Rite Aid sweeps up; Ford loses again; Cheniere adds; Transocean dips as energy names ease

By Rebecca Melvin

New York, May 23 - Rite Aid Corp.'s new 8.5% convertibles moved up to 105 on day one of secondary market trading on Friday, boosted by a rebound in the underlying shares, which were oversold on Thursday, market players said.

The Rite Aid convertible settled at about 103 bid, 103.25 offered, as shares also trimmed gains.

Ford Motor Co.'s 4.25% bonds extended losses, the day after the No. 2 U.S. carmaker lowered its outlook, saying higher oil and commodity prices are sabotaging its efforts to restore profitability.

But Cheniere Energy Inc. bucked the energy sector trend, and moved up, with its 2.25% convertibles due 2012 edging back to the 60 mark as its underlying shares jumped 13%.

Energy names overall remained weaker, extending a trend of a couple of days, as investors considered whether prices may have moved too high, too fast in response to spiking oil prices.

Transocean Inc. was among those energy names that may have succumbed to profit taking, and Peabody Coal Corp. was lower on its second day in trade, but looking fairly resilient versus its stock.

Overall, volume was low ahead of the long Memorial Day weekend, and market players were unwilling to make too much of price moves that may not have been indicative of genuine sentiment.

"On days like this, it's hard to tell whether it's real because of the light volume. People might just be selling positions before they go away for the weekend," a New York-based sellside analyst said.

Rite Aid rallies amid stock rebound

Rite Aid was hailed a "successful deal," and late in the day the new paper was called 103 bid, 103.25 offered, versus a stock price of $2.05.

The company priced $150 million of seven-year convertible notes to yield 8.5% with an initial conversion premium of 27.5%.

The notes priced at the rich end of talk, which was for a coupon of 8.5% to 9%, with an initial conversion premium of 22.5% to 27.5%.

The deal looked about 3% cheap, using a credit spread of 1,150 basis points over Libor and volatility capped at 45%.

Shares of the Camp Hill, Pa.-based retail drugstore chain (NYSE: RAD) closed higher, at $2.10, up 7 cents, or 3.45%, on the day. Earlier the shares had been as high as $2.13, which pulled its convertible up to the 105 bid, 106 offered range intraday.

Rite Aid's existing mandatory convertible is a small issue of $120 million that matures in November.

"Nobody is going to focus on that because the stock is trading at $2, and that's way out of the money, here. In this case, a mandatory is going to trade like the stock. It's more difficult to deal with this than the stock," a New York-based sellside analyst said.

Rite Aid's stock move was viewed as a reaction to being oversold. On Wednesday, the stock was at $2.30, and on Thursday it slid to $2.03.

"When people are shorting, they need the hedge. I think the fundamental guys might have looked at that, and now see that it's undervalued," the sellside analyst said.

Citigroup was bookrunner of the notes, for which there is an option to purchase up to an additional $8 million in notes to cover over-allotments.

The notes are non-callable for life, and there are no puts.

Rite Aid intends to use proceeds to redeem $150 million of its 6.125% senior notes due this year.

Ford slump continues

A slide in Ford Motor stock that began Thursday extended into Friday, with the 4.25% convertible due 2036 trading down as well, the day after Ford blamed economic conditions for stymied restructuring efforts.

Wall Street analysts on Friday cut price targets for Ford shares and reduced and financial forecasts. Lehman Brothers cut its price target to $6, and Calyon Securities cut its target to $7.

The 4.25% convertibles traded at 94.5 on Friday, down from 99.875 on Thursday, and down from prices ranging from 106 to 111 in the last several weeks

Shares of Ford (NYSE: F) closed down 29 cents, or 4%, at $6.87 on Friday, after dropping 8.2% on Thursday.

Cheniere regains some ground

Two weeks ago, Cheniere's convertibles dropped hard along with a 32.5% slide in their underlying shares after the developer of liquefied natural gas terminals reported a wider first-quarter loss and talked about steps being taken to reduce ongoing operating costs and capital requirements and increase cash to maintain adequate liquidity.

At that time, the 2.25% Cheniere convertibles traded as low as 46.5 versus a stock price of $5.91. But on Friday, the 2.25% convertible traded at 58 versus a share price of $5.90.

Shares of the Houston-based company (Amex: LNG) ended at $6.04, up 69 cents, or 13%.

Transocean eases

The convertibles of Transocean edged lower by nearly a point on Friday, weighed down by sector weakness as investors asked themselves about a price bubble, and perhaps amid speculation that a potential increase in rigs that Petroleo Brasileiro SA, or Petrobras, may introduce to the market to handle its own drilling could boost supply.

"The thought is that oil bid up so quickly, people are kind of worried that it's too quick. People are realizing that it might be the speculators pushing this up too high," a New York-based sellsider said, citing an article that said U.S. motorists drove 4.3% less in March due to higher gas prices, the biggest monthly drop ever.

"But maybe people are taking profits, too. Petrobras said they are going to spend money to build their own rigs to drill the large oil reserve discoveries that they have made, and that would mean increasing the number of rigs," the sellsider said.

Transocean's series A 1.625% convertible due 2037 was almost a point lower outright at 113.04 versus a stock price of $152 on Friday. Its series B 1.5% convertible due 2037 was also almost a point lower outright at 113.99 against the same stock price, while the series C 1.5% convertible due 2037 was lower by the same amount, 0.8 point, at 114.92 versus the same stock price.

Transocean common stock (NYSE: RIG) closed at $152.02 on Friday, lower by 2%, or $3.09.

"Bubble prices are being paid for O&G converts," a market observer said. "Of course, if oil keeps running that's a moot point."

A New York buysider said: "Who needs an analyst to speculate in energy? You just go long! I too wish I could tell if this is a bubble. I'm trying to figure it out. If I do figure it out, however, I'll probably keep mum about the answer for a while."

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