UAL, US Airways convertibles higher in line with shares on merger chatter; Saks improves

By Rebecca Melvin

New York, April 8 - UAL Corp. and US Airways Group Inc. were a central focus of trade in the convertibles market Thursday, with two UAL issues and one US Airways issue accounting for the top three volume names of the day.

Both names rose in line with their underlying shares, which gained on merger chatter.

The companies weren't commenting on the rumors.

"Most of the airline convertible paper is in the money and trades on a high delta, so if shares go up, the converts will too," a New York-based sellside desk analyst said.

Retail names were also getting a look after news of better-than-expected March sales from a number of major players, including Target Corp. and Gap Inc., neither of which is a convertibles issuer.

But luxury retailer Saks Inc. saw its convertibles gain 0.5 point on a 5-cents-per-share increase; and Barclays' recommended Best Buy Co. Inc. was indicated a little higher. Both companies have been positive about recovery.

Meanwhile, online travel company Priceline.com Inc. saw its recently priced issue of 1.25% convertibles trade at 105.75 versus a share price of $259.80 Thursday, which was up from a 104 indication previously.

Massey Energy Co.'s slump was still in evidence early in the session, but buyers stepped in to stem losses later, causing the stock to bounce back 2% by session's end.

Secondary trading sluggish

Trading overall was sluggish again. There was decent total volume, but a lot of it seemed related to the airline convertibles.

"I think we're going to have a below-average week in terms of volume," a New York-based sellside analyst said.

In addition, there was no activity in the U.S. primary market, making for a meager week so far with only one new deal priced, namely Telvent GIT SA's 5.5% convertibles that debuted Wednesday.

"With converts you tend to get a bunch of new issues all at once, and then no new issues for a period. It wouldn't surprise me if that was the case here," the sellside analyst said.

UAL, US Airways get lift

UAL's 6% convertibles due 2029 traded at 248.5 versus a share price of $20.25, according to a sellside trader. Trace data reported the paper in trade at 250.926, which was up 17 points from Wednesday, and with trades ranging from 246.75 to 253.

Also seeing heavy trade, UAL 4.5% convertibles due 2021 traded at 100 versus the same underlying share price of $20.25, which was up about 1.625 points from Wednesday.

Shares of the parent company of Chicago-based United Airlines ended higher by $1.28, or nearly 7%, at $20.23 on Thursday.

It's not "new" news that the airlines are looking for merger partners. In fact, UAL and US Airways have been in talks before, twice. But this time, the "climate seems prime for another airline merger," Gimme Credit analyst Vicki Bryan wrote in a note Thursday.

"A United/U.S. Airways combination would net some needed cost synergies and an improved market presence (though not on the scale that Delta/Northwest has achieved)," Bryan wrote.

Delta's 2008 acquisition of Northwest Airlines is on track to generate $2 billion in synergies, despite the struggling business climate, Bryan said last month.

Some $700 million was generated in 2009, including $500 million in cost savings, and another $600 million is expected (mostly from revenue generation) in 2010. "This well-executed merger has firmly established Delta as the world's largest airline - for now," Bryan said in a March 12 report called "Smile on Your Brother."

Meanwhile, US Airways' 7.25% convertibles due 2014 traded at 188.778, which was up 13 points, according to Trace data, with the day's range from 184.8 to 194.

US Airways' 7% convertibles due 2020 were at 99.875, up 0.625 point, trading in a very narrow range.

Shares of the Tempe, Ariz.-based air carrier jumped 73 cents, or 10.7%, at $7.55 on Thursday.

Airlines generally healthier

Gimme Credit's Bryan said the time seems ripe for a merger even though she favored a United/ Continental Airlines Inc. link up, which was the rumor last week.

"Indeed, British Airways and Spain's Iberia announced today their tentative agreement, which would create the third largest carrier in Europe. The airlines as a group are healthier these days with more cash and less debt, and the business environment is strengthening. Hence our favorable near term view on the sector," Bryan said in her note Thursday.

She pointed out that strategic alliances and joint ventures fall short of addressing chronic oversupply problems in the industry and don't provide tangible revenue and cost benefits that are possible with a merger.

She suggested that the new rumors "might just prompt Continental to revisit its options."

"Let's see - help create the largest airline in the world or be a distant fourth place in the U.S. in an overcrowded industry?" she quipped.

Massey losses slow

Massey Energy's 3.25% convertibles due 2015 traded at 92 versus a share price of $45.95 early Thursday, which was lower compared to a trade at 92.75 versus a share price of $45.90 on Wednesday.

Before the company's Upper Big Branch Mine accident Monday, in which 25 miners are known dead, the Massey 3.25% convertibles were trading near par.

Shares of the Richmond, Va.-based coal producer dropped to $45.10 in early trading Thursday before bumping back up in the afternoon to close at $46.14, up 92 cents, or 2% on the day. Since Monday, the stock has lost 16%.

The equity has definitely taken a hit, sources agreed, but the credit is solid and should remain so.

Massey has a poor safety reputation, one analyst said, but with a $4.4 billion market cap, it is a dominant player that likely only stands to gain from any supply tightening resulting from stricter regulations.

"Suppose production fell 10%, but revenue rose 20%. It would benefit Massey to make more money for producing less coal," the analyst said.

Massey is a metallurgical coal producer based in Richmond, Va.

Mentioned in this article:

Best Buy Co. Inc. NYSE: BBY

Massey Energy Co. NYSE: MEE

Priceline.com Inc. Nasdaq: PCLN

Saks Inc. Nasdaq: SKS

Telvent GIT SA Nasdaq: TLVT

UAL Corp. Nasdaq: UAUA

US Airways Group Inc. NYSE: LCC

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.