Convertibles quiet ahead of Fed news; Stanley Black & Decker, Developers Diversified flat

By Rebecca Melvin

New York, Nov. 3 - The convertible bond market was mostly quiet Wednesday ahead of the latest policy statement from the Federal Open Market Committee, and it remained subdued after 2:15 p.m. ET when the Fed outlined plans to buy $600 billion more in government bonds over the next almost eight months to help spur the economy.

In early trading, two new deals that priced Tuesday comprised the most notable action. Both issues held gains notched Tuesday.

Stanley Black & Decker Inc.'s 4.75% convertible preferred units traded early at 104 versus a share price of $61.55, which compared to Tuesday's 103.8 settle for the New Britain, Conn.-based provider of power tools' new paper.

Developers Diversified Realty Corp.'s 1.75% convertible senior notes traded at 101.5 versus a share price of $13.05, which compared to a Tuesday settle of 101.4 for the Beachwood, Ohio-based real estate investment trust's new paper.

Otherwise, most bid-ask spreads were too wide to foster any trade, one New York-based sellside trader said.

The Fed's action to buy $600 billion in Treasuries to stimulate the economy was really viewed as a non-event for the convertibles market, a sellside source said.

However, having behind it the uncertainty of the U.S. midterm elections - in which Republicans took control of the House and Democrats maintained the Senate - and Fed news, seemed to spark some action in the convertible primary market.

Pricing and timing details emerged on the planned General Motors Corp. mandatory convertibles offering. The Detroit-based automaker plans to price $3 billion of mandatory convertibles after the close of markets on Nov. 17 concurrently with the automaker's initial public offering, or its first stock offering since exiting Chapter 11 bankruptcy protection.

The GM mandatories were talked at a dividend of 5.5% to 6%, with an initial conversion premium of 15% to 30%, and were seen attracting interest from traditional convertibles investors.

Also launching after the close was Vishay Intertechnology Inc. The Malvern, Pa.-based maker of semiconductors and electronic components plans to sell $250 million of 30-year convertible notes that will be used to repay term and revolver debt. Remaining proceeds will be used to buyback common stock.

The notes are talked to yield 2.125% to 2.625% with an initial conversion premium of 10% to 15%. J.P. Morgan Securities LLC is the bookrunner.

Pricing was expected before the market open Thursday.

New issuance is expected to pick up now that there is more certainty regarding Fed action and as the quiet period around earnings season comes to an end, a New York-based syndicate source said. Heading into the end of the year, there should be more refinancing deals, he said.

Fed action and convertibles

The broader markets ended a choppy day steady to higher given that the U.S. Central Bank's purchasing plans were more or less priced in. But longer-dated Treasuries fell Wednesday because it hadn't been anticipated that the Fed would be purchasing mostly two- to 10-year paper and that the longer, 17- to 30-year bonds would not be targeted.

The Fed action "is not really going to have any effect [on convertibles]. It's not going to drive inflation higher any time soon, and in the meantime, we need interest rates to go up to drive people to do converts," a New York based syndicate source said.

In its statement Wednesday, the FOMC said it was going to keep rates at zero to 0.25% for the foreseeable future.

That said, the syndicate source anticipates that the convertible primary market will be "fairly busy in the next couple of months," heading into the end of the year.

Buying $75 billion a month

The U.S. Central Bank said it would buy about $75 billion of Treasuries per month into the middle of next year, an action aimed at lowering borrowing costs for consumers and businesses that haven't recovered from the deep recession of the past several years.

It will regularly review the pace and size of the program in light of economic recovery, which it described as "slow."

Some market-watchers had expected the Fed to announce a Treasury-buying program of $100 billion a month for as long as the market needed it. But Wednesday's market action showed that market players were pretty comfortable with the positions they had put on in recent months in expectation of the latest quantitative easing announcement.

GM deal in focus

General Motors plans to sell 60 million shares of mandatory convertible preferreds, and there is another 9 million dedicated to a greenshoe.

The $50 par mandatories are non-callable for life, as is typical for a mandatory, and they are being talked at a dividend of 5.5% to 6%, with a 15% to 20% threshold appreciation premium, or initial conversion premium.

The concurrent IPO will bring in about $10 billion.

There's two weeks for the roadshow, a syndicate source commented.

Morgan Stanley & Co. Inc., JPMorgan, Bank of Ameica Merrill Lynch, Citigroup Global Markets Inc., Goldman Sachs & Co., Barclays Capital Inc., Credit Suisse Securities, Deutsche Bank Securities Inc. and RBC Capital Markets Corp. will be the joint bookrunners for the offering.

Global coordinators on the mandatory Morgan Stanley, JPMorgan and Goldman Sachs.

GM also said Wednesday that it expects to earn up to $2.1 billion when it reports third-quarter results in the Nov. 8 week.

Mentioned in this article:

Developers Diversified Realty Corp. NYSE: DDR

General Motors Co. NYSE: GE

Stanley Black & Decker Inc. NYSE: SWK

Vishay Intertechnology Inc. NYSE: VSH

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