U.S. Steel, SunPower price; financials ease amid stress test chatter; Smithfield trades off

By Rebecca Melvin

New York, April 28 - Convertibles players Tuesday eyed two new deals that priced as expected after the close of markets, including an issue from United States Steel Corp., which was well liked and upsized by more than 100%, and one from SunPower Corp., for which interest was hampered by poor stock borrow.

SunPower's existing 0.75% convertibles were pushed higher, however, by the prospect of additional funding for the solar power company. The shorter-dated 0.75% securities are putable in 2010.

The convertible preferred shares of Bank of America Corp. and other financial services companies were a little lower, but mostly holding their own as investors continue to await the government's stress test results on the country's top 19 banks.

"They are acting far better than I feared in light of the chatter," a New York-based sellsider said of the financial preferreds.

The Wall Street Journal reported Tuesday that early results of the stress tests show that B of A and Citigroup Inc. will have to raise additional capital.

Otherwise, convertibles market trading was said to be fairly quiet.

Pork producer Smithfield Foods Inc. saw its convertibles trade lower amid fears that its business may be affected by the swine flu outbreak, or speculation - denied by the company - that it may even be associated with the origins of the outbreak.

In a release after the close, the company reiterated that it had found no clinical signs or symptoms of the presence of North American influenza in the company's swine herd or its employees at its joint ventures in Mexico, and noted that it routinely vaccinates its animals and tests for infection.

Dendreon Corp.'s convertibles were quiet, but getting a look from players as the Seattle-based drug development company's shares plummeted and were halted pending news related to its Provenge Phase 3 trial results, which turned out to be positive.

In the primary market, a $300 million issue was launched by Textron Inc.

U.S. Steel flies off the shelves

U.S. Steel priced a greatly upsized $750 million of five-year convertibles at the tight of talk, to yield 4% with an initial conversion premium of 25%.

The deal, which was originally going to be $300 million in size, was said to be well-liked by convertibles and equity players alike.

"It's a name like Alcoa. Everyone's going to be interested in them," a sellsider said.

During the session, the issue was seen trading in the gray at 102.5 to 103, and later in the day it was quoted at 103 bid, 105 offered.

The integrated steel producer based in Pittsburgh concurrently priced an issue of common stock at $25.50 per share.

J.P. Morgan Securities Inc., Morgan Stanley & Co. Inc. and Merrill Lynch, Pierce, Fenner & Smith Inc. were joint bookrunners for the common stock offering; while J.P. Morgan, Morgan Stanley and Goldman, Sachs were joint bookrunners of the convertibles.

The company plans to use proceeds to repay amounts outstanding on a $500 million three-year term loan due 2010. Any remaining proceeds will be used to repay a $500 million five-year term loan due 2012 and for general corporate purposes.

SunPower upsizes too

SunPower priced an upsized $200 million of five-year convertibles after the close of markets Tuesday to yield 4.75% with an initial conversion premium of 20%.

Initially the offering was talked at $175 million in size. There is a greenshoe of $30 million, which was upsized from $26.25 million.

The bonds priced at the midpoint of talk, which was 4.5% to 5% for the coupon and 17.5% to 22.5% for the initial conversion premium.

Concurrently, SunPower priced nine million shares of common stock.

"Sounds like the Sunpower has no borrow unless the underwriters create one, which is what they are expected to do," a Connecticut-based sellside analyst said.

But even if the underwriters do provide the borrow, the deal can and should do well out of the gate, but promises to be pretty illiquid after that, the analyst said.

SunPower is a San Jose, Calif.-based maker of solar cells, solar panels and solar systems.

"There is a lot of competition in the space, but SunPower is thought to have the best technology," the analyst said.

SunPower's existing 0.75% convertibles were seen trading at 89 bid, 90 offered on Tuesday, compared to 86 bid, 87 offered previously. Its yield to put moved down to 9.4%.

Shares of SunPower traded down $1.43, or 5.95%, to $22.61 on Tuesday.

Financials steady to lower

Bank of America's 7.25% convertible preferreds were seen closing Tuesday around 555, compared to 575 on Monday and 543.5 last Thursday.

Shares of the Charlotte, N.C.-based bank closed down 77 cents, or 8.6%, at $8.15.

On Tuesday, The Wall Street Journal reported that early results of the government's stress tests have shown that Bank of America and Citigroup will need to raise additional capital.

