Northwest convertibles bounce around, end higher; Encore Capital eases in trade; Chesapeake Energy rises

By Rebecca Melvin

Princeton, N.J., Sept. 14 - Northwest Airlines Corp. remained a major focus of the convertible bond market Wednesday, with speculation high on both sides of the table as to whether the troubled airline would file for Chapter 11 bankruptcy protection. In fact, the company did file for bankruptcy after the session's close as did Delta Air Lines Inc.

"Not a great day for the airlines," a convertibles source commented.

Early in the session, the Northwest convertibles were trading again with accrued interest, as people's opinions shifted in regard to the likelihood of a filing Wednesday.

But for much of the rest of the session the two convertible bond issues were trading flat, or without accrued interest, which was said to be worth about 2.5 points.

Trading was brisk and only slightly off from levels Tuesday when news reports of an imminent filing caused a surge of activity, sources said.

Wednesday's activity included trading bonds versus recovery swaps, which involves making predictions about where the bonds will trade on the day a filing is made.

"I think when they file the bonds will drop to 15 bid, 20 offered, down about 8 to 10 points," a Connecticut-based sellside trader said.

Also on Wednesday, a new issue from Encore Capital Group Inc. jumped out of the gate on its first day to trade at 102 bid, 102.5 offered. But the bonds ended the session lower at 100.125 bid, 100.625 offered, a syndicate source said.

Meanwhile Chesapeake Energy Corp.'s newer 4.5% convertible issue was up about 2 points to 103.75 bid, 104 offered, a syndicate source said. The bond was issued last week. Other energy names were also higher, representing "about the only bright spot" of the day, a trading source said.

Also a little better was TJX Co.'s convertibles on news that the company's chief executive resigned, saying that some of the off-price retailer's smaller divisions haven't met expectations in the past year and would benefit from a "fresh perspective."

And another new deal was announced by Midway Games Inc., which priced Tuesday $65 million of senior convertible notes with a coupon of 6% and a low initial conversion premium of 10%.

The Rule 144A bonds sold via bookrunner Banc of America Securities LLC were placed on a private basis and tightly held, with no trades reported in the issue on Wednesday.

Most of the company's 87 million shares outstanding are owned by media mogul Sumner Redstone, and the float is small at 8 million shares.

Midway Games is a Chicago-based developer and publisher of interactive entertainment software for video games.

Another deal involving Genworth Financial Inc. exchangeables via Citigroup Funding Inc. was announced and expected to price next week.

The all-in coupon, talked at 5.35% to 5.85%, was expected to be broken out at pricing and probably reduced by about one to 4.5%, as the dividend yield of the common stock is subtracted and the dividend pass through is added in.

Northwest convertibles rise ahead of filing

Both the 6.625% convertibles and the 7.625% convertibles of Northwest Airlines rose more than 5 points from Tuesday's slump to close at 24.5. News of the Eagan, Minn.-based airline's bankruptcy filing hit the tape less than an hour and a half later.

Earlier in the session the 6.625% convertible was at 19 bid, 22 offered and the 7.625% issue was at 18 bid, 21 offered, according to a New York-based desk analyst.

"There was a lot of trading going on all day. It was about 50-50 that they would file today and about 90% that they would file in the next month or two," a Connecticut-based sellside trader said.

"It's going to be whippy if they do," he said.

The fact that Northwest is "highly unionized means that what will happen to bondholders is even more unpredictable than usual," a New York-based convertible origination source said.

"Because the settlement can go anywhere, it's awful for investors. It will vary, i.e. it's dangerous," the source said. "Its profile, with its pensions and unions, makes it difficult to trade and analyze, and difficult to finance."

Early in the session, a J.P. Morgan securities analyst said that Northwest was debating possibly delaying the filing to focus on last resort efforts to secure at least $1.4 billion in labor concessions.

The analyst, Jamie Baker, said in a report that its default the previous day - including $42 million in payments due on financings and to a regional affiliate "may be a part of its master plan to hastily force labor to the table with a shortened window."

That report caused a shift in "people's opinion," a convertibles source said.

The bankruptcy filing means that holders of unsecured bonds of Northwest may lose as much as 90% of the face value of their investment based on previous airline bankruptcy cases.

With the filings by Northwest and Delta, the No. 3 carrier, four of the seven biggest U.S. airlines will be operating under court protection, or 47% of industry capacity.

The already squeezed out Delta convertibles were trading at 15 bid, 16 offered, a Connecticut-based sellside trader said.

The convertibles of AMR Corp., Continental Airlines Corp. and Jetblue Airlines Corp. - examples of airlines outside of bankruptcy protection - were also indicated lower.

Chesapeake Energy gains

The convertibles of Chesapeake energy rose as oil turned around after the Energy Department reported a larger-than-expected decline in U.S. inventories since Katrina cut production.

Chesapeake's 4.5% issue rose 2 points to 103.75 bid 104 offered. The Chesapeake 3s were seen at 165.25 bid, 167.25 offered, while one of the 5% preferreds was at 150.50 bid, 151.125 offered and the other 5% issue was at 208.375 bid, 208.875 offered, according to a sellside trading desk in New York.

Crude oil for October delivery jumped 3.1% to $65.09 a barrel in New York, the biggest increase since Aug. 30.

New deals emerge

Citigroup Funding Inc. is expected to price next week roughly $900 million of Genworth Financial exchangeables talked to yield 5.35% to 5.85% with an initial conversion premium of 20%.

The complex coupon structure is partly a fixed coupon and partly a pass-through of dividends. Right now it's an all-in coupon, a syndicate source said. But at pricing expected after the close Sept. 21, it will be broken out, which means that the roughly 5.5% will be reduced to probably about 4.5% as the dividend yield of the common stock is subtracted and then the dividend pass through is added in.

The reason given for having an all-in coupon now was "marketing."

Citigroup Global Markets is the bookrunner for the deal. Citigroup is expected to buy 21 million Genworth shares from General Electric Co. and then sell 29 million mandatory exchangeable securities and a 15% over-allotment option.

The GE move is aimed at reducing its ownership in Genworth, an insurance holding company, to about 32% from about 52%.

In addition to the 21 million Genworth shares that GE will sell to Citigroup, GE also plans to sell 60 million shares of Genworth's stock in a public offering.

Richmond, Va.-based Genworth will not receive any proceeds from either transaction.

New Midway issue tightly held

Midway Games Inc. priced $65 million of 20-year convertibles on Tuesday at par to yield 6% with an initial conversion premium of 10%.

Bookrunner for the Rule 144A deal of convertible senior notes was Banc of America Securities. UBS was a co-manager.

"It was tightly held," a syndicate source said, adding that, "The notes were placed on a private basis akin to a private placement."

The notes are non-callable for five years, with puts in years 3.6, five, 10 and 15. There is a $10 million greenshoe.

Proceeds are expected to be used for general corporate purposes, including working capital, capital expenditures and possible future acquisitions or alliances.

Chicago-based Midway is a developer and publisher of interactive entertainment software for video games.

© 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.