U.S. Steel convertibles jump outright, add on hedge after earnings; EZCorp also adds

By Rebecca Melvin

New York, July 30 – U.S. convertibles trading picked up later Wednesday after a mostly quiet start with some gray market action in Tyson Foods Inc.’s planned $1.5 billion of tangible equity units, which was expected to price after the market close, a New York-based trader said.

The Tyson equity units, which have a $50 par, were seen trading at plus 0.5 bid, 1.0 offered, the trader said.

After the market close, there was more new issue action as Qihoo 360 Technology Co. Ltd. launched a Rule 144A and Regulation S offering of $900 million of convertible senior notes in two tranches.

“It was really quiet in the morning, but in the afternoon, trading picked up some,” the trader said.

Back in established issues, the 2.75% convertibles of United States Steel Corp. were in focus, and they surged on an outright basis and added on a dollar-neutral, or hedged, basis. The move came after the Pittsburgh-based steelmaker reported a narrower second-quarter loss and said that operating income for all of the company’s businesses is expected to increase significantly in the third quarter compared to the second quarter.

EZCorp Inc.’s 2.125% convertibles were also better by about 0.5 point on a dollar-neutral basis after the Austin, Texas-based pawn store operator reported earnings that missed estimates by 2 cents but revenue that was in line with guidance. The company also reaffirmed current earnings per share guidance.

The EZCorp 2.125% convertibles due 2019 were quoted at 91.25 bid, 92.25 offered with the underlying shares at $10.04.

SINA Corp.’s convertibles were in trade, with shares of the Chinese internet company up modestly. Also among China issues, NQ Mobile Inc.’s 4% convertibles were seen higher by more than 10 points at 76.72, which was up from 63.88, according to a market source, while shares jumped 8% after the Chinese technology company said it received a takeout offer from Bison Capital Holding Co. Ltd. to acquire all outstanding NQ shares.

Meanwhile, DryShips Inc. changed hands at the high end of its range at 99.875. It’s crawling higher in its existing range of 99 to par, a New York-based trader said. The question is whether they restructure or pay off the convertibles, which mature in December.

In the broader markets, equities ended decidedly higher after the Federal Reserve said that it would continue to scale back its bond purchases to $25 billion a month from $35 billion a month, as per its existing schedule, and after offering up a modestly more upbeat assessment of the economy. The Fed did not update its guidance on when interest rates might begin to rise.

Short-term interest rates will remain low for “a considerable time after the asset purchase program ends,” the Fed said. The benchmark short-term rate has been near zero since late 2008.

Earlier in the session, investors were chewing on a few new pieces of economic data. Gross domestic product jumped at a seasonally adjusted annual rate of 4% in the second quarter, which was greater than the 3% pace that economists were expecting.

The Commerce Department said Wednesday that an upturn in inventory building and an acceleration in consumer spending led the broad gains and offset a larger drag from increased imports. The GDP offsets the first quarter when the economy contracted to a 2.1% pace.

Meanwhile, the private sector employment increased by 218,000 jobs from June to July, according to the ADP National Employment report for July.

The July employment gain was softer than June but remains consistent with a steadily improving job market, Mark Zandi, chief economist of Moody’s Analytics, said. At the current pace of job growth, unemployment will quickly decline, he said.

Tyson revises talk

Tyson Foods was seen pricing its $1.5 billion of tangible equity units after the market close. There was activity in the gray market ahead of final terms being fixed at “around plus 0.5 point to plus a point. “It’s a little all over the place,” a trader said.

Price talk on the planned $1.5 billion deal of tangible equity units was revised late Wednesday ahead of final terms being set to a fixed 4.75% coupon and an initial conversion premium of 22.5% to 25%.

Initially the deal was talked at a coupon range of 4.75% to 5.25% with an initial conversion premium of 17.5% to 22.5%.

The deal size of 30 million units at $50 par, or $1.5 billion, was unchanged from initial talk, as was the secondary offering of 24 million shares of common stock.

Bookrunners are Morgan Stanley & Co. LLC, J.P. Morgan Securities LLC (active) and RBC Capital Markets LLC (passive).

The units are non-callable and will mature on July 15, 2017. There are no puts except a takeover protection put.

Proceeds will be used together with cash on hand to finance the company’s merger with Hillshire Brands and for fees and expenses related to the merger.

Tyson Foods is Springdale, Ark.-based meat production company.

Qihoo to price

After the market close Thursday, Qihoo plans to price $900 million of convertible senior notes in two tranches, including convertible senior notes due 2020 talked at a coupon of 0.25% to 0.75% and an initial conversion premium of 35% to 40%, and convertible senior notes due 2021 talked at a coupon of 1.5% to 2% and a premium of 32.5% to 37.5%.

The Rule 144A and Regulation S offering has a greenshoe for $135 million of additional notes and was being sold via Citigroup Global Markets Inc. and Credit Suisse Securities (USA) LLC as bookrunners.

The deal was seen pricing Thursday.

Holders are able to put the 2020 notes on Aug. 15, 2017 and the 2021 notes on Aug. 15, 2019.

Proceeds are earmarked for general corporate purposes.

Qihoo provides PC and mobile internet security products in China.

U.S. Steel up dollar neutral

U.S. Steel’s 2.875% convertibles due 2019 were quoted at 143.875 with the underlying shares at $33.00.

That was up 1 point dollar neutral, a New York-based trader said.

“An outright buyer pushed it up,” a trader said.

The notes were up more than 14 points on an outright basis as shares of the Pittsburgh-based steelmaker surged $5.36, or 19%, to close at $33.03 on Wednesday.

Mentioned in this article:

DryShips Inc. Nasdaq: DRYS

EZCorp Inc. Nasdaq: EZPW

NQ Mobile Inc.’s NYSE: NQ

Qihoo 360 Technology Co. Ltd. Nasdaq: QIHU

SINA Corp. Nasdaq: SINA

Tyson Foods Inc. NYSE: TSN

United States Steel Corp. NYSE: X

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