PHH's existing convertibles steady to higher on new deal launch; Kodak paper improves

By Rebecca Melvin

New York, Jan. 10 - PHH Corp.'s existing convertible bonds were active and better on an outright basis Tuesday after the Mt. Laurel, N.J.-based mortgage, lending and fleet services company launched a new deal for $150 million of convertible senior notes before the market open.

There were bids for the existing PHH 4% convertibles due 2012, and the existing PHH 4% convertibles due 2014 traded actively but were little changed on an outright basis, a New York-based trader said.

The new PHH deal was seen mostly cheap by market players, but there was a source who found the new deal rich based on his valuation.

The new deal was seen pricing after the market close on Tuesday.

There was a gray market in the new PHH, ahead of final terms being fixed, at 100.75 bid, 101.5 offered late in the session, according to a New York-based trader.

Eastman Kodak Co.'s convertibles improved a point or two to 28 and the underlying shares soared after the Rochester N.Y.-based digital photography company announced it restructured into two segments aligned with consumer and commercial market activities.

The move, which didn't involve job cuts, was motivated, Kodak said, to simplify, cut costs, create shareholder value and accelerate its digital transformation.

Theravance Inc. was quiet and the stock stabilized a day after the bonds and stock sank on the South San Francisco-based company's mixed trial results for Relovair, its experimental lung drug. On Monday, the Theravance convertibles dropped in line dollar neutral with the underlying shares.

Existing PHH steady to higher

The existing PHH convertibles were steady to higher on news that the company is pricing a new $150 million issue of convertible senior notes, with proceeds earmarked to repay debt.

PHH's 4% convertibles due 2014 traded at between 80 and 81.5 on Tuesday, which was flat compared to 81 and 82 on Friday. The level is close to where the low-delta paper fell in December after a Standard & Poor's downgrade of PHH due to questions about its ability to cover straight debt maturing in 2013.

PHH's 4% convertibles due 2012, which mature in April, traded up by slightly more than a point to 99.

PHH shares fell 70 cents, or 6.4%, to $10.23 in heavy volume on news of the debt offering.

The longer-dated PHH 4% convertibles "traded a ton," but were little changed on an outright basis. "They would be better on swap if anyone were trading them that way," a New York-based trader said.

New PHH valuations vary

Valuations on the new deal were all over the map, with several market players calling the deal cheap, but at least one player who thought the deal looked rich.

"It's a matter of your view on the company, and there are two camps on that," a New York-based sellsider said.

The 2014 convertibles come due after the 2013 straight debt, which should be money good following this new offering, a trader said. But if things go south and the economy doesn't build as it promises to do, then PHH could suffer, he said.

The new deal was talked to yield a coupon of 5.5% to 6% with an initial conversion premium of 25% to 30%.

This sellsider's valuation put the paper's fair value at 98.70 at the midpoint of talk, using a credit spread of 1,400 basis points over Libor and a volatility input of 25%.

A second source thought the deal modeled 105.09 at fair value, using a credit spread of 1,250 bps over Libor and a volatility input of 35% at the midpoint of talk.

"Guys are arguing both sides of this 25," the first sellsider said.

Most players queried thought the deal modeled cheap and used higher volatility values with credit spreads between 1,400 bps to 1,250 bps.

"Modeling cheapness for companies with this wide of credit spread is tough to monetize since you don't really want to buy stock back as it moves down," one sellsider said. "Still it looks attractive as a carry trade set up on a heavy delta as it breaks even with maturity."

A second sellsider concurred, saying that putting the vol. up as high as 40% was a red flag, given that if the stock were to "fall out of bed," convertibles holders would likely jettison the paper as well.

PHH planned to price $150 million of 5.5-year convertible notes after the markets closed Tuesday. There is an over-allotment option to purchase up to $22.5 million additional notes.

J.P. Morgan Securities LLC and Bank of America Merrill Lynch are the joint bookrunners of the registered offering.

The notes will be non-callable. They will have takeover protection.

Proceeds will be used to repay the 4% convertibles due in April.

Fitch Ratings said it placed PHH's long-term issuer default and senior unsecured debt ratings of BB+ on rating watch negative. Fitch said it also expects to assign a BB+ rating to the company's new deal.

The action reflects PHH's heightened focus on liquidity and capital management following the company's unsuccessful issuance of $250 million of senior notes in the fourth quarter and the subsequent announcement of the change in the company's leadership, according to the agency.

PHH has some significant unsecured debt maturities coming due in the next 14 months, including $250 million of convertible notes due April 2012 and $421 million of senior notes due March 2013.

In December, S&P cut PHH's long-term issuer credit rating and its senior unsecured debt two notches further into junk status to BB- from BB+.

At that time, S&P also took the ratings off CreditWatch, where they had negative implications. The ratings action "reflects our view that PHH's historically high unsecured funding costs have reduced its financial flexibility to repay upcoming debt maturities, including $423 million of unsecured debt maturing in March 2013," an S&P analyst said in a statement.

Kodak ticks up

Kodak's 7% convertibles due 2017 traded at 28, which was up from 26 last week, while Kodak shares surged 50% to $0.60 in heavy volume.

The company, an icon of film photography, has been unable so far to transform itself into a successful digital photography company. The distressed company has been trying to sell its portfolio of digital imaging patents since last summer, and last November it said that it could run out of cash in a year if it didn't sell the patents.

Under the newly unveiled restructuring, which went into effect Jan. 1, Kodak is now a dual-pronged business instead of a three-pronged business.

Previously Kodak's business segments were divided into its traditional film and photography paper products, consumer digital imaging and graphic communications groups, which included printing equipment.

Since 2005, Kodak has been pressing toward growing its printer, software and packaging businesses, and it is aiming for more than 25% of revenue, or nearly $2 billion, coming from that division by 2013.

Dividing into consumer and commercial businesses cheered investors on Tuesday. An analyst suggested that the news was taken so positively because it means that possibly only one group would file for bankruptcy and not the other, so the whole group would not go to zero.

Theravance quiet

Theravance 3% convertibles due 2015 were quiet on Tuesday after trading down to 91.87 on Monday, with one trade at that level against a $14.19 stock price on a 35% delta, a New York-based trader said.

That compared to a recent trade in the Theravance 3% convertibles at 102.75 versus an underlying share price of $20.00 on a 50% delta, the trader said.

On Monday, shares of the San Francisco-based biopharma swooned 33%. Given that move, the decline in the convertibles was seen as unchanged on a dollar-neutral basis, the trader said.

Monday's drop was precipitated by the company's mixed phase 3 clinical data for its once-daily treatment for asthma and COPD, called Relovair, which didn't outperform Advair.

Theravance is developing the product with GlaxoSmithKline, which said it plans to seek U.S. and European regulatory approvals in the middle of the year based on the just-completed phase 3 program.

Theravance focuses on therapies for respiratory disease and bacterial infections. Its stock traded at $16.54 on Tuesday.

Mentioned in this article:

Eastman Kodak Co. NYSE: EK

PHH Corp. NYSE: PHH

Theravance Inc. Nasdaq: THRX

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