Johnson Controls rises to well above double par; D.R. Horton slips; Watson, Saks active

By Rebecca Melvin

New York, Aug. 19 - Convertible bonds were mixed in muted activity Wednesday, with market players predicting the trend will continue until Labor Day due the large number of people away from their desks for summer vacations.

"It's very quiet today," a New York-based sellside desk analyst said. "There is a little activity right after the open, and then it quiets down in the afternoon."

The general pattern has been holding true for the last several sessions.

Stocks, on the other hand, have been volatile, moving up on Wednesday after a weak opening, supported by, among other things, Merck & Co., the health care name that rallied after a federal judge ruled in favor of the health care company in a patent suit, a New York-based sellsider said.

Merck, which doesn't have a convertible, saw its shares rise 77 cents, or 2.5%, to $31.48.

Meanwhile, Johnson Controls Inc. took another leg up, trading well above double par as its shares continue to move higher. Shares of the supplier to the automotive and commercial-building sectors have nearly tripled since the company's convertible paper was issued in early March.

D.R. Horton Inc. was another name in trade, slipping with weaker shares. After the market close, the home builder said it adopted a rights agreement to preserve the value of certain deferred tax assets primarily associated with net operating loss carryforwards and built-in losses.

Watson Pharmaceuticals Inc. traded at a steady par plus level in good volume, marking a continuation of Tuesday's activity when the Corona, Calif.-based pharmaceuticals company said it planned to call its convertibles and repay $100 million of term loan borrowings, using part of the proceeds of an $850 million straight bond offering.

Meanwhile, Saks Inc.'s 7.5% convertibles due 2013 traded up to 127 versus a stock price of $5.75, also marking a continuation of Tuesday's activity. But its pricing Wednesday was more in line with indicated value, compared with trades at 120 and below on Tuesday, when the New York-based retailer posted a fifth consecutive loss that was better than expected.

Johnson Controls trades at 234

Johnson Controls' 6.5% convertible bonds due 2012 traded at 234 versus a stock price of $25.25, according to a sellsider.

That price was up more than 6 points from previous sessions, according to Trace data, which wasn't refuted by the sellsider.

The Johnson Controls 11.5% mandatories, which priced at the same time, weren't heard in trade.

Shares of the Milwaukee-based supplier to the automotive and commercial building sectors added 16 cents, or 0.6%, to $25.40 on the day.

In June, the 6.5% Johnson Controls bonds were 199.5 versus a share price of $21.65.

"These things were originally $8 or $9 per share when the bonds priced," another sellsider said, by way of explaining the huge move.

Since the bonds are convertible into the shares, "it just goes where the stock goes. Parity is 225 or 226. It's simple math," the sellsider said.

Not every issue would move like that just because the stock moved, however. "If the stock was $2 and parity was $4, then it wouldn't move very much. It depends on parity," the sellsider said.

The shares have recovered so dramatically because of more confidence in the auto sector under the Obama administration, the sellsider said.

D.R. Horton slips

D.R. Horton's 2% convertibles due 2014 traded at 114.75 versus a stock price of $12.00, according to a sellsider. Later, the paper was seen trading closer to 114.

The convertibles, which have been on a tear since early July, are retreating from a recent spike to as high as 120.

The move higher wasn't straight up. On July 28, the D.R. Horton paper traded at 110.714 versus a stock price of $11.43, which was in about 0.25 point using a 70 delta.

On Wednesday after the market close, D.R. Horton said it has adopted a rights agreement to preserve value of certain tax deferred assets under the Internal Revenue Code.

According to D.R. Horton, it had about $1.23 billion of net deferred tax assets as of June 30.

Under the rights agreement, the Fort Worth-based homebuilder will distribute to its stockholders a non-taxable dividend distribution of one preferred stock purchase right for each company share held as of the close of business on Aug. 31.

The company's ability to use its tax benefits would be limited if a 50% ownership change occurred as defined by the IRS.

Watson bonds trade just over par

Watson's 1.75% convertibles due 2023 were seen trading just over par, which was little changed on Tuesday. The company's shares ended the day at $35.06, which was up 45 cents, or 1.3%.

On July 31, the convertibles traded at 99.75.

"They're trading around par, and I think the company makes it fairly clear that it wants to make them disappear because they are going to be issuing the Arrow people stock," a New York-based sellside trader said.

Watson announced an $850 million offering of straight debt on Tuesday, saying it will use the proceeds to finance its acquisition of Arrow Group and to pay down debt, including its $575 million outstanding principal amount of convertible contingent senior debentures.

Mentioned in this article:

D.R. Horton Inc. NYSE: DHI

Johnson Controls Inc. NYSE: JCI

Saks Inc. NYSE: SKS

Watson Pharmaceuticals Inc. NYSE: WPI

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