Transocean strengthens on buyback news; Superior Energy holds gains; American Equity quiet

By Rebecca Melvin

New York, Sept. 16 - Thursday's convertible bond market was dominated by trading in Transocean Ltd., which saw its convertibles strengthen on news that the Switzerland-based offshore oil-services company plans to repurchase the convertibles with funding from a public offering of straight notes.

The convertibles of Superior Energy Services Inc., a New Orleans-based oilfield-services company, were also in trade and held on to gains notched Wednesday after the U.S. Department of the Interior said it is requiring oil and natural gas producers to plug about 3,500 oil wells in the Gulf of Mexico that have been idle for five years or more and take down platforms.

Ford Motor Co. was also active and higher after positive comments by its chief executive early Thursday, a New York-based sellside analyst said.

Elsewhere, Minneapolis-based hair salon franchise Regis Corp. traded better on a dollar-neutral basis by about 0.625 point. It wasn't certain why the bonds were more active than usual.

Volcano Corp.'s new 2.875% convertibles extended gains from their debut on Wednesday, with one sellsider reporting a trade at 107 versus a share price of $24.30. That compared to a rise to 105 bid, 105.25 offered on the debut of the Rancho Cordova, Calif.-based vascular measuring company's $100 million convertibles offering.

In the primary market, American Equity Investment Life Holding Co. wasn't seen in the gray market ahead of pricing a planned $150 million of convertibles via J.P. Morgan after the market close Thursday; but the deal was seen cheap by analysts.

The convertible bond market handily absorbed about $1.8 billion in new issuance on Wednesday given that it was the first big day in issuance for many months.

"The market swallowed the paper pretty easily. People are anxious for new paper in the market, so it was definitely good," a New York-based sellside analyst said.

American Equity seen cheap

American Equity's $150 million of five-year convertibles, talked to yield 3.25% to 3.75% with an initial conversion premium of 22.5% to 27.5, was seen 3.2% cheap at the mids using a vol. of 30%, according to a Connecticut-based sellside analyst.

The credit spread that analysts were agreeing on was somewhere between 700 basis points to 800 bps over Libor.

A drop Thursday in the underlying shares of the West Des Moines, Iowa-based underwriter of annuities and life insurance products might shake up the inputs a bit, one sellsider said.

But a second sellsider said the 8% lower stock price to $10.00 wouldn't affect his valuation.

Pinpointing a credit spread on American Equity was no easy task, one sellsider said, as the company has two existing convertibles that never trade, and so pricing wasn't reliable, and the company has few comparables.

The company's existing convertibles due 2013, or the longer-dated issue, compared to notes due 2011, is in the money and not a good credit indication, he said.

There was one similar-sized company that does life insurance products and annuities, and that company's debt looked to be about 650 bps over Libor.

Given that the credit metrics of American Equity were weaker, the higher spread looked to be merited.

Most entities selling annuities are part of large, multinational companies.

Another sellsider said that given the amount of cash that American Equity is sitting on, he would put the spread on the tighter end of the 700 bps to 800 bps range.

Also given that the other issues priced this week were priced pretty aggressively and the bonds moved up off the deal, he thought the issuer and its underwriters might try to sell it tighter.

Transocean jumps

Transocean's news that it's doing a straight deal to repurchase its convertibles boosted the convert paper.

The company said it plans to repurchase its 1.625% series A convertible senior notes due December 2037, its 1.5% series B convertible senior notes due 2037 and its 1.5% series C convertible senior notes due December 2037.

The company said that holders of the series A convertibles may require it to purchase the notes in December.

The Transocean A's traded at 99.75, a sellsider said.

"Basically the whole [capital] structure rallied on the news," a sellsider said.

The C's are the longest dated with a put in 2012.

Transocean intends to repurchase a portion of the 1.5% series B and C convertibles through repurchases in the open market, in privately negotiated transactions or in tender offers.

The company expects to fund the repurchases with proceeds from a public offering of senior notes.

Transocean is a wholly owned subsidiary of Transocean Ltd., a Switzerland-based offshore drilling contractor and provider of drilling management services worldwide.

Meanwhile, Superior Energy paper moved up after the government ordered non-producing wells shut, a New York-based sellsider said. The stock was up 9.6% on 4.7 times average volume, and the convertibles benefitted as well, moving to 97.375, up nearly a point, which is a 3.69% yield to put and a 67.4% premium off the close, he said regarding Wednesday's trading activity.

"We saw a few prints on that and I can see that the prints were higher for sure," a New York-based sellside analyst said.

Mentioned in this article:

American Equity Investment Life Holding Co. NYSE: AEL

Ford Motor Co. NYSE: F

Regis Corp. NYSE: RGS

Superior Energy Services Inc. NYSE: SPN

Transocean Ltd. NYSE: RIG

Volcano Corp. Nasdaq: VOLC

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