq: DRYS

Encore Capital Group Inc. Nasdaq: ECPG

Transocean Ltd. NYSE: RIG

Tyson Foods Inc. NYSE: TSN

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