Medtronic, Amgen fall prey to selling pressure; JetBlue adds; Actuant plunges

By Rebecca Melvin

Princeton, N.J., June 20 - The convertible bond market was weaker on Tuesday - and more active than on Monday - with sellers of several big, liquid issues weighing in and reversing the course of a recent run up of the market, sources said.

Names that cropped up often as being for sale on Tuesday included Medtronic Inc., Amgen Inc. and Gilead Sciences Inc.

Symantec Corp., which priced a large two-tranche issue last week, saw its convertibles remain in the doldrums in fairly active trade.

"We've had quite a rally and now investment grade, volatility names are coming in a little," a New York-based sellside analyst said. "Liquid issues and vol-driven names have been under pressure after a big spike."

An exception to downward moves on Tuesday was JetBlue Airways Corp., which lifted after the discount air carrier picked up coverage at "overweight," a market source said.

But Actuant Corp.'s convertibles plunged as their underlying shares tumbled 18% after the Milwaukee-based industrial company reported earnings that met expectations and unveiled a restructuring plan to cut costs.

In the energy sector, Nabors Industries Ltd. lost ground during the session, with its 0.94% convertibles trading early at 95.5 versus its stock high for the session of $32.20, but later indicated at 93.75 versus its stock close of $30.99, or down about 1.75 points, in line with the common.

The Bermuda-based oil and gas drilling and exploration company was in the company of its comrades. Transocean Inc.'s 1.5% convertible traded early in the session at 106.75 versus a share price of $33.50; but at the close the paper was seen down 1.75 points at about 105 versus the stock close of $71.15, which was lower by 2.4% on the day.

In the primary market, players were mostly focused on a proposed new deal from Group 1 Automotive Inc., which was expected to price after the close.

The $250 million deal, which was viewed as "okay at best" ahead of pricing, came in at the midpoint of talk for the initial coupon of 2.25% ( but after 10 years the coupon will drop to 2%) and toward the cheap end of talk for the initial conversion premium at 11%.

Market players expected pricing to come in toward the cheap end of talk, which was for a coupon of 2% to 2.5%, and for an initial conversion premium of 10% to 15%.

Alleghany adds in trade

During the session Alleghany Corp.'s $260 million of mandatory convertible preferred shares, which priced late Monday, were released for trade in the secondary market. The new convertibles gained about two points out of the chute, a syndicate source said, and ended the day up 3 points to 5 points. Meanwhile, Alleghany's common shares ended up $5.4, or 2%, at $270.

The convertible shares priced at par of $264.60 at the cheap end of talk, to yield 5.75%, with an initial conversion premium of 18%.

Price talk was for a dividend of 5.25% to 5.75% with an initial conversion premium of 18% to 22%.

The shares attracted mostly outright interest, according to sources. Hedge players "don't like mandatories; they don't like being short gamma," a New York-based sellside analyst said.

Stock borrow on the issue wasn't as problematic as anticipated. "It seemed fine according to our stock loan desk," the analyst said.

The deal was 2.4% cheap with a three-point volatility spread, and it has a 2.7 year breakeven, which is inside the three-year term, he said.

Bookrunner for the registered deal was Merrill Lynch and Co.

There is an over-allotment option of about $30 million, or 147,000 shares.

Alleghany (NYSE: Y) is a New York City-based property and casualty insurer.

Group 1 eyed as 'okay'

Proposed deals from Group 1 Automotive and American Medical Systems Holdings Inc. were getting the once-over from market players, but no gray market was reported in either.

The $250 million of 30-year convertible senior notes from Group 1 were viewed as "okay at best," according to a New York-based buysider. His sentiment was echoed by others who would have liked to see a higher coupon and a shorter put, but they said the premium was attractive. Nevertheless, the company's sector in automotive retail was viewed as a detraction.

"It's a used car and collision center company similar to Car Max, which is the biggest company in the field, but which has no convertible, and Sonic Automotive and Lithia Motors, which have convertibles," a sellside analyst said.

The Group 1 deal was seen 2.25% cheap at the midpoint of price talk, using 31% volatility and a credit spread of Libor plus 250 basis points, according to one analyst.

A buysider said that the 250 bps credit spread was "conservative," and he thought the spread should be closer to Libor plus 300 bps

Another analyst, who said he might change his inputs due to questions regarding the seniority of the issue, said he assumed Treasuries plus 325 basis points and a 31% volatility, making the deal 3% cheap.

He said the ranking issue was unclear. Group 1 has a senior subordinated straight bond at the operating company level that would have seniority over the convertible which is guaranteed by the holding company.

Commenting on the overall market, a New York-based analyst said: "It's a strange time right now for credit. In the high-yield market, spreads are starting to widen. Intelsat had a difficult time pricing, so there may be a shift. But spreads are still very tight and in convertibles, there was a pick up in volatility in the last couple of weeks when investment-grade paper got bid up," the analyst said.

The analyst's reference to Intelsat is regarding a multi-part bond deal that will help finance the merger of satellite communications operations PanAmSat Holding Corp. and Intelsat Ltd.

Another source mentioned that the Group 1 deal was coming on swap, and shouldn't have a huge impact on the stock. Nevertheless shares of the company were significantly lower on Tuesday.

The 7.2% drop in the common appears to have been driven primarily by the revised outlooks published by Standard & Poor's and Moody's on Tuesday.

S&P said it revised its Group 1 outlook to negative from stable because of increased debt levels that will result from the company's new $250 million convertible notes. The BB corporate credit rating on the company was affirmed, the agency said.

S&P noted that the ratings reflect a weak financial profile resulting from an aggressive acquisition strategy, combined with the competitive and cyclical challenges of the automotive retail industry.

JP Morgan was bookrunner of the Rule 144A deal.

Group 1 (NYSE: GPI) is a Houston-based owner and operator of auto dealer franchises and repair centers.

American Medical looks somewhat cheap

At the mid point of talk, pricing of the proposed $325 million of 30-year convertible senior subordinated notes of American Medical looked 0.5% cheap, using 35% volatility and a credit spread of Libor plus 175 bps, according to a New York-based sellside analyst.

The deal, being sold via bookrunner Piper Jaffray & Co., was expected to price after the close of markets on Wednesday. Several buysiders said that they were looking at both the Group 1 and American Medical deals.

"It's a decent company, somewhat volatile; and the smaller underwriter could have an affect," a New York-based arbitrage player said.

Minnetonka, Minn.-based American Medical (Nasdaq: AMMD) is a medical device concern.

JetBlue pulls up

Discount carrier JetBlue Airways saw its two convertible issues trade actively, gaining as much as 0.25 point on the day on a dollar neutral basis. Meanwhile its underlying shares jumped in early trade and remained strong through the session, closing higher by 6%.

"The bid picked up. It was about 0.25 point better, dollar neutral," a New York-based analyst said. He attributed the rise in the shares and bonds to Morgan Stanley reinitiating coverage on the airline sector and giving a favorable rating of "overweight" to JetBlue. He added that oil prices have stabilized in the high $60s to low $70s price range per barrel and that the summer is expected to be a busy flying season.

JetBlue's 3.5% convertible traded at 90.75, versus a stock price of $11.50 early in the session, while its 3.75% issue traded hands at 98.625.

Shares of the Forest Hills, New York-based company (Nasdaq: JBLU) closed north of $12, at $12.23, up 70 cents, or 6.1%.

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