ON Semi, Pioneer gain on earnings; Sovereign higher; Sprint down, but new Sprint deal, Massey up in gray

By Rebecca Melvin

New York, Aug. 6 - Activity in the convertible bond market Wednesday was driven by earnings news and a couple of deals on the calendar that encouraged investor attention, market sources said.

"There are more bids across the convertibles universe at this point in time," a New York-based sellside trader said regarding the current market.

And while trading is generally concentrated among a handful of convertible stalwarts, it seems that much of the trepidation that has hindered the market of late has begun to fade, he said.

ON Semiconductor Corp. gained after the semiconductor-component maker reported record revenue for the second quarter, but saw net income lower compared with the year earlier period.

Pioneer Natural Resources Co. was also higher after the oil and natural gas producer reported that second-quarter sales and profit jumped on increased daily oil and gas sales and strong production.

Sovereign Bancorp, which reported earnings last week, was noticeably to the upside in light of the generally mixed performance in the financial sector.

The fallout that hit the market after Freddie Mac reported much worse-than-expected earnings early Wednesday was relatively muted and highlighted expectations that there is light at the end of the tunnel for financials, the sellsider said.

In the primary market, Sprint Nextel Corp., which announced plans to price $3 billion of cumulative perpetual convertible preferreds after the close Thursday, gained in the gray market to a plus 0.75 point bid. Earlier in the session, the bid was issue price plus 0.50 point.

The older Sprint Nextel 5.25% convertibles were active and slightly off previous levels, perhaps indicating that investors were selling the paper to get into the new preferred.

Massey Energy Co., which planned to price $600 million of seven-year convertible senior notes after the market close Wednesday, saw gray market activity in the second half of Wednesday's session.

The deal was said to be at issue plus 0.75 point to 1.75 point in the street.

Final terms on the notes were not expected to be released until early Thursday, a syndicate source said late Wednesday.

ON Semiconductor gains on earnings

ON Semiconductor's 2.625% convertible senior subordinated notes due 2026, the company's largest issue at $485 million in size, traded at 115 and 115.5 versus a share price of about $10 during the session. It was indicated closing slightly higher at 115.6 versus a closing share price of $10.07.

That compared to quotes at 109 bid, 110 offered, versus a stock price of $9.20 in mid-July.

ON Semiconductor's 1.875% convertible senior subordinated notes due 2025 were seen at 142.5. And the ON Semiconductor 0% convertible senior subordinated notes due 2024 were seen at 95. But these two issues were less actively traded.

Shares of the Phoenix-based semiconductor company (Nasdaq: ONNN) added $0.64, or nearly 7%.

The convertibles and shares jumped after the company reported revenue of $562.7 million for the quarter ended June 27, up from $381.2 million for the comparable quarter of 2007, beating guidance.

But net income for the quarter was lower at $44.6 million for the second quarter 2008, compared to $65.4 million for the second quarter of 2007.

Regarding its outlook, ON Semiconductor said that based on product booking trends, backlog, and other trends, revenue for the third quarter should be $570 million to $585 million.

Pioneer gains on earnings results

Pioneer Natural's 2.875% convertible notes due 2038 jumped to 120.5, versus a share price of $58.42 on Wednesday, up from 116.5 versus a share price of $55.40 on Tuesday.

The Irving, Tex.-based oil and natural gas company missed estimates, but raised its capital expenditure and production targets guidance. The company is involved in production sites in the United States, South Africa and Tunisia.

Lower-than-expected price realizations more than offset better-than-expected production volumes, according to analysts in a CreditSights research note.

But the company lowered total debt by $161 million on the quarter to $2.6 billion, and management is targeting a further reduction in debt to capital, CreditSights said.

Production was higher, driven by drilling and operational efficiencies and incremental Wolfberry production in Spraberry, according to the CreditSights report.

Pierre Shale drilling successes and acquisitions integration in Raton, drilling efficiencies, higher rate wells and infrastructure expansion in the Edwards Trend, plus the Cherouq discoveries and infrastructure expansion in Tunisia boosted growth.

As a result of these gains, management is boosting capital spending by 30%, or $300 million, to $1.3 billion, and "commensurately raised its production growth target for the year up to 18% to 20%, from 14% previously," the report said.

Shares of the oil and gas company (NYSE: PXD) gained $3.02, or 5.5%, on Wednesday.

Sprint lifts in the gray

The Sprint 5.25% convertibles due 2010 traded at 97, down about 0.125 point on Wednesday after word that the Overland Park, Kan.-based wireless carrier planned to price $3 billion of perpetual convertible preferreds.

