New Meritor trades flat despite higher shares; exiting Meritor active; Amgen up on hedge

By Rebecca Melvin

New York, Nov. 29 - Meritor Inc.'s newly priced 7.875% convertibles traded little changed outright despite higher shares on Thursday after the upsized $250 million deal priced at a steep discount and toward the cheap end of the coupon range.

The new Meritor edged up slightly from its discounted offer price of 90.

"This was an extension trade for them in their capital structure," a syndicate source said of the Meritor deal, which he termed a "bullish transaction," despite the high 9.7% yield at which the paper was issued.

Meritor's existing 4.625% convertible remained active for a second day, gaining to about 95.

Elsewhere, Amgen Inc.'s convertibles edged up on a hedged basis by just about 0.125 point, a New York-based trader said, with the Thousand Oaks, Calif.-based biotech's paper, which goes away in February, still seen "a little bit rich."

United States Steel Corp. was also in trade against shares that stepped down during the session to end nearly unchanged. That paper had been on an improving trajectory on a hedged basis, a New York-based trader said.

But in a similar sphere, the newish AK Steel Holding Corp. convertibles looked to have come in about 0.25 point against a 3.25% rise Thursday in the underlying shares of the West Chester, Ohio-based carbon, stainless and electrical steel maker.

Elsewhere things were mostly quiet. One trader said some in-the money names were better for sale - or saw sellers - on Thursday, but a second trader said such moves were "very modest."

"Deeper, in-the-money names may have leaked, but there was nothing big," he said.

He noted that the Intel Inc. convertibles have been leaking but they are very long dated.

The first trader said a lack of liquidity was hurting the pricing of some in-the-money issues. "There are not enough guys looking at them," he said. The fact that investors are holding many issues on varying deltas, made it difficult to pinpoint an overall trend.

The convertibles of bankrupt AMR Corp. were also higher, boosted at least in part by news that a bondholder group has offered to provide financing.

Looking ahead, Friday could bring some interesting trades as the books for November close out.

New Meritor little changed

Meritor's newly priced 7.875% convertibles traded little changed at near 90 on their debut in the secondary market on Thursday against the underlying shares of the Troy, Mich.-based truck parts maker, which jumped 25 cents, or 6%, to $4.25.

One trader put a late market on the new paper at 90.25 bid, 90.625 offered.

A second trader said that the new paper suffered "a three-quarters of a point leak."

The deal was upsized to $250 million from an initially talked $150 million and included a $25 million greenshoe that was already fully exercised. But the paper still was not seen trading very actively early in the session.

A syndicate source attributed the lack of turnover to the deal having been allocated primarily to outright, long only investors, which have their eye on a turn in the company's business cycle and concomitant push higher in the shares.

He said the company's emphasis on aggressively pushing out maturities made this a "bullish transaction" from the company's perspective.

It wasn't a "back against a wall" deal, but instead its use of proceeds to repurchase debt point to its purpose of extending maturities, and therefore the high yield, high conversion price, and discount were in line with its other debt, he said.

Although it was upsized, the deal size was relatively small for a high-yield offering, which may have been what pushed it into the convertibles market.

In any case, the deal is bullish for investors, who benefit from a 10% discounted offer price and an outsized coupon for a 9.7% yield.

Meanwhile, Meritor's 4.625% convertibles due 2026 traded up to 95 from around 91.25 bid, 91.50 offered on Wednesday.

Amgen up slightly

Amgen's 0.375% convertibles due 2013 traded actively, with a late-day level at 115 versus the close on the underlying share at $88.61.

They got better by about 0.125 point on a dollar-neutral, or hedged, basis, a New York-based trader said. The underlying shares of the biotechnology giant ended higher by $1.57, or 1.8%.

"That's a hedge name at these prices," a second New York-based trader said.

The paper is about 0.75 point over parity and has some optionality left. If the stock drops sharply, then the convertibles could slip below par. So "you could set it up on a heavy delta and if the stock cracks, the strike is around 77," a trader said, adding that at the present level the paper is a little bit expensive from the investor's perspective.

U.S. Steel, AK Steel trade

U.S. Steel saw its 4% convertibles due 2014 trade late in the session at 104 and nine teenies versus a share price of $21.74.

"They've definitely moved up on swap, and look better by about 0.5 point in the last month and a half," a trader said.

The paper, which is set up in different ways and against credit default swaps, was still seen as cheap.

AK Steel's 5% exchangeables due 2019 traded last at 103.875 versus an underlying share price of $4.10.

That level appeared to be lower by about 0.25 point on a hedged basis, a New York-based trader said.

AMR adds

AMR's 6.25% convertibles were quoted at 76 bid, 77 offered, up a point from the previous session.

A group holding about $885 million of the bankrupt airline's debt - a group that includes JPMorgan Chase & Co. and Pentwater Capital Management LP - has said it will provide restructuring financing for the Fort Worth-based parent of American Airlines, which would allow the company to emerge as a stand-alone business. But the group has one demand: fire the entire current board of directors.

Speculation is that the group wants to get rid of the board so that upon emergence, it can seek a merger with U.S. Airways. However, U.S. Airways might only be interested in buying the company while it remains in bankruptcy, as it would likely get it for a cheaper price.

"We remain convinced that the best solution for AMR is to be run by someone else, and the best candidate in our view still is U.S. Airways," wrote Gimme Credit LLC analyst Vicki Bryan in a report released Thursday. "We suspect this ad hoc bondholder group with its 'exit financing with a catch plan' might be reading the tea leaves the same way we are, and if it can convince all of AMR's stakeholders that a merger with U.S. Airways is their goal it might help to fast track an efficient path for the carrier to exit bankruptcy with a more promising future of growth with sustainable profitability and full support of its employees."

Stephanie Rotondo contributed to this report

Mentioned in this article:

AK Steel Holding Corp. NYSE: AKS

Amgen Inc. Nasdaq: AMGN

AMR Corp. NYSE: AMR

Intel Inc. Nasdaq: INTC

Meritor Inc. Nasdaq: MTOR

United States Steel Corp. NYSE: X

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.