Continental, UAL float on merger speculation; Cooper Cos. falls outright on results; Cadence quiet in gray

By Kenneth Lim

Boston, Dec. 13 - Airline names rose with their stocks in the convertible bond market on Wednesday, buoyed by continued speculation about industry consolidation.

Leading the airlines' climb were Continental Airlines Inc. and UAL Corp., which were reported to have discussed a possible merger.

Meanwhile, The Cooper Cos. Inc. fell outright but improved on a hedged basis after the company reported disappointing fourth-quarter results and cut its forecast for the next year.

In the primary market, Cadence Design Systems Inc.'s dual-tranche $500 million offering was relatively quiet in the gray market, although the deal was seen as fairly interesting.

The wave of new convertible issuance continues, with International Game Technology Inc. and Peabody Energy Corp. announcing deals that could bring another $1.3 billion of new paper to the market late Thursday.

Continental, UAL fly with stock

Convertibles of Continental Airlines and United Airlines parent UAL rose outright in line with their stocks on Wednesday after it was reported that the two airlines were in early merger discussions.

Continental's 6% convertible preferred improved about 0.65 point outright on Wednesday, trading at 46.03 against a stock price of $44.48. Continental stock (NYSE: CAL) rose 4.38% or $1.88 to close at $44.76.

UAL's 5% convertible due 2021 climbed about 4 points outright, changing hands at 119.5 versus a stock price of $45.40. UAL stock (Nasdaq: UAUA) ended at $45.24, up by 4.65% or $2.01.

"They're talking about possible mergers again, but it's more of a constant theme now rather than new news," a sellside convertible bond strategist said. "It's just a continuation of the news flow."

Several reports on Wednesday said Houston-based Continental and Elk Grove, Ill.-based UAL had begun preliminary talks to explore a possible merger between the two companies, although any deal is far from certain. The development came amid possible consolidation elsewhere in the industry, with U.S. Airways Group Inc. bidding for Delta Air Lines Inc. in November and AirTran Holdings Inc. making an offer for Midwest Air Group Inc. on Wednesday.

Consolidation would be good for all the airlines, said J Giordano senior vice president Paul Berkman.

"The assumption is that it would be a big improvement in the credit," the convertible analyst said. "We've seen a number of airlines heading that way, and it seems like we're at the beginning of a consolidation phase...it's simply less competition and hopefully a better chance that some of these companies will become profitable."

Berkman said his Dec. 5 recommendation of Continental's convertible preferred for outright investors remains valid. In a research note, Berkman wrote that the convertible was a "vehicle for participation in the expected continued appreciation of the underlying common stock," explaining that any improvement in Continental's common stock would generate perceived improvement in the low-rated convertible.

"Continental shares, like others in the airline sector, are responding these days to a more stable outlook for fuel prices and the likelihood of additional mergers within the group," Berkman wrote. "Further consolidation, in the wake of the proposed US Airways/Delta merger, is widely expected. An attempt by Continental to acquire another airline would shock nobody."

Cooper Cos. drops outright

Cooper Cos.' 2.625% convertible due 2023 fell about 10 points outright but improved on a dollar-neutral basis after the company missed estimates for its fourth quarter and lowered its 2007 outlook.

The convertible traded at 111.875 against a stock price of $44 on Wednesday afternoon. Cooper Cos. stock (NYSE: COO) closed at $44.59, falling by 9.77% or $4.83.

"Saw a bunch of them trade earlier," a sellside convertible bond trader said. "It's kind of converts 101. The credit is unchanged, the stock drops, the premium expands."

Cooper Cos. said late Tuesday that its fourth-quarter net profit rose to $13.6 million, or 30 cents per share, from $8.6 million, or 19 cents per share, in the year-ago period. Excluding items, Cooper Cos. earned 67 cents per share. Analysts were expecting 80 cents per share.

Cooper Cos. also cut its fiscal 2007 revenue guidance to between $920 million and $960 million, from the earlier forecast of between $948 million and $1 billion.

