Alcoa shines like gold on debut; Citigroup tightens; Johnson Controls notches further gains

By Rebecca Melvin

New York, March 19 - Alcoa Inc.'s newly priced convertibles surged on their first day of trading in the secondary market to 121.25, in what convertibles sources suggested anecdotally was a record debut.

"In my 10 years trading converts, I do not remember a deal of any significant size trading up to 115 no less 120 on the first day of trading," a sellside trader said.

Another trader said he remembered upper teens, but never the solid 20 points outright that this issue climbed. But the common stock of the aluminum producer also jumped, and the new issue ably kept up.

Citigroup Inc. preferred shares tightened up closer to, but still remained below parity, as terms for the New York bank's exchange offer were reiterated, removing some uncertainty surrounding the deal, but timing was still not nailed down.

The convertibles of Johnson Controls Inc., which priced last week, notched another in a string of steady gains amid news that the Treasury Department will provide up to $5 billion in aid to troubled auto-parts suppliers as part of its continuing effort to bolster the foundering auto industry.

Overall, activity in the convertible market "was nothing to write home about," but bids, which felt stronger in tandem with credit and equity markets on Wednesday, remained strong, a sellsider said.

The market was responding to news Wednesday that the Federal Reserve planned to buy up to $300 billion of long-term Treasuries. The expectation is that players will "see what's on their pad improve," the sellsider said.

But he was not convinced that the moves would solve the current credit problems facing the financial system.

"Still nobody is lending. So what may happen with the Fed move, is that nothing may happen," the sellsider said.

Alcoa shines

Alcoa's newly priced 5.25% convertible bonds gained more than 21 points outright amid strong demand for the paper, and comprised a solid chunk of trading activity in Thursday's market.

The $500 million deal priced with an initial conversion premium of 22.5% -- the issue was concurrent with a sale of 150 million shares of common stock at $5.25 a share.

The bond traded up to $121.25 against a stock price of $6.60 on Thursday.

"It's pretty crazy; but the common was up 20%," a sellsider trader said. "I could have bought some this morning for 115 to 116."

Alcoa stock closed a little off that level at $6.40, but still up by $0.92, or 17% on the day.

"Crazy prices here," another sellsider said. "If these are trading here, the entire market should be up five points!"

The deal's terms - 5.25% up 22.5% - were richened in the face of high demand when the deal was launched. But the market response suggests the company would have been able to them richen even further.

It was priced for equity and crossover buyers, not just convert buyers, a sellside trader said.

Credit Suisse, Morgan Stanley, Barclays and Citigroup were joint bookrunners of the registered offering. There is an over-allotment option for a further $75 million.

Alcoa, a Pittsburgh-based aluminum producer, said it will use proceeds to repay outstanding indebtedness under its senior unsecured 364-day revolving credit facility, with any remainder for general corporate purposes.

The offerings are part of a series of operational and financial actions the company is implementing to improve its cost structure and liquidity.

SK Telecom prices

Terms of the convertibles of SK Telecom Co. Ltd., a Regulation S deal that also made a debut Thursday, made an interesting comparison to Alcoa's issue. SK Telecom's converts were priced at 1.75% with an initial conversion premium of 25%.

Seoul-based SK Telecom priced $332.528 million of five-year convertible bonds, via Barclays Bank, Citigroup, Credit Suisse and Nomura International.

Proceeds will be used to finance a planned redemption of bonds that are maturing in May.

SK Telecom is a mobile phone operator with 50.5% of the market in Korea.

Moody's Investors Serve assigned an A2 rating to the SK Telecom convertibles and Fitch Ratings assigned a rating of A to the convertibles, with both rating agencies citing the company's key position in the Korean mobile telecommunications market.

Citigroup tightens up

Citigroup's 6.5% convertible preferred shares closed their gap below parity to just 6.5 points as the preferred edged up to 27 and the common stock fell. On Wednesday, the preferreds were 14 points below parity.

The bank has offered to exchange 13.0769 shares of common stock for each preferred share. At the same time, convert arb players confronted a massive borrow problem.

"The arb opportunity that they created caused the massive short interest that caused the borrows to get pulled. People are struggling to cope with what was an irresistible carrot at 30-plus cents per share on the arb versus the preferreds," a sellside trader said. "[It] really became unavoidable to many, especially in the hedge fund world."

Although Citigroup common shares came off on Wednesday to $2.60, down 16%, it had previously tripled in value in a couple of days.

"People complain about naked shorting, which was allowed to go on with impunity forever. Now here's a legitimate arb that the company wants to occur, the government wants it to occur and yet no precautions were taken to prevent buy ins?" a sellside trader complained.

Johnson Controls adds

Johnson Controls' 11.5% convertible preferreds traded at 61.75 versus a share price of $11.60 on Thursday, while the Johnson Controls' convertible bonds traded at 117.5 versus $11.25.

Shares of the Milwaukee-based energy efficiency parts supplier gained $0.90, or 6.6%, to $11.34.

The stock is up from $8 when the convertible issue was priced. On Thursday, the government said that funds would be made available from the Troubled Assets Relief Program, or TARP, to provide financing for auto parts that suppliers have shipped to the Big Three automakers but which have not yet been paid for.

Mentioned in this article:

Alcoa Inc. NYSE: AA

Citigroup Inc. NYSE: C

Johnson Controls Inc. NYSE: JCI

SK Telecom Co. Ltd. NYSE: SKM

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