New Tyson trades around par amid rattled markets; existing Qihoo drops; Hornbeck adds

By Rebecca Melvin

New York, July 31 – Tyson Foods Inc.’s newly priced 4.75% tangible equity units traded higher before the market open on Thursday but slipped with the broader markets at the open to trade around par, a syndicate source said.

Tyson priced $1.5 billion of the units at the rich end and beyond the rich end of originally talked terms, and it also priced $900 million of common stock.

But in the broader markets both credit and equity were under pressure Thursday after news that Argentina was deemed to be in default on its bond payments and Portugal’s Banco Espirito Santo posted an outsized net loss, sending its shares plummeting 50%.

For the day, the S&P 500 stock index fell 39.40 points, or 2%, to 1,930.67; the Dow Jones industrial average fell 317.06 points, or 1.9%, to 16,563.30, and the Nasdaq composite index dropped 93.13 points, or 2%, to 4,369.77.

Elsewhere in convertibles, Qihoo 360 Technology Co. Ltd.’s existing 2.5% convertibles came in about 2 points on a hedged basis early Thursday after the China-based provider of PC and mobile internet security products launched a new, dual-tranche deal for $900 million of convertibles.

Given the down move in the Qihoo convertibles and stock, which fell 5% initially, there was speculation that the new deals might come under a bit of pressure that could crimp pricing as well.

“The trend has been to come at the rich end and to upsize; but I think these might have to come on the cheaps,” a New York-based trader said, referring to the cheap end of talked terms.

“It seems that some guys have been spooked,” he said.

Qihoo’s planned six-year notes were talked at a coupon of 0.25% to 0.75% with an initial conversion premium of 35% to 40%, and the seven-year notes were talked at a coupon of 1.5% to 2% with a premium of 32.5% to 37.5%.

But Hornbeck Offshore Services Inc.’s 1.5% convertibles improved in trade on a hedged basis on Thursday after the Covington, La.-based provider of offshore supply vessels posted second-quarter earnings that beat estimates.

United States Steel Corp.’s 2.875% convertibles due 2019 extended gains Thursday after notching gains on both an outright and hedged basis on Wednesday following the Pittsburgh-based steelmaker’s narrower second-quarter loss and positive outlook.

And SINA Corp.’s convertibles also expanded a bit in trade on Thursday, quoted at 92.25, which was about 0.125 point better on hedge with shares of the Chinese internet company down in tandem with the broader markets.

Overall, volume in convertibles was generally light with a good deal of investment-grade paper changing hands.

The broader markets’ downdraft was of a greater magnitude than investors expected, a New York-based trader said, citing catalysts as Argentina, Banco Espiritu Santo and weak earnings from the likes of Adidas that sent its shares down 15% on the Frankfurt exchange.

“People thought the market might go down, but not to this degree. It all culminated today,” the trader said.

Market players were also eyeing the possibility of an unemployment report surprise on Friday, the trader said. “People are being cautious.”

July performance

As for the performance of convertibles for the last month, the trader said that outright players were hit by lower stocks, but hedged players were likely to do OK.

“There was good vol. and the new deal calendar slowed down in July so that paper wasn’t under a lot of pressure,” the trader said.

New Tyson trades around par

Tyson Foods’ new 4.75% convertible tangible equity units, which mature July 2017, were seen trading up a little bit before the market open but lower at about par after the open.

Tyson shares were down about 1.8% at that point. But they slipped a little further into the close, ending down 99 cents, or 2.6%, at $37.21.

The markets are a little bit volatile today so the convertibles may be also,” a syndicate source said.

Allocations for the new issue were mostly to outright players, the source said.

A second source said the deal could be deemed a success given the size of the deal and the amount that it traded.

Tyson priced $1.5 billion of convertible tangible equity units at $50 par with a distribution rate of 4.75% and an initial conversion premium of 25%, according to a prospectus.

Tyson also priced $900 million of common stock, or 23.81 million shares at $37.80 per share.

Both deals were registered, off-the-shelf offerings.

The equity unit offering of 30 million units priced at the fixed price point of revised talk and at the rich end of revised 22.5% to 25% premium talk. Original talk was for a 4.75% to 5.25% coupon and a 17.5% to 22.5% premium.

There is no greenshoe for the units deal, which was sold via bookrunners Morgan Stanley & Co. LLC, J.P. Morgan Securities LLC (active) and RBC Capital Markets LLC (passive).

Co-managers were HSBC Securities (USA) Inc., Mizuho Securities USA Inc., Rabo Securities USA Inc., U.S. Bancorp Investments Inc., Credit Agricole Securities (USA) Inc. and MUFG.

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 Co. and for fees and expenses related to the merger.

Tyson has applied to list the units on the New York Stock Exchange under the ticker symbol “TSNU.”

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

Existing Qihoo down on swap

The existing Qihoo 2.5% convertibles due 2019 were quoted at 115 bid, 116 offered with the underlying shares at $96.25. That was down 2 points on a hedged basis, a market source said.

Previously the bonds were at about 119.

Shares were down $4.92, or nearly 5%, to $94.08 at late morning but weakened further, down $7.85, or 8%, at $91.15 by the close.

One trader said that the issuer might be compelled to price the new deal at the cheap end of talk, contrary to the prevailing trend because of the pressure on markets and on the existing Qihoo securities.

Even though the older deal has a much higher coupon than the planned new deals: “At the end of the day, people who need to be invested in the name have to make their bet. They often get rid of the old and buy the new for whatever reason. People prefer bonds at par, and there is such a thing as people liking the ‘new car smell,’” the trader said.

After the market close Thursday, Qihoo was expected 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 the bookrunners.

The deal was seen pricing late Thursday.

Proceeds are earmarked for general corporate purposes.

Hornbeck adds on swap

Hornbeck’s 1.5% convertibles due 2019 traded at 115.375 versus a share price of $42.80, which was up about a point on a hedged basis.

Later, when shares came off a bit from their highs, the hedged gain was said to be a point to 1.5 points, on a delta of 65%.

“There were outright buyers in the name,” a trader said.

Hornbeck is a Covington, La.-based provider of offshore supply vessels. It reported earnings that beat estimates on revenue that also outpaced expectations. But after the company’s earnings conference call Thursday morning, shares pulled back for only a 2.1% gain on the day.

U.S. Steel extends gains

U.S. Steel’s convertibles added another 0.25 point on a hedged basis after a 1 point expansion on Wednesday.

“There were more buyers of U.S. Steel,” a trader said, quoting the paper at 144.22 versus a share price of $33.03. On Wednesday, the paper traded at 143.875 with the underlying shares at $33.03.

The trader said that the paper is being held on about an 80% delta.

“The big move was yesterday when the stock moved 20%, but it was up a little bit again today,” he said.

Mentioned in this article:

Hornbeck Offshore Services Inc. NYSE: HOS

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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