U.S. Steel, SunPower gain on debuts; Textron moves up in gray; Qwest edges up, but UAL slips

By Rebecca Melvin

New York, April 29 - Convertibles players were eager takers of a new offering from Textron Inc. Wednesday as new issuance in the convertibles space continues at a fairly steady clip.

The Textron issue, which was described as very oversubscribed, rose to 105 in the gray market ahead of pricing, which was expected after the close, according to market sources.

A syndicate source said late Wednesday that the issue had been upsized to $500 million of convertibles, from $300 million, but final pricing wasn't yet available.

United States Steel Corp.'s newly priced 4% convertibles due 2014 were active upon release for secondary market trading. The upsized $750 million of convertibles traded up to as high as 106.75 in early dealings before edging back down to 105.5 bid, 106 offered. Its underlying shares also moved lower.

SunPower Corp.'s newly priced 4.75% convertibles due 2014 rose to as high as 105 as its underlying shares climbed an impressive 11% in heavy volume.

Back in the established issues, market stalwarts Amgen Inc. and Transocean Inc. were active in trade but were little changed.

Intel Corp., a heavyweight name whose convertibles don't often trade, was pulled into action at about 0.5 point higher than previous trades.

Qwest Communications International Inc. was slightly higher and its shares were strong after the Denver-based telecom reported a mixed first quarter in which profit rose 37% because of cost cuts and in which free cash flow was higher than expected. Still, revenue was lower due to customer losses.

UAL Corp., which has been a name in trade for several sessions, was active again on Wednesday, but the UAL 4.5% convertibles were weaker toward the close, closing lower for no apparent reason.

Overall, trading was described as active. "I was very busy today and I continued to be busy right up to the close," a New York-based sellside trader said.

U.S. Steel's strong debut

U.S. Steel's newly priced 4% paper traded up through the 105.5 level, to as high as 106.75, with a two-sided market seen at 106.5 bid, 107 offered.

Later, the quotes for the new U.S. Steel paper slipped as did its shares, to about 105.5 bid, 106 offered.

The Pittsburgh-based steel producer's new convertibles did better than some had expected. On Tuesday, when the company reported "ugly results" for its first quarter, slashed its quarterly dividend, and launched a convertibles offering, one analyst saw the deal "a little bit cheap," at about 102.

"I saw it 2% cheap ... because it's just a crappy industry. They reported ugly results for the first quarter," a Connecticut-based sellside analyst said, noting that the once steel producing behemoth is now a company with only a $3 billion market cap.

U.S. Steel actually traded up to 103 in the gray market, but that was still lower than the 106 bid, 107 level actually achieved. "The gray was higher than where they'd be fair value for me," the analyst said.

The company reported that its sales fell 47% in the first quarter to $2.75 billion.

Adjusted EBITDA plunged $725 million to $314 million, and aggregate shipments fell 52% to 3.2 million tons, while average prices climbed 12% to $808 per ton, independent credit research firm, CreditSights pointed out in a research note.

With proceeds from the convertible bond offering and concurrent common stock offering, U.S. Steel plans to pay down its three-year term loan, which has $180 million outstanding, due 2009 to 2010 and its five-year term loan, which as $474 million outstanding, due 2009 to 2012.

The company was able to obtain consents from its lenders holding a majority of the commitments under its $750 million revolver and two term loans to eliminate the existing financial covenants which was 3.25 times total leverage and 2 times interest coverage, the CreditSights report stated.

Instead it will be replaced with a fixed-charge coverage ratio covenant of 1.1 times in the event that availability under its $750 million revolver falls below about $112.5 million.

CreditSights said that steps announced will help clear up some of the company's upcoming debt maturities while also providing more operating flexibility with the amended covenants. "However, given the dire steel markets, profitability and free cash flow are likely to remain under pressure which may lead to reduced liquidity down the road."

CreditSights maintained an "underweight" recommendation on U.S. Steel.

The Connecticut-based sellside analyst said that for the outright investor, the new U.S. Steel convertibles offer a "nice up side, down side profile."

SunPower adds as shares jump

SunPower's newly priced 4.75% convertibles moved up to about 105 in early trade.

Shares of the San Jose, Calif.-based maker of solar cells, solar panels and solar power systems jumped $2.44, or nearly 11%, to $25.05.

SunPower's existing 0.75% convertibles extended gains to about the 91 context, while the longer-dated, existing convertibles, a 1.25% issue due 2027, moved up to the 80 mark from the mid to upper 70s. Last week the 0.75% paper was at 84 and change and the 1.25% paper was at 75.25, according to research published by Barclays Capital.

The Barclays convertibles research team recommended owning one or more of the solar convertibles rather than the equities, given the favorable long term of the solar sector and the near-term concerns.

With the newest addition to the space, there are 13 solar sector convertibles with a total face value of more than $3.5 billion.

Textron upsizes to $500 million

Textron was upsized to $500 million from $300 million amid high demand, which was suspected to be coming from a good amount of crossover equity investors in addition to convertibles players.

The convertibles and stock offerings were launched in tandem with the Providence, R.I., aircraft, industrial and financial company's first-quarter earnings report, which was weak as expected.

The move to improve its liquidity through the offerings was viewed as favorable for financial risk.

Final pricing wasn't yet available late Wednesday, but the bonds were talked to yield 5.25% to 5.75% with an initial conversion premium of 20% to 25%.

Concurrently, Textron intends to offer about $200 million, or 19 million shares, of common stock.

J.P. Morgan Securities Inc. and Goldman Sachs & Co. are joint bookrunners of the registered offerings.

The four-year bonds will be non-callable for life, with no puts.

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