NCI Building jumps on sweetened exchange; International Game gains; players eye primary

By Rebecca Melvin

New York, Aug. 27 - NCI Building Systems Inc. convertibles shot up Thursday as its underlying shares plunged on news of a sweetened proposed exchange offer from the company, which is in a distressed situation, market players said.

International Game Technology Inc. added again in trade; D.R. Horton Inc. was a little weaker; and Terex Corp. changed hands at steady to firmer pricing, as the convertibles market seemed to be treading water even though equities succumbed to early selling but later turned around, which allowed the Dow Jones Industrial Average to rise for an eighth consecutive day.

Almost half of the day's volume in the convertible market was taken up by liquid stalwarts including Medtronic Inc., EMC Corp., Transocean Inc. and Amgen Inc.; while Newmont Mining Corp. was also a top trader.

"These are huge issues that are on top of Trace every week. It's natural for them to be active," a New York-based sellside analyst said.

Another sellsider commented that these are issues that are pretty easy to replace and fully valued.

That marks a contrast from much of the paper in the convertible space. "You can't replace stuff. There's not that much being sold," the sellsider said.

Overall, August brought less "chasing" of convertible paper, and it was more of a "hold" month in the market, compared to July when the best strategy was to buy, the sellsider said.

Primary market outlook

The primary market, which has been quiet for much of August, is predicted to revive in September or in the last quarter.

"It should be busy in September," said one New York-based sellside analyst, adding that he has heard people are ready to go.

But another New York-based sellside analyst pointed to the final quarter as a good time for new issues, not necessarily September.

"The new issue calendar should be heavier in the final quarter. In the past this hasn't been the case, but this year might be different," the analyst said.

The recent rally in equities is expected to support more convertible new issuance, which was pretty disappointing for the first seven months of the year.

"We had a good April and May, but after that the issue market went on the sidelines," the second analyst said. "Part of the reason was the summer and part of the reason was issuers were feeling like the equity price was not in the sweet spot to do their converts, and there has been competition from the high-yield or fixed-income markets."

"People opted to go to fixed income, or if they considered offering a convert, they said, 'why don't we just do equity,'" the analyst said. "But given the good rally in equity prices, some companies may be attracted more to the convert market."

NCI Building shoots up

NCI Building's 2.125% convertibles due 2024, which are callable in November, traded up to 110 from 87 after word that most of its holders had agreed to an amended, proposed exchange offer.

Shares of the Houston-based steel building products manufacturer dropped 84 cents, or 25%, to $2.64.

The moves were spurred by news of its amended debt exchange offer, which is now for $500 cash plus 390 shares for each $1,000 principal amount tendered in the exchange offer, from $500 cash and 125 shares offered earlier this month.

"Borrow is an issue on the stock as well," a New York-based sellside analyst said.

This exchange is of a different stripe from last week's Johnson Controls exchange.

"JCI was paying a lot of coupon and it was deeply in the money, already like an equity, so they asked, "why are we paying so much on that," a New York-based sellside analyst said, who thought the JCI exchange was a one off that would not become a trend.

"We did a screen and identified maybe one or two potential candidates," the analyst said.

The NCI exchange is different. It's a distressed situation and it doesn't look like there is any place to refinance the convert into cash, he said.

Under the amended terms still being discussed, the Clayton, Dubilier & Rice Fund would continue to invest $250 million in the company through newly issued convertible participating preferred shares, but its pro forma ownership of the company would be 68.5%.

Finalizing the amended terms requires agreement from more than two-thirds of the holders of the outstanding convertible notes. Representatives of the holders of more than two-thirds of the convertibles have indicated they would support the potential amended terms and would be willing to enter into appropriate lock-up and voting agreements, subject to negotiation of the terms of such agreements.

The company said discussions are ongoing, and the expected launch of the exchange offer, which otherwise would have occurred by Aug. 28, will be delayed.

International Game adds again, Terex firm

International Game's 3.25% convertibles due 2014 traded at 129.5 versus a share price of $21.25 on Thursday, compared to 128 versus a share price of $21.00 on Wednesday, which was up from about 126 previously.

Shares of the Reno, Nev.-based maker of gaming machines and systems actually ended the day unchanged at $21.23 after swinging from negative to positive territory.

Terex tipped back to the firmer price of 125 after seeing a lower 124 handle Wednesday. The Terex 4% convertibles due 2015 traded at 125 versus a share price of $16.80.

Also the new Intel Corp. 3.25% convertibles traded at 102 versus a share price of $19.30.

Mentioned in this article:

Amgen Inc. Nasdaq: AMGN

D.R. Horton Inc. NYSE: DHI

International Game Technology Inc. NYSE: IGT

NCI Building Systems Inc. NYSE: NCS

Newmont Mining Corp. NYSE: NEM

Terex Corp. NYSE: TEX

Transocean Inc. NYSE: RIG

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