James River steams higher as coal curries favor; Kodak gains outright; Best Buy lower

By Rebecca Melvin

New York, March 25 - Convertibles held their own during the past week as equities regained ground lost the week before on worries related to Japan, the Middle East and Europe.

Stocks pared gains but remained in positive territory Friday after investors were cheered earlier by among other things the third-quarter estimate of gross domestic product, which came in better than expected at 3.1%.

Stocks began to push higher starting Wednesday despite headlines that remained troubling.

The rally in equities was a disincentive to convertibles action, a New York-based sellside trader said.

"Stocks are up because investors have been trained by past events to ignore headlines and trust the government to make everything all better," he said, mentioning such actions as lower rates, bailout funds, and quantitative easing.

Amid a pretty quiet Friday, James River Coal Co.'s new 3.125% convertibles deal, which upsized and priced late Wednesday, continued to steam upward, trading at 107 versus a share price of $23.50 on Friday.

The strong move in James River was attributed to demand for new issues and good appetite for coal names in the wake of devastating floods in Australia that have curbed Australia's production of metallurgical coal and after Japan's nuclear crisis that may promote a shift toward a greater percentage of global energy coming from coal-based production.

Eastman Kodak Co.'s 7% convertibles due 2017 jumped in active trade. They printed at 89, which was up 3 points outright on the day.

A New York-based sellside desk analyst said his firm traded Kodak at 89.5 versus a share price of $3.45.

Smithfield Foods, Inc.'s 4% convertibles due 2013 traded flat to higher between 125.8 and 128.3 during the session, according to Trace data.

But Best Buy Co. Inc., which is a potential takeover target, slipped again Friday in a continuation of a move sparked by the electronics retailer's fourth-quarter earnings and a lackluster forecast on Thursday.

James River rises

James River Coal's new 3.125% convertibles jumped up to 107 versus a share price of $24.50 on Friday after having gained to 101.5 on their debut Thursday.

Shares of the Richmond, Va.-based coal producer traded as high as $24.55 on Friday before settling back to $23.90, which was down 7 cents, or 0.3%.

"I think it's a result of demand for new issues and very strong interest in coal leveraged names in particular," a New York-based sellside analyst said, regarding the strong jump higher in the newly priced convertibles.

A second sellsider said that he had thought the bonds would have traded up to 103 on their debut if the underlying shares had held up on Thursday, but after James River concurrently priced 6.65 million shares of common stock at $23.50 a share, the share price dipped.

James River priced an upsized $200 million of seven-year convertible senior notes on Wednesday after the close richer than talk to yield 3.125% with an initial conversion premium of 30%.

The deal was initially talked at $125 million, and on Friday, deal size rose to $230 million after exercise of the deal's greenshoe.

In addition to the convertibles and common stock, the company also sold an upsized offering of senior straight debt due 2019.

UBS Securities LLC and Deutsche Bank Securities Inc. were the bookrunners of the Rule 144A offering.

Proceeds are earmarked to pay a portion of the purchase price of its previously announced acquisition of International Resource Partners LP. Any remaining proceeds will go to general corporate purposes, including acquiring or investing in businesses or repaying debt.

Independent mutual fund research firm Morningstar said Friday that coal stocks, which have been on the rise for the last six months, are likely to maintain upward momentum in the aftermath of the flooding that disrupted metallurgical coal shipments out of Queensland, Australia, and after the earthquake and tsunami in Japan that devastated northeastern parts of the country and severely damaged its Fukushima nuclear power plant.

In the medium term, damage to Japan's nuclear plant will slightly increase demand for thermal coal, and in the long term, there are potentially profound consequences for the global energy mix, according to a Morningstar report.

Kodak climbs outright

Kodak's 7% convertibles due 2017 traded at 89 and at 89.5 versus a share price of $3.45, which was up 3 points or better on an outright basis. It wasn't known how the paper did on a hedged basis.

Shares of the Rochester, N.Y.-based photography company settled at $3.40, which represented a surge of 8% in ultra-heavy volume amid speculation that the U.S. International Trade Commission would take a step in favor of Kodak regarding its patent infringement suit against Apple Inc., the maker of iPhone, and Research in Motion Ltd., the maker of BlackBerry.

Late Friday, the ITC did say it would review Kodak's loss in a patent battle filed in January 2010, arguing that the iPhone and Blackberry infringe a Kodak patent related to a method for previewing images.

Kodak's common stock and convertibles lost ground in late January after the ITC determined that Kodak's patent claim against Apple and RIMM was invalid.

Smithfield flat to higher

Smithfield's 4% convertibles traded up to 128.3 on Friday with its shares up 47 cents, or nearly 2%, at $24.44.

The Smithfield, Va.-based pork producer's chief financial officer, Robert "Bo" Manly, said Friday during a presentation at the Barclays Capital High Yield Bond and Syndicated Loan Conference in Orlando, Fla., that the company has the strongest balance sheet in its history after retiring more than $930 million of bonds in 2010.

The company now has $2.1 billion of debt and is working toward a goal of lowering its debt to $2.0 billion, Manly said.

With $72 million of debt maturing in August, the company will achieve its debt-reduction goal before the end of 2011.

"I think we now have a situation where the volatility of the marketplace dictates that we probably have more liquidity going forward than was necessary in the past," Manly said.

Smithfield has had as much as $1.4 billion of available liquidity on hand but believes it is positioned to scale the figure back based on its stronger earnings on the packaged meats side and lower reliance on the hog production side, he said.

Best Buy slips

Best Buy's 2.25% convertible due 2022 traded at 103 versus a share price of $28.75, and the convertibles were seen lower at 102.625 later in the session.

That compared to Thursday when the Best Buy paper traded at 103.125 versus a common stock price of $30.65 following the company's fourth-quarter results.

The common stock fell 91 cents, or 3%, to $29.22, which was on top of a 5.4% slide on Thursday.

The Richfield, Minn.-based electronics retailer said Thursday that fourth-quarter net income fell to $651 million, or $1.62 per share, year on year. But Best Buy earned $1.98 per share when restructuring costs were excluded, beating Street estimates of about $1.84 per share.

But the company's forecast of full-year profit of $3.30 per share to $3.55 per share was just short of analysts' expectations.

Mentioned in this article:

Best Buy Co., Inc. NYSE: BBY

Eastman Kodak Co. NYSE: EK

James River Coal Co. Nasdaq: JRCC

Smithfield Foods Inc. NYSE: SFD

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