American Equity rises on debut; Symantec gains on week; airlines quiet on merger approval

By Rebecca Melvin

New York, Sept. 17 - American Equity Investment Life Holding Co.'s newly priced 3.5% convertibles cleared a couple of points on their debut in secondary dealings Friday, trading up to as much as 102.75 after the West Des Moines, Iowa-based annuity and insurance products company priced $170 million of convertibles at the midpoint of price talk late Thursday.

Also in trade Friday was the new AngloGold Ashanti Ltd. 6% mandatories, which slipped a little in line with lower underlying shares, after the $789 million issue pushed higher on its Wednesday debut.

The primary market for convertible bonds revived this past week, with some of the deals pricing fairly aggressively and almost all trading up in secondary dealings as demand runs high.

Volcano Corp.'s 2.875% convertibles pushed north of 106 on Friday after pricing late Tuesday. One sellside credit analyst called it the best deal of the week due to its cheapness and the company's fundamental story.

Nevertheless there was a good amount of frustration among convertible traders as it seemed that too many dollars were chasing too little paper.

"It's one of those things. We have a lot stuff that we're involved in and a lot of situations, and we only get a few accomplished," a New York-based sellside trader said.

"There's clearly plenty of money to be put to work and not enough paper to go around," the trader said.

Back in established issues, a few tech names, including Intel Corp. and Symantec Corp. traded actively, according to a sellside analyst. The Symantec 0.75% convertibles due 2011, or the A paper, looked stronger on the week, having changed hands at 102.5 versus a share price of $14.95 on Friday, compared to 102 versus a share price of $15.00 on Monday and Tuesday.

Airlines were mostly quiet despite news that shareholders of both Continental Airlines Inc. and UAL Corp. approved the merger of an entity to be called United Airlines, which be based out of UAL's home turf in Chicago but which will be headed up by Continental's chief executive, Jeff Smisek.

Continental's 4.5% convertibles traded at 136 versus a share price of $22.90 on Tuesday.

American Equity adds on debut

American Equity's newly priced 3.5% convertibles due 2015 traded mostly at 102.25 bid, 102.50 offered, although one sellsider reported a trade at 102.75 versus a share price of $10.00.

Shares of the company ended little changed, up 2 cents, at $10.02.

American Equity priced $170 million of five-year convertibles after the close of markets Thursday with an initial conversion premium of 25%.

There is a greenshoe of $30 million. Initially, the Rule 144A offering was talked at a deal base size of $150 million and a $50 million greenshoe.

J.P. Morgan Securities LLC was the bookrunner for the deal, for which proceeds will be used to pay for the convertible note hedge transactions, and to repay outstanding amounts of principal and interest under its credit facility, to repurchase outstanding convertible notes and for general corporate purposes.

As for the new issuance that was seen in the past week, including Level 3 Communications Inc. and NextEra Energy Inc., it was Volcano that was called the deal of the week.

"I thought they came cheap. It's a good equity story, and people should look at it," a sellside credit analyst said.

"They were in my world. They set up well, and they came cheap," he added.

Continental, United quiet

Continental's 4.5% convertibles traded at 136 versus a share price of $22.90 on Tuesday, and weren't heard in trade on Friday.

Shares of the Houston-based airline slipped toward the end of the session Friday to end lower by 28 cents, or 1.2%, at $23.04.

Both companies saw 98% approval for the deal, which is expected to close in two weeks.

Vicki Bryan, senior high-yield analyst at Gimme Credit, an independent research service on corporate bonds, noted this week that the merger is occurring nearly three months ahead of schedule, having received antitrust approval from Europe in July and from the U.S. Department of Justice in August.

"We were a fan of this merger even before it was announced, since we consider United and Continental to be the best matched partners of all the current U.S. airlines," Bryan wrote in a research note.

She said that short interest in United's stock has fallen 24% over the past month, and last week Fitch Ratings joined Moody's Investors Service and Standard & Poor's by upgrading its credit quality ratings on both companies.

The merger has proceeded smoothly as expected since the companies have been working on it in effect since last fall when Continental joined United's Star Alliance and became a partner in one of United's cross-ocean joint ventures. In addition, the two companies pursued a combination in 2008.

The Continental convertibles were trading at a premium to whatever a change of control would merit, and it wasn't certain whether the merger constituted a change of control, which would be in the form of a put.

"In either case, you wouldn't use it, or you'd lose your premium," a Connecticut-based sellside analyst said.

From the company's perspective, it would want to convert the convertibles out rather than pay them out, the analyst said. There's four years left on the Continental 4.5% convertible paper, and less than three years left on the Continental 5% convertibles, the analyst said.

United and Continental have projected merger benefits of $1 billion to $1.2 billion in revenue and cost savings by 2013, which may prove conservative, Gimme Credit's Bryan wrote.

"Last March, we estimated potential cost savings of at least $1 billion, which is less than one-third of Continental's current SG&A. The airline industry has rebounded nicely since then, with better than expected revenue and operating profits on stronger demand and higher air fares and fee income," Bryan wrote.

"We expect most of the merger cost savings to be realized early, which implies that most of the improvement will accrue in 2011. The difference could be dramatic. Assuming a conservative 5% growth for revenue in 2011, plus $500 million to $1 billion in cost savings, we estimate pro forma EBITDA of $4.5 billion to $5 billion. That indicates EBITDA margin up 100 basis points to 200 bps to 13% to 14%."

"We expect most of that improvement to boost free cash flow to $3.9 billion to $4.2 billion," Bryan said. "That's enough to cover the $1 billion in Continental notes to be repurchased when the merger closes plus the indicated $3 billion pro forma debt due over the next year - without tapping the massive pro forma cash balance of $8.8 billion (25% of estimated revenue).

"With strong EBITDA and $3 billion in debt reduction, leverage could fall by half to 2.4x-2.7x by year-end," Bryan wrote.

Mentioned in this article:

American Equity Investment Life Holding Co. NYSE: AEL

AngloGold Ashanti Ltd. NYSE ADS: AU

Continental Airlines Inc. NYSE: CAL

Intel Corp. Nasdaq: INTC

Symantec Corp. Nasdaq: SYMC

Volcano Corp. Nasdaq: VOLC

UAL Corp. Nasdaq: UAUA

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