First Reserve sells $800 million Glencoe notes in secondary sale; Clearwire 'in line'

By Rebecca Melvin

New York, Sept. 8 - Signs of optimism that stocks have stabilized for the time being have shown up in the convertibles market, with Thursday's market fairly quiet despite lower shares as market players paused ahead of president Barack Obama's jobs speech set for Thursday evening.

Private equity firm First Reserve Corp. sold $800 million of Glencore Finance (Europe) SA's 5% convertible bonds due 2014 in a secondary offering to mostly European investors at a price of 134.3 per bond. Concurrently with the convertibles sale, First Reserve bought 141 million Glencore ordinary shares.

The move expressed First Reserve's bullish sentiment on Glencore stock, which was punished during the summer sell-off.

Back in the United States, hedge players were said to be lowering deltas on certain names, which was another sign of optimism that stocks are more likely to move to the upside rather than to the downside.

"You've seen a significant selling off, especially in highly levered names, and now you might see some stabilization in those pockets of the market," a New York-based sellside analyst said.

"Stocks look to have stabilized," the analyst said, noting that for the past three or four weeks, stocks have not moved down materially.

Partly driving the optimism is an expectation that government stimulus is about to be injected into the markets, with many anticipating that president Obama will unveil stimulus in his address to a joint session of Congress at 7 p.m. ET, otherwise known as a jobs speech.

However, Federal Reserve chairman Ben Bernanke spoke Thursday as well, offering nothing new regarding steps policy makers might take to help economic recovery. After Bernanke spoke, stock markets fell more than 1%. The next meeting of the Federal Open Market Committee is scheduled for Sept. 20 and Sept. 21.

Thursday's session was very quiet as players sat tight ahead of the speech even though the S&P 500 stock market ended the session down nearly 13 points, or 1.1%, at 1,185.90.

If downside risk in the market is reduced at this time, it can only be positive for the convertibles market, sources said.

Clearwire Corp.'s convertibles were more or less steady in early trade, although the underlying shares took a dive midsession, ending near the lows of the day.

MF Global Holdings Ltd. was slightly lower in what looked to be a move that was in line with lower shares.

EMC Corp.'s convertibles were also little changed, although the twin 1.75% convertibles are standing at lower levels than when they began the summer, and pricing is no longer considered rich, but fair value to slightly cheap, a New York-based sellside analyst said.

Glencore secondary prices

A syndicate source said that the secondary offering of $800 million of Glencore Finance (Europe) 5% convertible bonds due 2014 represented something of a reopening of the European market, which has stood nearly as quiet as the U.S. market in the last six weeks.

"In Europe, this is reopening the market for sure," the syndicate source said.

The original $2.2 billion Glencore convertible bond issue was a pre-initial-public-offering deal, completed in December 2009, and it was sold initially to a handful of investors, including First Reserve, Government of Singapore Investment Corp., BlackRock and Zinjin Mining Group.

The Regulation S secondary offering, sold via joint bookrunners Credit Suisse Securities (Europe) Ltd. and Morgan Stanley & Co. International plc, opens that deal up to trading in the secondary market.

Glencore is a Baar, Switzerland-based commodities trader.

Buyers of the secondary offering were mainly European hedge funds and the deal was a so-called "happy meal," meaning that the buying of convertibles came in conjunction with selling of shares.

First Reserve bought many of the shares that became available in a decision that was aimed at not losing the option value on the shares by doing a normal conversion out of the bonds, the syndicate source said.

He couldn't recall a similar deal to this one done before in Europe and thought it could be the first.

"It was an interesting transaction," the syndicate source said, and he hoped it might be replicated.

"The book was well covered and the terms were pretty attractive," he said.

Clearwire looks in line

Clearwire's 8.25% convertibles due 2030 traded at 67 versus an underlying share price of $3.00 on Thursday, according to a New York-based sellside desk analyst.

The price looked pretty close to "in line" with previous levels and "sounded reasonable," a Connecticut-based trader said. "It has not changed materially."

Shares of the Kirkland, Wash.-based wireless broadband services provider sold off into the close, however, from early levels close to the $3 level. They ended down 18 cents, or 6%, to $2.82 in quiet trade.

That 6% loss underperformed the broader markets, but there was nothing specific driving the trading, one source said, referring to the fact that it is "a volatile, high beta stock."

MF Global slips outright

MF Global's 1.875% convertibles due 2016 were seen at 84.3 versus an underlying share price of $51.70, according to a sellside analyst near the session's end. That level was down a point or two but was not materially different from previous levels given the move in the underlying shares.

The MF Global 9% convertibles due 2038 were not heard in trade but were seen little changed at 109.5.

"Lots of MF global 1.875s traded...It's not normally a most active," a New York-based trader said Thursday.

Shares, which "cracked," or sold off sharply in early August, were down 13 cents, or 2.5%, at $5.18 at the session's end Thursday.

EMC steady

EMC's 1.75% series A convertibles due 2011 were seen at 135.625 versus an underlying share price of $21.67 on Thursday, according to a New York-based sellside analyst.

The EMC As are a very short dated instrument, trading as three- or four-month paper with a very high delta.

EMC's 1.75% series B convertibles due 2013 were seen at 143.875 versus an underlying share price of $21.67, the analyst said.

The B paper trades on an 80% delta and is 2.2-year paper and is essentially a stock replacement, meaning that it trades with the shares, with a significant amount of upside and downside risk because of the high delta.

The B's "pay some premium and holders get some yield as well, but given the profile there is a significant amount of upside and downside risk," the analyst said.

The differential in pricing between the two bonds "makes sense," he said.

During the summer sell-off, the EMC convertibles "came in. They are about fair value or slightly cheap. They are not rich anymore," the analyst said.

Mentioned in this article:

Clearwire Corp. Nasdaq: CLWR

EMC Corp. NYSE: EMC

Glencore International plc London: GLEN

MF Global Holdings Ltd. NYSE: MF

Salesforce.com Inc. NYSE: CRM

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