The former Nextel 5.25s trade like a straight bond, and they were active at 97, compared to where they had been steadily in the 97 bid, 97.125 offered range previously, a New York-based sellside trader said.

The new preferreds themselves, which were talked at a 4.75% to 5.25% dividend, with an initial conversion premium of 25% to 30%, were seen in the gray market up 0.75 point from issue price.

The Rule 144A deal, being sold via joint bookrunners Deutsche Bank, Goldman Sachs, Citigroup and JP Morgan, was expected to price after the market close Thursday.

The perpetual preferreds have a soft call in year five with a hurdle of 130%.

"I think the market has spoken," a Connecticut-based sellside analyst said regarding the activity in the Sprint issue in the gray market early compared with the non-activity early in the Massey deal.

Massey was seen coming cheap, but its large premium might discourage some investors from playing the name, the sellside analyst said.

Both issues were supposed to have solid borrow. But the larger coupon and lower premium of the Sprint issue was favored, at least early in the session.

Proceeds of the Sprint issue are intended for general corporate purposes, which may include, among other things, debt reduction.

Sprint shares (NYSE: S) fell sharply Wednesday, down $1.21, or 14%, at $7.34.

Massey seen 3% to 6% cheap

The new Massey deal looked between 3% and 6%, cheap, depending on what credit spread was being used, versus a volatility capped at 45%. The company's shares are highly volatile and the actual volatility is well above 45%.

The underwriters were using Libor plus 350 basis points for the credit spread, according to a New York-based sellside analyst. Those inputs made the deal 6% cheap.

In the second half of the session, activity in the gray market was reported, with bids up about a point.

Nevertheless the terms that were talked - a coupon of 3% to 3.5% and an initial conversion premium of 40% to 45% - were a little surprising, the Connecticut-based analyst said.

"It comes cheap no matter what spread you use, but the premium is so high, outright investors have to be very comfortable about where energy is going to be," he said.

A neutral hedge is around 75%, he said.

Coal is seen as an oil substitute, and tends to move in tandem with oil, the analyst noted.

"You just don't know where energy is going to go," the analyst said, pointing to the sharp pullback in oil and natural gas prices in recent weeks.

Massey has already priced much of their production for 2009 and 2010, and they "are bragging" that they left a piece open, hedged to the downside, the analyst said.

Back in March, Massey's share price was about $34, and then it ran all the way up to more than $90 a share, and now this issue is pricing off about $63 a share, he added.

Concurrently with the notes, Massey plans to sell more than $200 million of stock.

Massey, a Richmond, Va.-based coal producer, said it will use proceeds of both deals to fund the repurchase of its 6.625% senior notes due 2010 and for general corporate purposes, working capital or acquisitions.

On Tuesday, Massey started a cash tender offer for its outstanding $335 million of 6.625% senior notes due 2010. The company is offering $1,016.56 plus interest for each $1,000 par note to holders who tender by Aug. 18, and the same amount less $25 for those who tender after that. The tender offer expires at midnight ET on Sept. 2.

"I think you'll see it at 102 to 103 on these terms," the analyst said of initial trading in the secondary market.

"It's good to have at least this trickle of new deals, since there weren't any before," he said.

UBS Investment Bank and J.P. Morgan Securities Inc. are the bookrunners of Massey's off-the-shelf offering.

The weak U.S. dollar, high ocean shipping rates and other factors have driven the price of Appalachian coal sold to electricity generators up to $140 a ton, from $45.60 a year ago.

In addition, strong international steel production has pushed the price of Appalachian metallurgical coal used to fire blast furnaces as high as $250 a ton, from about $90 a ton last year.

Massey has increased pricing expectations to $84 to $92 per ton for 2009, from an earlier range of $65 to $74 per ton. For 2010, Massey is projecting a range of $115 to $132 per ton, up from $75 to $87 per ton.

Massey, which posted earnings July 31, reported record second-quarter operating results that were offset by a litigation charge.

Produced coal revenue increased 38% to $710.3 billion, produced coal increased 8%, and operating cash margin per ton increased 83%.

The company is planning to construct additional preparation plants.

During the quarter, the company booked a pre-tax charge of $245.3 million related to contract litigation with Wheeling-Pittsburgh Steel Co.

Contrary to the shares of many other coal companies on Wednesday, Massey's stock (NYSE: MEE) was down $2.52, or 3.8%, at $63.38.

The shares of other coal companies with convertibles were higher, including Patriot Coal Co., which was up 8%; Peabody Energy Corp., which was up 5%; and Alpha Natural Resources Inc., which added 2.7%.

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