Cash America, Wyndham add in calmer debuts; Key stronger on exchange, US Steel edges back up

By Rebecca Melvin

New York, May 14 - Cash America International Inc. Thursday added a point or so on its secondary market debut after pricing a day early, and as its underlying shares edged downward. Wyndham Worldwide Corp.'s new convertibles opened stronger with a gain of 3 or 4 points, but were reported as quieting pretty early in the session.

They were both "rather quiet," a Connecticut-based sellsider said of trading activity.

The initial gains were not as dramatic as those notched by many new issues priced since the convert market reopened in earnest in March. Investor demand is still described as very healthy, and terms are thus coming more in line and less cheap, reflecting that confidence.

KeyCorp's convertible preferreds were better after the Cleveland-based regional bank exchanged common stock for $113.97 million shares of its convertible preferred stock.

United States Steel Corp., which priced more than $850 million convertibles on April 28, has bounced off highs of around 120 to trade actively in the past two days in the 106 bid, 108 offered range. On Thursday, the paper appeared a little stronger than on Wednesday. Barclays Capital analysts recommended the name as a convert arb opportunity in research published Thursday.

Cash America clears

Cash America's newly priced 5.25% convertibles was seen at 101.25 bid, 102.5 offered versus a share price of $19.75 before noon ET on Thursday, and near the close were seen just a tad over 101.

Shares of the Fort Worth, Tex.-based pawnshop owner and operator ended well off their lows for the day, but still down 35 cents, or 1.75%, at $19.65.

There had been no real gray market in the name on Wednesday, and several sources said they did not see the paper on Thursday.

"I am telling people avoid the Cash Americas and buy the Dollar Financial 2.875% convertibles. It's a better company and a bigger issue, and a much better yield to put," a New York-based sellside trader said.

But an analyst pointed out that there is a substantial amount of term loan debt due ahead of the Dollar Financial 2.875% convertibles.

The Connecticut-based sellside analyst said he liked Cash America on the surface, but he pointed out some negatives associated with the issuer, such as that there is potential future litigation risk and that the company is banned from operating in several states.

"It's tied heavily to gold prices, so it's an interesting way to play gold in the convert space," the analyst pointed out.

The issuer, which operates pawnshops in the United States and Mexico, priced just $100 million of 20-year convertibles after the close of markets Wednesday to yield 5.25%, with an initial conversion premium of 27.5%.

The pricing came a day ahead of schedule since it was supposed to price after the close Thursday. An origination source said investor demand has been very healthy and that is assisting issues, their terms and "where deals clear at."

Cash America's Rule 144A offering priced at the aggressive end of talk for the coupon, which was 5.25% to 5.75%, and beyond the aggressive end of talk for the initial conversion premium, which was 20% to 25%.

Jefferies & Co. was bookrunner of the notes, with JMP Securities acting as co-manager. It was Jefferies' first convertibles deal of the year.

The bonds will be non-callable for five years, with investor puts in years 2014, 2019, and 2024.

Proceeds are earmarked for paying down debt.

Wyndham is welcomed

Wyndham's newly priced 3.5% convertibles opened up at about 103 bid, 104 offered and were later seen at 102.75 bid, 103.75. Shares of the Parsippany, N.J.-based hotelier and time share operator closed little changed at $10.60, down a cent, after opening up weaker.

Wyndham priced $200 million of three-year convertible notes after the close Wednesday to yield 3.5% with an initial conversion premium of 20%.

The off-the-shelf deal priced at the midpoint of talk.

Concurrently, Wyndham also priced $250 million of five-year senior unsecured straight notes.

Credit Suisse Securities (USA) LLC, J.P. Morgan Securities Inc., Merrill Lynch & Co. and Citigroup were joint book-running managers for the convertible notes offering.

The notes are non-callable with a standard change of control put.

Wyndham also entered into convertible note hedge and warrant transactions with affiliates of one or more of the underwriters.

Proceeds are earmarked to pay down debt.

KeyCorp strengthens on exchange

KeyCorp's 7.75% series A non-cumulative perpetual convertible preferred stock was seen at about 77, which was stronger, after the regional bank did a private swap of preferreds for common.

The bank said holders of $113.97 million of its convertible preferred stock agreed to take common stock in exchange.

In total, the holders exchanged 1,139,700 preferreds for 13,670,362 shares of common stock, which represents 2.64% of KeyCorp's common stock outstanding as of Tuesday.

The exchanges are expected to settle by Monday, according to an 8-K filing with the Securities and Exchange Commission.

U.S. Steel adds in active trade

U.S. Steel's 4% convertibles due 2014 traded at 108 versus $27.25 on Thursday, which was up from 106 bid, 107 offered on Wednesday. Shares of the Pittsburgh-based steelmaker were up by 68 cents, or 2.6%, to $27.39 at the close, in lackluster volume.

The convertibles spiked up to about 120 during their first week after pricing, but have pulled back in tandem with their underlying shares since about May 4.

The convertibles were very active Wednesday and Thursday.

On a pure valuation basis the issue is quite cheap, Barclays analyst Venu Krishna told Prospect News. So it could be part of any diversified valuation. But even if you have no directional view it looks good for convert arb.

The big rally upward after pricing, Krishna attributed to new issue valuations coming cheaply, a rally in high yield and credit in the last few weeks, and "a real paucity of paper in the convert market."

Based on fundamentals, U.S. Steel has some headwinds. It has high operating leverage and if earnings and revenue continue to be weak due to weak global demand for steel, it will suffer, even more than its peers perhaps because it is an integrated steelmaker as opposed to a mini mill operator.

But that said, it was formerly an investment-grade name, Krishna pointed out. And if the environment improves, U.S. Steel should benefit more than the other names in the sector

Following the company's first quarter results, where the company declared a loss of $3.84 per share against consensus expectations of $1.67 loss per share, both S&P and Moody's downgraded the company's debt to non-investment grade.

The Barclays team recommends a duration neutral ratio between the convert and the CDS, which means adjusting for interest rate sensitivity

"The equity appears to be cheap relative to the sector, but we believe it continues to be exposed to the macro environment because of its operating and financial leverage," the Barclays analysts wrote in their note, called US Steel: Arb Opportunity.

"At current levels, the convertible bond implies a vol of about 40%, much lower than the 68% priced into the listed options, and therefore does not seem to adequately price these uncertainties," the analysts wrote. To take advantage of the relative cheapness of the convert, Barclays recommends going long the convertibles, delta hedged and long CDS.

"We find U.S. Steel converts to be trading cheap relative to theoretical price on account of the listed options market pricing 5-year ATM options on U.S. Steel at an implied vol of 68% based on an extrapolation of the available option maturities," they wrote.

The company guided to weak visibility on demand going forward when it reported first-quarter earnings.

The company does not have any amount drawn under the credit facility. While this has relived some of the pressure in the short term, the company has about $741 million of debt coming due in 2011 and in the absence of better utilization rates and demand environment, the focus on covenant compliance and thereby credit may increase.

"I'd like to thing that our research note created more interest," Krishna said, when asked what was pushing up the U.S. Steel convertibles Thursday. "But even yesterday it was trading a lot when the market was collapsing. But we've had a lot of expressed interest."

Mentioned in this article:

Cash America International Inc. NYSE: CSH

KeyCorp NYSE: KEY

United States Steel Corp. NYSE: X

Wyndham Worldwide Corp. NYSE: WYN

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.