SunPower shines; International Coal sits; investors look to good credit convertibles as stocks tumble

By Evan Weinberger

New York, July 26 - A market meltdown may not have been what a company launching a new convertible wanted to see on the first day of trading. But it appears that a new issue from SunPower Corp. lived to tell the tale of opening when the Dow Jones Industrial Average had its second biggest drop of the year Thursday.

International Coal Group, Inc., on the other hand, stayed remarkably flat on its first day on the market, with one analyst saying that it ticked up earlier in the day but gave back its gains as the company's stock joined in the market-wide plunge.

According to traders and analysts, the convertibles market began the day like usual with issues changing hands before the stock freefall caused heads to turn like at a nasty traffic accident.

"It did hit a wall, I think, as the equity markets cratered and came back over the course of the day," a sellside analyst said.

Another trader said that he saw a "ton of offers" but bids were "far and few between."

That didn't mean that convertibles trading stopped altogether. According to analysts, investors were looking for convertibles with short puts or maturities as an attractive place for a short-term investment and also a little insulation from falling markets.

Two that traded fairly actively, according to an analyst, were Global Industries Ltd.'s convertibles that priced earlier in the week and Peabody Energy Corp.

Along with SunPower and International Coal pricing Wednesday and trading Thursday, one other new issue came across the wire. UBS AG Jersey Branch priced €3.1715 billion in exchangeable mandatory notes linked to shares of Banco Bilbao Vizcaya Argentaria SA. The notes have a 3.22% coupon, an upper strike of 120% and a lower strike of 85%. The deal came in at the rich end of talk, which had been for a 3.2 to 3.3% coupon and a 118% to 121% upper strike.

The deal is essentially a vanity convertible. The exchangeables a part of the financing for Spanish billionaire Manuel Jove's effort to claim a 5% stake in Banco Bilbao, of Bilbao, Spain. Jove purchased 4.9% of the bank earlier in the week.

As newsworthy as it is that a Spaniard can raise nearly €3.2 billion to buy 0.1% of a bank, the real story was the carnage on Wall Street.

A day after picking up over 60 points on a volatile day that was a microcosm of a volatile week or so, the Dow started dropping early and just kept dropping. Credit concerns and worse-than-expected news on new home sales caused a sell-off with the Dow sinking 311.50 points, or 2.26%, to 13,473.57. The Nasdaq fared a little better, dropping 48.83 points, or 1.84%, to 2,599.34.

Short put, good credit the place to be

While credit spreads are widening seemingly across the board, convertibles investors may well be running to issues with short puts or maturities or those issued by secure, investment-grade companies in the coming days.

Thursday good credit was in.

"I think if you're in the right convertibles," one analyst said. "If you distinguish the convertibles that have real bond force - and when I say real I also mean steady - decent credits with relatively short durations - those bond flows are going to hold."

Among active names Thursday, Peabody Energy's 4.75% convertible junior subordinated debentures were moving all day. The St. Louis-based coal miner saw its convertibles close at 99.5 versus a closing stock price of $41.95. The debentures began the day at around par versus Wednesday's stock close of $42.66. The debentures moved lower and then rallied over the course of Thursday. Peabody's stock did not do as well. The stock (NYSE: BTU) lost 71 cents, or 1.66%.

On the flip side, Global Industries' senior convertible debentures also were traded relatively actively Thursday, with one analyst quoting the closing price at 97.5 versus $26.41. When last seen on Tuesday, the Global Industries debentures were trading at around 99.875 versus $26.27.

Shares in the Carlyss, La.-based offshore oil and gas driller couldn't escape the double whammy of the stock market drop and rising oil prices. The stock (NYSE: GLBL) lost 34 cents, or 1.27%.

SunPower a ray of light

It wasn't all doom and gloom in the markets Thursday as the eagerly anticipated new SunPower convertible debentures priced Wednesday night and came to market Thursday morning. The $200 million offering's coupon came in at the middle of talk at 0.75%. Talk had been 0.5% to 1%. The initial conversion premium came in at 27.5%, at the rich end of talk that had it pegged at 22.5% to 27.5%

The San Jose, Calif.-based solar cell maker, which was nearly universally hailed as a solid name in the week leading up to pricing, saw its convertibles move up in relatively light trading, finishing the day at 102.125 versus a closing stock price of $67.27

Even the company's stock (Nasdaq: SPWR) rose as the market went down, gaining $1.51, or 2.3%.

That, one analyst said, may have been part of the attraction of the bonds. "What you're mostly concerned with is what your stock is doing," the analyst said. "Assuming your stock is doing what the rest of the market is doing, it might be a tough time to sell it."

The SunPower debentures were issued at the same time as 2.45 million shares of class A common stock valued at $64.50 per share. The company plans to use the proceeds from both offerings for general corporate purposes.

International Coal sits like a lump

One other issue hit market Thursday. International Coal priced $195 million in convertible senior notes with a 9% coupon and a 45% initial conversion premium.

While the convertibles didn't drop, they did hover around par all day, giving back a short-lived quarter-point gain. Stock in the Scott Depot, W.Va.-based coal miner (NYSE: ICO) dropped 19 cents, or 4.51%, to $4.02 Thursday.

The big question, according to one analyst who looked at International Coal's offering, was how the company would do in the future. "They modeled extremely cheap. The borrow's less than ideal," the analyst said. The question is whether there's an equity upside story."

The analyst pointed out that possible legislation looking to curb coal's effects on the environment in coming years could hurt International Coal's value, and the value of its convertible.

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