New Macquarie higher on strong demand; UAL slips dollar neutral; market moves sideways

By Rebecca Melvin

New York, July 10 – Macquarie Infrastructure Co. LLC’s newly priced 2.875% convertibles gained in active trade on Thursday after the New York-based infrastructure services company priced an upsized $305 million of the five-year senior notes at the tight end of revised talk.

Demand, particularly from outright players, outstripped supply, driving up the price, a syndicate source said.

The Macquarie bonds were last seen at 105 against the closing share price of $66.73. The gain on a dollar-neutral basis was roughly 5 points even though shares were off by 1%. The move was calculated to account for the fact that it is a low-delta stock.

The lion’s share of the day’s trading action was in Macquarie. But elsewhere, the airlines were pulled into focus after positive guidance from several airlines for the second quarter lifted stocks.

United Continental Holdings Inc.’s convertibles traded up on an outright basis, but contracted slightly on a dollar-neutral, or hedged, basis by 0.25 point to 0.5 point, a New York-based trader said.

A second trader said that the UAL convertibles were not going to move very much given that they are deep in the money, and the UAL 4.5% convertible notes have less than a year until maturity. UAL’s 6% convertible preferreds were also trading.

Meanwhile, RPM International Inc.’s 2.25% convertibles due 2020 were seen at 119.75 bid, 120.25 offered at the end of the day versus a closing share price of $44.93. RPM priced $205 million of the convertible notes last December, and like Macquarie, the convertibles of the Medina, Ohio-based maker of specialty chemical products traded up sharply on strong outright demand due to its appealing investment-grade rating.

Overall, convertibles market players were reducing a little risk in the early going as equities sank. But as stocks pared losses, convertibles came back in a bit.

They were “kind of moving sideways,” a trader said.

Many market pundits are signaling that investors need to be cautious following a long run up in stocks. But the result has been a see-saw action rather than weakening. The Dow Jones industrial average shed 70.54 points, or 0.4%, to 16,915.07, which was about how much it gained on Wednesday. The S&P 500 stock index lost 8.15 points, or 0.4%, to 1,964.68; and the Nasdaq stock market lost 22.83 points, or 0.5%, to 4,396.20.

Macquarie bid higher

In the early going, the Macquarie bonds were seen at 104.125 or 104.25 bid to 104.625 or 104.75 offered with the underlying shares at $66.80. Shares were down about 1% at that point.

The bonds closed at 105 with shares at $66.73, which was down 77 cents, or 1.1%, at $66.73.

The new bonds “started out lower but bid right up,” a New York-based trader said.

The deal, which saw significant outright demand, modeled rich at about 99.3 at the tight end of revised talk, and using a credit spread of 200 basis points over Libor and 18% vol. versus Wednesday’s closing share price, a syndicate source said.

But market players pulled their credit spreads in after S&P came out with a BBB- rating on it, a Connecticut-based analyst said.

Then models sported spreads of more like 100 bps over Libor to 150 bps over Libor. That made it “fair around 103 as they came,” the analyst said.

There was a lot of outright demand for the paper, and the price was driven higher on limited supply, a syndicate sources said.

European outright investors were big buyers of the rated paper, another market source said. “It gets out of hand pretty quick.”

The bond delta on the new notes was seen at 22% to 23%.

The deal priced late Wednesday at par to yield 2.875% with an initial conversion premium of 27.5%.

The registered, off-the-shelf deal was upsized to $305 million, up from $250 million initially talked.

Pricing came at the fixed 2.875% coupon, which was revised during two-day marketing from 2.875% to 3.375% and at the tight end of revised talk for the premium. Premium talk was revised to 22.5% to 27.5% from 17.5% to 22.5%.

There is a $45 million greenshoe, which was upsized from $37.5 million.

Macquarie also priced 10 million shares at a price of $66.50 per share, which raised $665 million. There is a greenshoe for an additional 1.5 million shares.

The convertibles are non-callable for life and have standard dividend and takeover protection.

Proceeds from the convertibles and $115 million of the shares to the sellers of International-Matex Tank Terminals will be used to acquire the remainder of IMTT that it does not currently own.

The balance of proceeds from the offerings will be used for general corporate purposes. Closing of the offering is not conditioned on closing of the equity offering or of the International-Matex Tank Terminals acquisition.

Joint bookrunning managers of the deal are Barclays, J.P. Morgan Securities LLC, RBC Capital Markets LLC, SunTrust Robinson Humphrey Inc. and Wells Fargo Securities LLC.

Co-managers are BofA Merrill Lynch and Oppenheimer & Co. The notes will not be listed on any securities exchange.

New York-based Macquarie owns, operates and invests in a diversified group of infrastructure businesses that provide basic services.

UAL slips on hedge

UAL’s 4.5% convertible due 2015 flew higher by nearly 18 points on an outright basis to 228.45, according to Trace data.

UAL’s 6% preferreds also climbed on an outright basis as UAL shares jumped $5.10, or 13%, to $45.17.

On a dollar-neutral basis, they slipped in just slightly.

UAL said in an investor update that it expects its unit revenue in the quarter ended June 30 to be up 3.5% over the year earlier. In April, UAL forecast a gain in the range of 1% to 3%.

Also American Airlines Group Inc. put out strong second-quarter profit margin guidance, and Southwestern Airlines Co. expects strong revenue.

“They didn’t move that much,” a trader said of the UAL convertibles. With less than a year to go on the 4.5% convertibles, “they will bleed in as the interest gets paid to parity.”

Mentioned in this article:

Macquarie Infrastructure Co. LLC NYSE: MIC

United Continental Holdings Inc. NYSE: UAL

RPM International Inc. NYSE: RPM

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