Coinstar, Jaguar add in gray, price at rich end; Photronics up in gray; airlines busy

By Rebecca Melvin

New York, Sept. 10 - Convertibles players weighed three new deals in the market ahead of final pricing Thursday, with the two larger issues, Coinstar Inc. and Jaguar Mining Inc., bid higher in the gray market and pricing at the rich end of talk that was tightened during the session.

Coinstar was plus 2 points in the gray market, and Jaguar Mining was plus 1 point in the gray market.

Photronics Inc.'s $50 million of five-year notes were plus 2 points in the gray, but pricing wasn't available at Prospect News' deadline.

In the secondary market, airline names were in focus after a bullish report on the sector from J.P. Morgan analysts, who cited mending fundamentals that should push 2010 airline revenue levels to positive 5.5% from negative 17% in 2009.

In addition, the J.P. Morgan analysts, including airline equity analyst Jamie Baker and airline/ aircraft credit analyst Mark Streeter, said they didn't expect any bankruptcies in the sector for the foreseeable future, assuming stable demand and fuel.

UAL Corp.'s convertibles gained several points while its stock surged 18%; and US Airways Group Inc.'s were higher as its shares gained 12% on the day.

Tech Data Corp. convertibles extended gains in strong volume for a second consecutive day as its stock mostly stood still after running up on Wednesday.

USEC Inc. improved amid news that the enriched uranium provider inked a contract with Exelon Generation Co. LLC to buy separative work units from its American Centrifuge Plant.

Coinstar prices at tight end

Talk on the $175 million Coinstar offering of five-year convertible senior notes was tightened toward the end of the session to 4% to 4.25% for the coupon and 32.5% for the premium, down from 4.25% to 4.75%, with an initial conversion premium of 27.5% to 32.5%. After the market close, the paper priced at 4% with a premium of 32.5%

The deal had initially modeled 7% cheap and at least one source "had a feeling" it would be re-priced.

"It has pretty good demand; it's a decent credit; and the company is known through the equity side. It's pretty easy to understand its businesses: anyone who goes to the grocery store sees Coinstar, the red box there," a New York-based sellsider said.

He said the company has steady EBITDA and a clean balance sheet, and he modeled it 7% cheap using a credit spread of 650 basis points over Libor with a vol. of 40%. Another source put the credit spread a little wider at 775 bps over Treasuries.

After re-pricing the Coinstar deal was seen about 4.5% cheap.

Placing was seen going mainly to the outright crowd, probably due to the fact that it is an easy business for people to get their arms around and there was some skittishness that it would be re-priced, a source said. Plus there was talk that people had borrow problems.

The paper had a full slate of underwriters including Morgan Stanley, Bank of America, Merrill Lynch, Jefferies & Co., and RBC Capital Markets. Co-managers are J.P. Morgan, Wells Fargo, KeyBanc Capital Markets and Merriman Curhan Ford & Co.

Jaguar upsized, Photronics also seen cheap

Jaguar's $110 million Rule 144A offering of five-year convertible, which was seen up 1 point in the gray market, was upsized to $150 million of notes, pricing with a 4.5% coupon and a 26.24% premium.

The deal talk was tightened to 4.5%, with a premium of 25%-27.5%, which represented a boost of the premium with the coupon pinpointed at the rich end. Original talk was 4.5% to 5% for the coupon with a 22.5% to 27.5% premium.

The smaller gold mining concern has few comparables given the large cap names like Freeport-McMoRan and Newmont Mining in the space. But it was seen modeling at 101 using a credit spread of 1,100 basis points over Libor and capping vol. at 45%.

"That's going to disappear to the outright as well. That's the way they've gone. The last crop of deals in April and May went that way," a sellsider said.

Fewer players were looking at Photronics due to its smaller, $50 million size; and terms had not been set by Prospect News' deadline.

UAL, US Airways up

UAL's 5% convertibles due 2021 traded up a few points, changing hands at 63 versus a share price of $7.25.

UAL's 4.5% convertibles due 2021 traded at 56 versus the same $7.25 stock price.

Shares of the Chicago-based air carrier surged $1.15, or 18%, to $7.60 in extra heavy volume.

J.P. Morgan analysts wrote: "We simply cannot ignore recent economic data and growing evidence of global economic improvement. As such, we believe the industry is on the verge of turning a financial corner and would suggest that risk-tolerant investors begin adding more aggressively to their existing airline equity holdings,"

But despite the fact that 2004-2008 annual industry revenue growth was about 6%, and 2009 has a forecast of negative 17%, "we cannot bring ourselves to model greater than 5.5% recovery next year," but they added that with some luck their revenue forecast will prove conservative.

They said their fairly bullish stance was boosted recently when J.P. Morgan's chief economist Bruce Kasman raised his third quarter 2009 gross domestic product forecast to 6.1% nominal (4% real), while maintaining his 2010 forecast of nominal 4.0% (3.2% real).

The airline analysts upgraded their airline sector credit opinion from "neutral" to "overweight."

"By no means are we recommending a 'buy everything credit related' strategy in airlines given the still precarious situation in terms of traffic, pricing, and fuel input costs. Nevertheless, our industry fundamental thesis is improved and our credit recommendations reflect this less bearish, perhaps dare we say somewhat bullish stance," they said.

For perspective, airline credit has lagged the overall rally in the credit markets since the spring in relative terms. On an absolute basis, however, airline credit trading levels have indeed strengthened along with most higher-beta, higher-risk credit instruments.

While the outlook for UAL and US Airways has arguably improved, "they aren't fully out of the woods (nor is AMR) and therefore remain at greater risk should fuel spike or demand fail to cooperate. That being said, we are more constructive on some of the credit options within their respective capital structures," according to the JP Morgan report.

Tech Data continue strong

Tech Data's 2.75% convertibles due 2026 were seen last at 103 versus a share price of $41.61, which was up from 101.44 versus $41.26 near the end of Wednesday's session.

"Tech Data was strong again. It has a pretty high. It has a solid bond floor. Because it's a good credit, there may be a mixture of outright and hedgie interest. For hedgies it's basically a bearish trade," a sellsider said of Tech Data, which was the third most active issue in trade Thursday according to Trace data.

USEC adds outright

USEC 3% convertible senior notes due 2014 traded at 71 versus $5 which looks better by more than a point on swap, according to one sellsider.

Shares of the Bethesda, Md. Surged 13.5%

Mentioned in this article:

Coinstar Inc. Nasdaq: CSTR

Jaguar Mining Inc. NYSE: JAG

Photronics Inc. Nasdaq: PLAB

Tech Data Corp. Nasdaq: TECD

UAL Corp. Nasdaq: UAUA

US Airways Group Inc. NYSE: LCC

USEC Inc. NYSE: USU

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