Dick's Sporting Goods, Best Buy trade; airlines lower; General Mills' put looks likely to entice holders

By Rebecca Melvin

Princeton, N.J., Sept. 26 - Retail names like Dick's Sporting Goods Inc., Best Buy Co. Inc., and Lowe's Cos. Inc. saw bidders in the convertibles market Monday with patches of strength also seen in technology, traders said.

Pinnacle Airlines Corp. remained firm despite news that Northwest Airlines Corp. has asked the regional feeder carrier to take out of service 15 aircraft by Oct. 31. Buyers also supported AMR Corp., the parent of American Airlines, a trader said.

But much of the rest of the airline sector - with the exception of Northwest, which was lower all day - gained early in the session only to close lower amid renewed energy concerns and a bounce in oil prices.

The 3.25% convertible of Nektar Therapeutics Inc. rose again, extending its Friday debut gain by about 0.50 point to 0.75 point on Monday to close at 103.5 bid, 104 offered. Also moving higher in continued active trade was Citigroup's exchangeable into shares of Genworth Financial Inc., which began trading Thursday, traders said.

Retail "felt a little better" after the sector weakened last week ahead of Hurricane Rita and uncertainties about what consumer spending would look like in upcoming months with $3 gasoline and higher home heating costs expected, a New York-based trader said.

There were outright support as well as swap in a lot of the retail names, he said.

Meanwhile, it looked likely that holders will put back to General Mills Inc. the 0% convertibles due 2022 by the end of October when the put option expires because the price looks slightly richer than fair value, sources said.

Bids support Dick's Sporting, Best Buy

The convertibles of Dick's Sporting Goods gained about 0.50 point early in the session as its stock climbed to a close that was almost 5% higher.

The retail chain was boosted by an upgrade by Harris Nesbitt to "outperform" from "neutral."

The Pittsburgh-based sporting goods purveyor saw its 1.6061% convertibles due 2024 trade early at 68. Its shares gained $1.46, or 4.90%, to close at $31.25.

Best Buy saw a lot of outright support with its 2.25% convertibles trading at 106 early in the session. But it was higher at 109.125 bid, 109.50 offered at the close. Shares of the company gained 74 cents, or 1.72%, to close at $43.66.

The Richfield, Minn.-based consumer electronics retailer, which has lagged since mid September when its 2.25% convertible traded at 116, said Monday that its store in Beaumont, Texas, is its only one that remains closed following Hurricane Rita.

It plans to reopen the location after a damage assessment of the area is completed. Meanwhile, three of Best Buy's stores in Louisiana remain closed following Hurricane Katrina.

Retail stocks and bonds typically weaken amid bearish sentiment ahead of the holiday shopping season, and this year has been no exception. In fact, the trend may have been more pronounced amid uncertainty related to hurricanes, energy prices and interest rates.

"We often see a collapse as Christmas approaches, but you never know, maybe Christmas can come in September," a New York-based buyside source said.

Pinnacle hovers unchanged

The 3.25% convertible bonds of Pinnacle appeared to remain unchanged at about 73 after the company said Monday that it received a request from Northwest, its airline partner, to remove 15 CRJ aircraft from service effective Oct. 31.

It also said it expects its block hours and cycles in the fourth quarter of 2005 to be reduced by about 11% and 10%, respectively, compared to its original expected schedule in which it operated a full complement of 139 CRJ aircraft. Pinnacle is making arrangements to place these aircraft in long-term storage.

Under the airline services agreement between Pinnacle and Northwest, Pinnacle expects the schedule reduction to impact only the variable components of its revenue; accordingly, Pinnacle expects fourth-quarter 2005 revenue to be reduced by about 7% from previous expectations.

On Sept. 15, First Tennessee Bank advanced Pinnacle $17 million under the company's revolving credit facility. Based on the informal discussions that Pinnacle has had with Northwest, Pinnacle expects to receive pro-rated payments on Sept. 30 and Oct. 17 from Northwest for regional airline services.

General Mills put seen likely

Investors look likely to put the 0% convertibles of General Mills back to the company, but sources said that things can change between now and Oct. 31, which is the put deadline. And if the underlying stock value climbs, some investors may choose to hold the convertibles, at least until the next put date in two years.

"The put looks slightly richer than fair value. Fair value shows up as 71 and the put will get 71.30," a New York-based sellside desk analyst said. "But the theoretical is close enough to the put price that investors might just say that they'll get paid next time around."

Investors have time to examine the put as it gets closer to the deadline in order to determine what the value of the securities will be once the put expires.

General Mills said Sept. 15 that it had notified holders of its 0% convertible senior debentures that they have the right to surrender their debentures for purchase by the company between Sept. 29 and Oct. 28.

The put entitles each holder to a price equal to $712.97 in cash per $1,000 principal amount at maturity.

The Minneapolis-based food company said that if all outstanding debentures are surrendered for purchase it will cost about $1.6 billion.

Gimme Credit analyst B. Craig Hutson in examining the company's latest earnings and guidance said that, "Unless the company increases the size of its committed credit facilities, we believe it will have to issue new unsecured debt to fund the redemption."

Hutson reasoned that the redemption will eliminate the dilutive effect of the debentures, but it will also replace a 0% coupon instrument with commercial paper borrowing at rates of more than 3%. Also, Hutson said, it doesn't make sense for General Mills to have roughly 30% of its debt in the commercial paper market.

© 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.