Henry Schein wavers on call notice; TRW Automotive, Textron trade; Petrominerales on tap

By Rebecca Melvin

New York, Aug. 10 - The convertible bond market was quiet Tuesday, with so called "topical" names overcoming inertia enough to change hands, but with activity mostly squelched by the August vacation period and hesitation ahead of the Federal Open Market Committee meeting.

After a one-day meeting, the FOMC announced its decision to keep rates unchanged and to use proceeds from its mortgage bond investments to buy government debt.

The impact of the decision was minimal in the convert space, at the outset. The broader markets, which had been lowered earlier in the session, ended better than they started.

"I think a lot of people sat around waiting for the Fed. And now that they [the Fed] pretty much did as expected, no one wants to do anything," a New York-based sellsider said.

Henry Schein Inc. became a topical name when the company officially announced it was calling its outstanding 3% convertible contingent notes due 2034 for redemption on Sept. 3. There was a little confusion surrounding when the 20-day averaging period begins, and the Henry Schein 3% notes wavered but ended the day up about 1.125 points.

TRW Automotive Holdings Corp.'s convertibles traded at 145 versus a share price of $37.60 after Deutsche Bank downgraded the auto-parts supplier's shares to "hold" from "buy," citing the potential end of a considerable run up in the stock price. Another high-priced bond in trade was Textron Inc.

Both TRW and Textron are "cash flow trades," a New York-based sellside analyst said, and interest picked up last week regarding the possibility of flushouts after Newell Rubbermaid Inc. unveiled plans to get rid of its higher priced convertibles as part of a capital structure optimizing plan.

Symantec Corp. strengthened about 0.3 point in trade Tuesday, with the common stock in negative territory. The computer security company confirmed after the close of markets Monday that it closed its $1.28 billion acquisition of VeriSign Inc. VeriSign's 3.25% convertibles due 2037 rose to 101.625, which was up nearly a point.

In the primary market, Petrominerales Ltd. launched an offering of $300 million of six-year convertible bonds on Tuesday that were seen pricing Thursday and were talked to yield 2.375% to 2.875% with an initial conversion premium of 32.5% to 37.5%.

Overall, volume was light. Sources said that volume was lighter on Tuesday than on Monday.

Fed's decision as expected

Following its policy meeting, the FOMC said that it was keeping its target range for the Federal Funds rate unchanged at 0% to 0.25% in light of information received since June that indicates the pace of economic recovery is likely to be more modest than previously anticipated.

To help support recovery, the committee said it will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.

The committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature.

The committee also said that inflation is likely to be subdued for some time, and that conditions are likely to warrant exceptionally low interest rate levels for an extended period.

"The market started off crappy based on the data about unit labor costs and the expectation of no inflation whatsoever. In fact there are fears about a deflationary environment and a repeat of the Japanese 20-year malaise," a New York-based sellsider said.

"It was rumored that they [the Fed] were thinking of reinvesting in more mortgages, in the five- and 10-year notes. And I think that's positive from a fixed income standpoint, but not from an equity standpoint. But the market viewed it differently than I am. It's more bullish, half full kind of thing.

"People have been worried about the recovery, and clearly the market was down more before the announcement than after," the sellsider said.

Henry Schein wavers

Henry Schein's 3% convertibles due 2034 traded between 114.554 and 119.125, and at 119.125, it was up 1.4 points, according to Trace data.

Shares of the Melville, N.Y.-based health care products and services company closed up 67 cents, or 1.2%, at $54.87 on Tuesday.

Henry Schein expects to pay $240 million in cash and to issue approximately 780,000 shares of its common stock in connection with the redemption.

"The averaging period was confusing. These are trading right around parity or a little below. They go to call them, and the question is whether people will take par or convert. Most people are going to convert. But there was confusion in the market today about the averaging period being used to calculate that," a New York-based sellside analyst said.

"It wasn't clear if the period started last Thursday or Monday or today to have the 20-day averaging period, and that makes a difference versus where it was," the sellsider said.

Hopefully that confusion will be cleared up sooner rather than later, he said.

"Redeeming the convertible notes will eliminate one of our more expensive sources of capital, and will avoid the potential for future dilution on our earnings per share," executive vice president and chief financial officer Steven Paladino said in the release.

TRW, Textron trade

TRW's 3.5% exchangeable senior notes due 2015 traded at 145 versus a share price of $37.60 on Tuesday, according to a New York-based sellsider.

The Textron 4.5% convertibles due 2013 traded at 167 versus a share price of $20.00.

These higher-priced, in the money convertible names that have seen their shares move up a lot since issue are candidates for being paid down by the issuer, or flushed out.

"These are cash flow trades, and they trade based on the chance that the company calls them, or can they not call them. The cash flow trades are guesses on what they think. And there are other investors too; they are not paying much premium, and some swap from the common into the convertible," a New York-based sellsider said.

Last week when Newell Rubbermaid announced it would optimize its capital structure, and it was "going to flush those bonds and get rid of the high coupon, interest in a number of these names as flush candidates increased," the sellsider said.

Petrominerales to price Thursday

Petrominerales launched an offering of $300 million of six-year convertible bonds on Tuesday that were seen pricing Thursday and were talked to yield 2.375% to 2.875% with an initial conversion premium of 32.5% to 37.5%.

The Rule 144A and Regulation S deal will be based on the volume weighted average share price of Petrominerales' shares on the Toronto Stock Exchange for the trading period between Aug. 10 and Aug. 12.

ABG Sundal Collier Norge ASA is the bookrunner of the offering, which is being conducted by private placement outside of Canada.

Petrominerales, which is 66% owned by Petrobank Energy and Resources Ltd., is a Bogota, Colombia-based oil exploration and production company.

The company has the option to pull the deal if the VWAP of the shares exceeds a 10% discount to the market close on Aug. 9.

The notes will be non-callable for six years. There is an investor put in year three, on Aug. 25, 2013. There is full dividend protection.

Proceeds will be used to fund the company's oil and gas exploration and development activities in Colombia and Peru and may be used to capitalize on potential acquisition opportunities as they arise.

Mentioned in this article:

Henry Schein Inc. Nasdaq: HSIC

Newell Rubbermaid Inc. NYSE: NWL

Petrominerales Ltd. Toronto: PMG

Symantec Corp. Nasdaq: SYMC

Textron Inc. NYSE: TXT

TRW Automotive Holdings Corp. NYSE: TRW

VeriSign Inc. Nasdaq: VRSN

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