Morning Commentary: Planned U.S. Steel convertible notes look cheap ahead of pricing

By Rebecca Melvin

New York, Oct. 16 – Convertibles market players were sizing up United States Steel Corp.’s proposed $300 million of seven-year convertibles early Wednesday after the deal was announced late Tuesday.

The deal, which is expected to price after the market close on Wednesday, looked about 3 points cheap, according to two market sources.

At the midpoint of price talk, or 4.25% coupon and 30% premium, the deal looked to be worth 103.47, using a credit spread of 900 basis points over Libor and a 45% vol., according to one source.

A second market source said the deal looked 3 points cheap at the midpoint of talk, using a credit spread of 875 bps over Libor and 42% vol.

The company has a “piece of paper just ahead of this in 2026 that trades around plus 850 [bps],” so that was the thinking going into the credit spread assumption, according to one source. And the ballpark for vol. is 42% to 45%.

Payment on U.S. Steel’s last convertible issue was accelerated in March 2015 after U.S. Steel Canada Inc. filed for protection from creditors and may not have been able to make payments on a C$150.6 million note to the Province of Ontario. That convertible was upsized to $275 million from $250 million and came at the midpoint of talk for a 2.75% six-year convertible note pricing in March 2013.

The proceeds of U.S. Steel’s new convertibles are earmarked for general corporate purposes, including strategic investments. It is non-callable for four years and then provisionally callable if the stock price exceeds 130% of the conversion price, and there are no puts.

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