Pleasanton, Calif.-based Cooper Cos., a supplier of contact lenses and surgical instruments, cited logistics delays and a worldwide slowdown in the contact lens market for the poorer than expected results.

A sellside convertible bond analyst said the poor quarter was not a complete surprise, noting that the equity began to show weakness in November and fell on Tuesday before the results were announced.

"Well, what are you gonna say?" a sellside convertible analyst remarked. "A lot of analysts had already been expecting it, yet the stock's down 10%...It's down to where it was back in July, so it's not the end of the world."

The analyst said the premium on the convertible appeared to improve after Wednesday's stock plunge, so hedge investors emerged from the news much better than outrights.

"When I told the dealers that Cooper's going to miss, the hedge guys were like, "Yay!,'" the analyst said.

"The bonds have held, so people are not seeing it as a credit issue so much," the analyst added. "I guess it's a matter of unrealistic expectations. Since July."

Cadence seen as fair

Cadence's planned $500 million dual-tranche offering of five- and seven-year convertible senior notes were quiet in the gray market ahead of Wednesday pricing, as investors described the deal as reasonably attractive at the mid-range of talk.

The $250 million five-year tranche is talked at a coupon of 1.375% to 1.875% and an initial conversion premium of 15% to 20%. The equally sized seven-year series is talked at a coupon of 1.5% to 2% and an initial conversion premium of 15% to 20%.

The notes are being offered at par.

JP Morgan, Merrill Lynch and Morgan Stanley are the bookrunners of the Rule 144A offerings.

Cadence, a San Jose, Calif.-based developer of electronic design automation software, plans to use up to $200 million of the proceeds to buy back part of its zero-coupon, zero-yield convertible senior notes due 2023. It will also use the proceeds to concurrently buy back its common stock and fund convertible note hedge and warrant transactions.

The zero-coupon convertible, meanwhile, gained about two points to 118.75 versus a stock price of $18. Cadence stock (Nasdaq: CDNS) closed at $18, up by 2.33% or 41 cents.

"It looks kind of fair at the mids," a convertible bond analyst said. "If it comes at the cheap end it'll do fine. The credit is...a strong BB, maybe BB+ plus credit, and it's a little over one time levered."

International Game, Peabody launch

Another two deals were launched Wednesday and expected to price Thursday after the market closes.

International Game Technology's $825 million offering of 30-year convertible senior debentures is talked at a coupon of 2.1% to 2.6% and an initial conversion premium of 35% to 40%.

There is an over-allotment option for a further $75 million.

Merrill Lynch, Banc of America, Goldman Sachs, Wachovia, UBS Investment Bank, Deutsche Bank and Bear Stearns are the bookrunners of the Rule 144A offering.

International Game, a Reno, Nev.-based maker of gaming machines and systems, said it will use about $612 million of the proceeds and cash on hand to redeem its outstanding zero-coupon convertible debentures. It will also use about $225 million of the proceeds and cash on hand to concurrently buy back its common stock.

Peabody's $500 million offering of 60-year convertible junior subordinated debentures is talked at a coupon of 4.5% to 5% and an initial conversion premium of 40% to 45%.

There is a greenshoe option for a further $75 million.

Morgan Stanley, Lehman Brothers and Citigroup are the bookrunners of the registered off-the-shelf offering.

The convertibles will have a scheduled maturity of 35 years, at which time Peabody must redeem the debentures with similar equity-credit securities. Failure to do so will be a breach of covenant, but not an event of default.

Peabody may defer coupon payments for up to 10 years. After five years of deferral or if a mandatory trigger event occurs, Peabody must fund coupons by selling warrants or preferred stock.

Peabody, a St. Louis, Mo.-based coal company, said it will use the proceeds of the deal to repay outstanding revolving and term debts, which were used to help pay for its recent acquisition of Excel Coal Ltd.

© 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.