Airlines see sellers; but UAL up in gray before pricing; D.R. Horton lower; Virgin Media firm

By Rebecca Melvin

New York, Oct. 1 - Convertibles players were sellers of airline paper on Thursday, even as they sized up a new issue from UAL Corp., and bid up that paper in the gray ahead of final pricing after the close.

Terms of the new UAL deal were repriced during the session, making it less cheap, with the coupon talk revised to the 6.25% area, down from initial talk of 6.75% to 7.25%, and the initial conversion premium revised to the 20% area from 15% to 20%. It eventually priced at the rich end of revised talk, with a 6% coupon and a 20% conversion premium.

"We heard people bidding 106 before the revised terms came out," a Connecticut-based sellside analyst said of the UAL convertible. After the revised terms, the gray market was seen plus 2.5 points to plus 4 points, sources said.

UAL's existing 4.5% and 5% convertibles were also in trade and slightly better, after rising on Wednesday.

Other airline convertibles were mostly lower with sinking equities. AMR Corp.'s new 6.25% convertibles fell. US Airways Group Inc. was also lower as was Continental Airlines Inc.

Elsewhere, convertibles were also under pressure. D.R. Horton Inc. convertibles slipped further as a weakening trend of recent sessions continued.

Simon Property Group Inc. convertibles were at slightly lower levels, but better compared to weaker shares. Virgin Media Inc. was resilient.

Stocks fell sharply Thursday after attempts at a rally Wednesday gave way to a lackluster finish.

"Yesterday I said the market's going to roll over," a New York-based sellsider said.

Data Thursday included jobless claims, which climbed by 17,000 to 551,000, which was higher than expected. But continuing claims dropped to 6.09 million

In addition, the ISM Manufacturing Index for September came in below expectations, but was still above 50 at 52.6. And U.S. auto sales for September were abysmal.

UAL upsizes to $300 million

Chicago-based UAL, the holding company for airline United Air Lines Inc., found significant demand for its convertible securities even though the deal comes seemingly on the heels of other airline new issuance, including AMR's offering last week and JetBlue Airways Corp.'s deal in June.

UAL priced an upsized $300 million of 20-year convertibles after the close.

The notes came at the rich end of talk.

"You've seen a lot of this lately. It seems to be the best the company could get and still clear the market," a sellsider said, adding that valuations on the new paper showed it to be cheap using a credit spread of about 2,000 basis points over Libor with a vol of 55%.

"Vol is being disputed with some people using 55%," the sellsider said, adding that 90-day vol for the company is 92.

With those inputs the deal was seen 5% cheap, he said.

"It's a risky proposition, being tied up for five years," the sellsider said. "And you'd think that people would be not be excited to add more airline paper."

The company also has an existing 5% convertible that was issued shortly after the company's emergence from bankruptcy with a deal size of $150 million, and 4.5% of convertible notes of which about $726 million was issued in July 2006,.

The UAL 5% bonds due 2021 were quoted higher at 87.25 versus a share price of $8.05 on Thursday.

The UAL 4.5% bonds due 2021 were at 76.75 versus $8.05, which was lower compared to 86.5 versus $8.65 on Wednesday, and 77 bid, 79 offered, versus $9.30 on Tuesday.

The new paper was not expected to be of much interest to outright players.

"You might as well buy the stock. If the stock hits the fan, they [the bonds] are going to drop like a rock," a sellsider said.

Another source said he didn't know why anyone would buy the new paper when the older UAL 4.5% bonds are yielding 20% and are putable in 2011.

"I think the convert guys are buying this just to flip them back," he said.

"Everyone wants to hedge up airline paper. But then all of sudden you have a big expense on the borrow," the source said.

Virgin Media stays strong

Virgin Media's 6.5% convertibles due 2016 traded at 106 versus $13.90, which was essentially unchanged from Wednesday, but dramatically higher than a few months ago amid a strong stock move.

On Aug. 18, the Virgin Media bonds traded at 88.75 versus $10.125.

"They've improved since they announced the dual listing," a New York-based sellside desk analyst, referring to the company's new listing in London earlier this week.

Simon holds in

Simon Property's 6% series I preferreds were seen trading plus 3.5 points to plus 4.5 points, which was off slightly from previous levels, and better compared to shares, which fell $3.36, or 5%, to $66.07 in heavy volume.

Meanwhile, D.R. Horton's 2% convertibles due 2014 traded at 111 versus a share price of $11, compared to 114.25 versus a share price of $11.50 on Wednesday, and compared to 116 versus $11.75 on Tuesday.

Mentioned in this article:

AMR Corp. NYSE: AMR

Continental Airlines Inc. NYSE: CAL

D.R. Horton Inc. NYSE: DHI

Simon Property Group Inc. NYSE: SPG

US Airways Group Inc. NYSE: LCC

Virgin Media Inc. Nasdaq: VMED

UAL Corp. Nasdaq: UAUA

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