Bank of America's capital shortfall amounts to billions of dollars, while Citigroup's shortfall remains unclear, the Journal said, citing people familiar with the matter

The convertible financial preferreds have been trading actively, with some, particularly the mandatories acting as an equity surrogate, a New York-based sellside analyst said.

"People are swapping out of equities into the mandatories. They are asking how many more exchanges there will be; who is going to follow suit in a Citigroup deal. People [want to see] what the Citigroup ratio is going to look like. Even though you think you know, you want to see that in writing," the sellside analyst said.

Smithfield lower

Smithfield's 4% convertibles due 2013 traded at 74 versus a stock price of $9.375 on Tuesday, compared to 80 versus $10.32 on Friday. Shares of the Smithfield, Va.-based hog and pork producer ended higher on the day, up 40 cents, or 4.4%, to $9.44.

Smithfield's stock was hit on Monday on news that international health officials were inspecting its jointly owned and contracted hog facilities in Mexico as a possible source of the recent outbreak of flu.

The current outbreak has been described by the World Organization for Animal Health as a "North-American influenza" with characteristics of "swine, avian, and human components" and it is not by contact with pigs.

The timing of the outbreak was described as "unfortunate for the pork industry" by independent credit research firm, Gimme Credit.

The pork industry has been trying to curb over-production in step with falling demand, Gimme Credit analyst Vicki Bryan wrote in a research note.

"Smithfield is in better shape this year to meet this unexpected challenge. Debt is lower and operating margins have improved. It continues to reduce the size of its hog herd, with a 10% reduction accomplished as of December 31," Bryan wrote.

Gimme Credit sees the credit as stable. "Smithfield was stuck with a massive oversupply of hogs 2006-2008, just as feed costs were rising to record levels. It has made encouraging progress by slashing its hog herds, selling its beef production operations, and raising cash. We expect credit quality to improve in 2009," the research note said.

Dendreon quiet amid stock drama

Dendreon's 4.75% convertible senior subordinated notes due 2014, which are deep in the money, weren't seen quoted Tuesday, according to several sources.

The issue is a relatively small $85 million in amount outstanding.

The paper had been around 50 early this month, but shot up to 161 bid, 163 offered on April 16 when the company said its phase 3 study of Provenge in men with advanced prostate cancer met its primary endpoint of significantly improving overall survival compared to a placebo.

On Tuesday, the data were presented at the American Urological Association Annual Meeting.

And the finding was that Provenge extended median survival by 4.1 months compared to a placebo to 25.8 months versus 21.7 months.

Provenge improved three-year survival by 38% compared to a placebo, and reduced the risk of death by 22.5% compared to a placebo.

The results confirm the clinical value of Provenge to prolong survival in patients with advanced prostate cancer, according to the company's release.

Prostate cancer is the most common non-skin cancer in the United States and the third most common cancer worldwide. More than one million men in the United States have prostate cancer, with an estimated 186,320 new cases and approximately 28,660 men expected to die from the disease in 2008

Shares of Dendreon plummeted prior to the results being unveiled at 2 p.m. ET. Nasdaq halted trade and investigated the extremely low trades, but later said it would let the trades stand. It wasn't clear why the shares dropped so precipitously.

Textron to price

Textron an aircraft, industrial and finance company based in Providence, R.I., plans to price $300 million of four-year convertible senior notes after the close of markets on Wednesday.

The bonds were talked to yield 5.25% to 5.75%, with an initial conversion premium of 20% to 25%, according to a syndicate source.

Concurrently, Textron intends to offer about $200 million, or 19 million shares, of common stock.

J.P. Morgan Securities and Goldman Sachs are joint bookrunners of the registered offerings.

The bonds, with a $1,000 par, will be non-callable for life, with no puts. They will be convertible, under certain circumstances, into cash, shares of Textron common stock, or a combination of cash and shares, at the option of Textron.

Proceeds will be used to repay debt and purchase a call spread.

Mentioned in this article:

Bank of America Corp. NYSE: BAC

Dendreon Corp. Nasdaq: DNDN

Smithfield Foods Inc. NYSE: SFD

SunPower Corp. Nasdaq: SPWRA

Textron Inc. NYSE: TXT

United States Steel Corp. NYSE: X

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