Apache up a little in the gray; Genco quiet ahead of pricing; United Rentals, Cephalon add

By Rebecca Melvin

New York, July 21 - The convertible bond market held in OK Wednesday as two new offerings and earnings news spurred activity in the space, despite a late down draft in equities, market sources said.

Apache Corp.'s new $1.1 billion offering of three-year mandatory convertible preferred stock was up a point in the gray market after the deal was launched late Tuesday for pricing Thursday.

The Genco Shipping & Trading Ltd. deal, which launched early Wednesday, was mostly quiet as the smallish $100 million deal size and difficult stock borrow deterred interest, sources said.

Genco's $100 million five-year convertible senior notes were talked to yield 4.5% to 5% with an initial conversion premium of 20% to 25%.

Back in the secondary arena, Gilead Sciences Inc. was trading in line after reporting revenue that missed estimates, even though profit was up 25%. The news initially pulled shares sharply lower, but shares recovered by the end of Wednesday.

United Rentals Inc.'s convertibles were up about 1.5 points after the equipment-rental company swung to second-quarter profit of 18 cents a share from a year-earlier loss of 28 cents. On an adjusted basis, the Greenwich, Conn., company earned 25 cents a share against a loss of 24 cents. But revenue was down.

Cephalon Inc.'s convertibles were also moving to the upside after the Frazer, Pa.-based biotechnology company said it expects second-quarter sales and earnings to outpace its previous forecasts due to strong product performance.

The equity markets slid after Federal Reserve chairman Ben Bernanke said in testimony before the Senate Banking Committee that he believes the U.S. economy faces "unusually uncertain" prospects.

He said the Fed was ready to take further steps to bolster growth if needed as jobs and housing remain significant problems.

Apache offering up a point in the gray

Apache's registered, off-the-shelf offering was seen in the gray market at 101.

The deal, which was talked with a dividend of 6% to 6.5% and with an initial conversion premium of 18% to 22%, was seen cheap by several analysts.

Using a credit spread of about 200 basis points over Treasuries and a vol. of 34%, the deal was seen as a little less than 4% cheap at the midpoint of price talk, according to a Connecticut-based sellside analyst.

Using a credit spread of 150 bps over and a vol. of 36%, the Apache issue was seen about 2% cheap, according to another Connecticut-based sellsider.

The $1.1 billion offering of three-year mandatory convertible preferred stock was expected to price after the close of markets Thursday, together with an offering of common stock. The two offerings are not contingent on one another.

One sellsider said that although the deal may have been valued as cheap, valuation was "nearly a moot point."

"This is a large issue from a large cap name, doing multiple tranche securitization pricing across several asset classes, on an investment-grade company where the preferred will be in all of the widely followed indices in a market that has not seen much in the way of new issues," the sellsider said.

The issue will be well-subscribed whether its 4 or 5 points cheap or even 1 point cheap, the sellsider said.

Goldman Sachs & Co., Bank of America Merrill Lynch, Citigroup Global Markets Inc. and J.P. Morgan Securities Inc. are the joint bookrunners for the offering.

Houston-based Apache is an oil and gas exploration and production company, with operations in the United States, Canada, Egypt, the U.K. North Sea, Australia and Argentina.

Mandatories are typically good for more equity-like convertible strategies, offering good upside capture if the underlying stock appreciates and yet also relatively high yields.

They are also good for strategies that require investment-grade holdings since most mandatories are investment grade.

Genco mostly quiet in the gray

Ahead of the open Wednesday, Genco Shipping launched an offering of five-year convertible senior notes, which were talked to yield 4.5% to 5% with an initial conversion premium of 20% to 25%.

The paper was mostly quiet in the gray market but was said to be offered at plus 0.625 point near the end of the session.

The Genco deal was valued at about 1% cheap at the cheap end of talk, given that borrow was difficult, a source said.

Genco shares fell, ending the session down $1.55, or 8%, at $16.18.

"I don't know the company. It's got a $500 million market cap, and it's doing a $100 million offering; that's 20% they're going to sell," a New York-based sellside trader commented.

Deutsche Bank Securities Inc., BNP Paribas Securities Corp. and Credit Suisse Securities (USA) LLC were joint bookrunners for the offerings, with Credit Agricole Securities (USA) Inc. and DVB Capital Markets LLC acting as co-managers for the offerings.

Proceeds from both offerings will be used to fund a portion of the purchase price for Genco's previously announced acquisitions of 13 drybulk vessels from Bourbon SA and five drybulk vessels from affiliates of Metrostar Management Corp., as well as for general corporate purposes.

There is contingent conversion at a price hurdle of 130%. They are convertible into cash, shares of Genco, or a combination, at the option of Genco.

New York-based Genco transports iron ore, coal, grain, steel products and other drybulk cargoes.

Gilead trades in line

Gilead's 0.5% convertibles due 2011 traded at 103.5 versus a share price of $32.75 during the session, and at the close they were wrapped around 103.5, a New York-based sellside trader said.

Gilead's 0.625% convertibles due 2013 were at 111.

Shares of the Foster City, Calif.-based biopharmaceutical company ended the session down 9 cents, or less than a third of a percentage point, at $32.91.

"They were in line," the trader said of the convertibles.

From a hedged perspective, the Cephalon As set up quite a bit better than the B's, the trader said.

"It's a nice gamma set up, but the B's are a bit frothy at that price and would have to be about 2 points lower to attract hedged interest, in my opinion," the trader said.

The Gilead's were fairly active but the valuation didn't move all that much.

The Foster City, Calif.-based biopharmaceutical company reported second-quarter revenue of $1.93 billion, which missed estimates of $1.96 billion.

RBC Capital Markets downgraded the shares to "sector perform" from "outperform."

United Rentals moves up

United Rental's 4% convertible bonds ended the session at about 127.75 bid, 128.25 offered, which was up about 1.5 points dollar neutral on the day.

Shares of the rental company zoomed up 12% on its quarterly report, which swung to a profit, and the company also raised its outlook for capital spending, citing stronger demand.

Net income in the three months to June 30 was $12 million, or 18 cents per share, reversing a loss of $17 million, or 28 cents, a year earlier.

Revenue fell 9% to $557 million from $615 million a year ago.

Mentioned in this article:

Apache Corp. NYSE: APA

Cephalon Inc. Nasdaq: CEPH

Genco Shipping & Trading Ltd. NYSE: GNK

Gilead Sciences Inc. Nasdaq: GILD

United Rentals Inc. NYSE: URI

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