Convertibles 'tread water' ahead of data, earnings reports; planned Crown Castle deal eyed

By Rebecca Melvin

New York, Oct. 21 - The convertibles market was steady in muted trading on Monday in tandem with stable equity and credit markets and ahead of U.S. jobs data to be released Tuesday and a raft of earnings reports expected through the week, market sources said.

The U.S. Labor Department's September non-farm payroll employment report, which was originally due Oct. 4 but was delayed by the partial government shutdown, will be released on Tuesday.

"I would say it was marginally better to buy, but basically treading water," a New York-based trader said of Monday's convertibles session.

Better to buy means that there are more offers than bids in the market.

In the primary market, Crown Castle International Corp. launched an offering of $750 million of mandatory convertible preferreds, which looked like it was going to price attractively for investors, according to traders who looked at the price talk early Monday.

Meanwhile a syndicate source said later in the day that the deal was well received.

The Crown Castle mandatory deal is coming together with a large equity offering of 36 million shares of common stock.

The large deal size and the large equity deal added to its appeal, a New York-based trader said.

"I bet they have to price cheap just due to the size. I am a fan just on that basis," the trader said.

Among existing mandatories, General Motors Co.'s 4.75% mandatory convertible junior preferred stock, which matures Dec. 1, 2013, was down slightly but not looking likely to move significantly between now and maturity given that GM's common stock is sitting right between the upper and lower strikes on the convertibles.

Given where the GM shares are trading, "you're only going to get $50 worth of stock [upon conversion]," a New York-based convertibles analyst said about the mandatories.

The securities were seen at $50.5 versus an underlying share price of $35.90, which was slightly down with the stock slightly down as well.

"With the stock in the middle of the two strikes, it's hardly going to move to maturity," the analyst said.

Elsewhere, the convertible market was described as "very quiet."

"It's a typical Monday," the Connecticut-based trader said.

A top-volume name in trade was Archer-Daniels-Midland Co.'s 0.875% convertibles, which mature Feb. 15, 2014 and which changed hands little changed between 101.875 and 102.25, according to Trace data.

Gilead Sciences Inc.'s 1.625% convertibles due 2016, or the Gilead Ds, were also among the most active names and little changed to in line with the underlying shares. Shares of the Foster City, Calif.-based biopharmaceutical company ended down 1.8%.

Gilead's hepatitis C drug, sofosbuvir, is expected to be reviewed later this week by a Food and Drug Administration advisory panel. The company is seeking approval of its drug for genotype 1 patients, the most common strain of hepatitis C in the United States, as well as for the other five genotypes.

Equity closed narrowly mixed. The technology-heavy Nasdaq stock market was once again the best performer, edging up 5.77 points, or 0.2%, to 3,920.05. The S&P 500 stock index was little changed, ending higher by 0.2 point, or 1,744.66, but the Dow Jones industrial average slipped 7.45 points to 15,392.20.

Crown Castle to price

Price talk on the Crown Castle deal was for a 4.75% to 5.25% dividend and a 15% to 20% initial conversion premium. The registered offering was being sold via joint bookrunners Morgan Stanley, BofA Merrill Lynch, J.P. Morgan Securities LLC and Barclays.

One market source said the pricing might come at 4.75% to 5% with an initial conversion premium of 15%, which was "very fair," he said.

A syndicate source said that the deal was good for the market since it brings fresh supply on the heels of some recent maturities, including "$500 million of MetLife Inc. that went away."

Another syndicate source said that the planned Crown Castle was a focus of Monday's session, which was lackluster otherwise.

The Houston-based wireless infrastructure company plans to price the 7.5 million of mandatory convertible shares at a $100 liquidation preference after the market close on Tuesday.

There is a greenshoe of up to an additional $112.5 million of mandatories for the registered offering.

Proceeds from the convertible and the common share offerings, together with cash on hand and additional debt financing, are going to be used to pay AT&T Inc. and its affiliates in connection with a previously announced transaction between Crown Castle and AT&T.

If the transaction does not close, proceeds will be used for general corporate purposes, which may include repayment of debt, the company said.

Mentioned in this article:

Archer-Daniels-Midland Co. NYSE: ADM

Crown Castle International Corp. NYSE: CCI

General Motors Co. NYSE: GM

Gilead Sciences Inc. Nasdaq: GILD

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