Kodak prices upsized deal; Sonic up in gray; D.R. Horton, Chesapeake steady as stocks retreat

By Rebecca Melvin

New York, Sept. 17 - Eastman Kodak Co.'s offering was the primary focus of the convertibles market ahead of final pricing that came after the close of markets Thursday, convertibles players said.

The deal, which was bid higher in the gray market by as much as 8 points, was upsized to $400 million from an expected $300 million. No gray market trades were reported.

Kodak's existing 3.375% convertibles due 2033 were higher in active trade. Those bonds are expected to be bought back by the company with proceeds from the new offering together with a large financing commitment from Kohlberg Kravis Roberts.

Gray market bids on Sonic Automotive Inc.'s $125 million of 20-year convertibles rose to plus 3 Thursday, from plus 1 or 2 Wednesday, sources said. Again, no trades were seen. And pricing, which was occurring together with an equity offering, was still not seen by Prospect News' deadline.

Terms of both the Kodak and Sonic deals were tightened up during the session, making them richer, but that didn't seem to deter bids for the new bonds.

Back in the secondary market, D.R. Horton Inc. were steady as its shares pulled back following a strong run up in the equity in previous sessions.

Chesapeake Energy Corp. bonds were mixed as the equity markets cooled after notching gains for most of the past week.

Intel Corp. was also steady to higher in trade despite cooling stocks.

"It feels like it should be weaker, but it's not," a New York-based sellside trader said near the close. "Things are running even though stocks have come off."

Equities cooled even after an installment of positive economic news.

The Labor Department said new claims for weekly unemployment benefits fell to their lowest level since early July; and the Commerce Department said housing construction in August jumped to its highest level in nine months.

Workers filing first-time jobless claims dipped to 545,000 last week from an upwardly revised 557,000 the previous week. Contrary to a dip, economists had been expecting a rise. But continuing claims increased to 6.2 million, a little higher than about 6.1 million expected by economists.

Housing starts rose 1.5% last month to an annual rate of 598,000 units, just below the pace of 600,000 units forecasted by economists.

Prior to Thursday, equities had risen eight out of the last nine days. The Dow Jones Industrial Average ended down about 8 points to 9,783.93, after jumping 108 points to a high for the year on Wednesday.

Converts see 'Kodak moment'

Although revised terms were expected to take a lot of the juice out of the Kodak offering of 7.5-year convertibles, the paper was bid higher after the terms were tightened, and a syndicate source said there was a lot of demand, which translated to.upsizing the offering by $100 million to $400 million.

The same was true of the Sonic convertibles offering, with bids building even after the terms were revised.

Kodak's terms were tightened to a lower coupon and higher premium, or 7.25% to 7.75% coupon and 22.5% to 27.5% initial conversion premium, from an initially talked 7.75% to 8.25% coupon with an initial conversion premium of 17.5% to 22.5%.

Sonic terms were revised similarly. The new Sonic terms were 5% to 5.5% for the coupon with an initial conversion premium of 27.5% to 32.5%, from 5.5% to 6% for the coupon, with an initial conversion premium of 22.5% to 27.5%.

Kodak's existing 3.375% convertibles due 2033 traded actively at 99 bid 99.5 offered, compared to about 94 ahead of the news after the close Wednesday that the company was getting $700 million of financing on Wednesday.

Shares of the Rochester, N.Y.-based photography and imaging services company fell 75 cents, or 11%, to $5.93 on Thursday.

Kodak was definitely the focus of the session in convertibles, sources agreed.

Kodak still seen cheap

Even with the revised terms, the new issue was seen "double digits cheap," or 12% to 13% cheap at the midpoint of talk, using a credit spread of 1,000 basis points over Libor and vol. of 40% to 45%, according to one New York-based sellside analyst.

."It depends on the borrow, too," the analyst said. "Right now, the borrow is a little more expensive, but it should go back down after the deal settles."

With the financing transactions including the KKR deal, Kodak is "cleaning house," another sellside analyst said. "They've really pushed out their maturities. Their next debt due is 2013. That's just wonderful. It's a lovely feeling. They don't have to worry about going bankrupt until then."

But while Kodak's credit picture improved, the fundamental side doesn't necessarily look any better, given the uncertain future of its businesses, including cameras, even digital cameras, and film, including film for distribution to theaters.

Chesapeake trades steady to mixed

The more widely traded Chesapeake's 2.25% convertibles due 2038 (Cusip: 165167CB1) gained about a point to 76.25 even though its underlying shares dropped into negative territory after an initial climb. Shares of the Oklahoma City-based natural gas producer ended lower by 3.3%, at $27.97.

Chesapeake's 2.5% convertibles due 2037 (Cusip: 165167BZ9) traded more or less flat at about 90.

Natural gas futures fell 30 cents, or 8%, to $3.458 per MMBtu, pulling back somewhat after spiking all week.

The government reported Thursday that natural gas stockpiles grew to 16.4% above the five-year average for this time of year.

D.R. Horton in line, Intel still strong

D.R. Horton's 2% convertibles due 2014 traded at 124.5 versus $13, compared to 126.5 versus a stock price of $13.60 on Wednesday.

Intel's newer 3.25% convertibles due 2039 traded at 105.75 versus a share price of $19.50, which was a little higher than earlier this week when the paper traded at 105.25 bid, 105.50 offered versus a share price of $19.65 and at 105.25 against a share price of $19.55.

Mentioned in this article:

Chesapeake Energy Corp. NYSE: CHK

D.R. Horton Inc. NYSE: DHI

Intel Corp. Nasdaq: INTC

Eastman Kodak Co. NYSE: EK

Sonic Automotive Inc. NYSE: SAH

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