Convertibles steady at quarter-end; CIT, D.R. Horton lower; Saks, Six Flags up: UAL on tap

By Rebecca Melvin

New York, Sept. 30 - The convertible bond market didn't see much scrambling Wednesday to end September or the third quarter, and pricing was stable, market players said.

"Things have been bid up so much - and it has only gone one way - up. So people are just holding on to it," said a New York-based sellside desk analyst, adding that volume has been light.

CIT Group Inc.'s convertible preferred C shares fell amid speculation that the New York-based commercial lender is working out an exchange that would cut its debt and offer bondholders an equity stake in the company in a bid to avoid bankruptcy.

D.R. Horton Inc. remained a focus in trade, slipping with weaker shares.

Saks Inc.'s 7.5% convertibles due 2013 traded up to 148 versus a share price of $6.75 after the company offered up to $100 million in common stock.

Six Flags Inc. convertibles have strengthened over the last several sessions amid rumors that a competing plan is being formulated by a few large holders over the last week or so.

The primary side of things was still quiet during the session, but after the close of markets UAL Corp. launched an offering of $175 million of 20-year convertibles that was expected to price after the close on Thursday.

No new issues had priced so far this week in the United States, contrary to the European convertible new-issue market in which three new deals priced so far this week, including Banco Bilbao Vizcaya Argentaria SA's €2 billion of five-year mandatory convertibles, Salzgitter AG's €296 million of seven-year convertibles and UCB SA's €450 million of six-year convertible bonds, which priced Wednesday to bear a 4.5% coupon.

CIT drops amid speculation

CIT's 8.75% perpetual convertible preferred shares, or the C shares, traded down to 2.25 points over parity, from 3.25 points on Tuesday.

"They came in," a sellsider said, suggesting that holders of this paper fear getting squeezed down the capital structure to zero recovery as talk about reorganizing or filing for bankruptcy protection continues.

Earlier this month, CIT said it was deferring a Sept. 15 interest payment on its 6.1% subordinated notes due 2067.

Since then speculation has abounded about whether the company will reorganize its debt, file for Chapter 11 bankruptcy or find a merger partner.

The company is allowed to defer interest on the notes from time to time unless a trigger event has occurred. A trigger event has previously occurred, and CIT said the trigger event is continuing because the average four-quarters fixed charge ratio for its most recently completed fiscal quarter is less than or equal to 1.1.

Once a trigger event has occurred, CIT is required to use commercially reasonable efforts to sell common stock or preferred stock and use the proceeds to satisfy the next interest payment and pay previously deferred interest.

The company was not able to successfully complete the needed stock sale and is therefore required to mandatorily defer interest on the notes.

CIT is a New York-based lender to small businesses and middle-market companies. Its common stock Wednesday plunged 99 cents, or 45%, to $1.21.

UAL to price

Chicago-based UAL, the holding company for airline United Air Lines Inc., plans to price $175 million of 20-year convertibles, which were talked to yield 6.75% to 7.25% with an initial conversion premium of 15% to 20%, according to a news release.

The bond issue has an over-allotment option for an additional $26.25 million in notes.

The company also plans to price 19 million shares of common stock.

J.P. Morgan Securities Inc., Morgan Stanley & Co. Inc. and Goldman, Sachs & Co. will act as joint bookrunners of both offerings.

Neither offering will be contingent on the completion of the other. The company intends to use the net proceeds from both offerings for general corporate purposes.

The bonds are non-callable for five years, with puts in years five, 10 and 15. There is takeover and dividend protection, and proceeds will be used for general corporate purposes.

September issuance $3.04 billion

Although the primary market in September brought 12 new deals totaling $3.04 billion, and that was well over a quiet August in which only $400 million in two deals was priced, market players had been expecting more.

"When you talk to the buyside, people were expecting more in terms of numbers and proceeds," a sellsider said, adding that the market needs to see some larger deals, to make "people have a good sense that it will be widely spread out and that people are going to want to play."

The sellsider didn't agree with other sources who have said that the market needs investment-grade paper, of which there was zero in September.

"If you want to be picky about that we didn't see any of investment grade, but we didn't have that one big deal," he said.

"There is very little distressed paper out there anymore. What used to be 30 or 40, is now 70 and 80 and people don't want to sell it," he said.

Another source referred to it as a "sellers strike," in which people are "more likely not to sell things. People want to show things on their current holdings as opposed to a year ago."

"Do they have to stand on their toes a little bit?" the sellsider said about trading.

Continuing well in trade are several of the issues priced in September, including AMR Corp.'s $460 million deal and Eastman Kodak Co.'s issue.

Mentioned in this article:

CIT Group Inc. NYSE: CIT

D.R. Horton Inc. NYSE: DHI

Saks Inc. NYSE: SKS

Six Flags Inc. NYSE: SIX

UAL Corp. Nasdaq: UAUA

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