Convertibles loose zest as stocks snap rally; Thoresen sells $169.8 million; PetroQuest brings upsized deal

By Reshmi Basu

New York, Sept. 20 - The convertible market remained in a holding pattern Thursday, as investors were reluctant to play, given the uncertainty surrounding the U.S. economic picture.

However, while sentiment was reserved if not skittish, the primary market saw two new deals price.

From outside the United States, Thoresen Thai Agencies PCL sold $169.8 million of 2.5% unsecured convertible bonds due 2012.

The initial conversion price is Thai baht 59.90 per share, which was calculated from the volume-weighted average price of Thoresen Thai shares on the Singapore Exchange Securities Trading Ltd. from Sept. 17 to Sept. 19, plus a 15% conversion premium.

The notes will be redeemable at the option of the holder or company on Sept. 24 of 2010, 2011 and 2012.

Completion of the offering is slated for Sept. 24.

The Bangkok-based company owns and operates 45 general cargo vessels and bulk carriers.

Meanwhile in the U.S. market, PetroQuest Energy, Inc. priced an upsized offering of $65 million in series B cumulative convertible perpetual preferred stock with a 6.875% dividend and a 30% initial conversion premium.

The dividend came at the cheap end of talk, which was 6.375% to 6.875%, while the conversion premium came at the rich end of the expected 25% to 30% range.

The 1.3 million preferred shares priced Wednesday after the market close. Talk initially set the offering at $50 million.

JPMorgan Securities is the bookrunner of the registered transaction.

PetroQuest is a Lafayette, La.-based oil and natural gas company that drills primarily in the Arkoma Basin, East Texas, South Louisiana and the shallow waters of the Gulf of Mexico.

The company plans to use the proceeds to repay the majority of its borrowings outstanding under its bank credit facility and general corporate purposes. The company plans to continue borrowing under the credit facility to fund its 2007 capital expenditures to step up its drilling and leasing activities in its longer lived areas in Arkansas, Oklahoma and East Texas.

Quiet day for convertibles

Returning to the secondary, market sources depicted Thursday as slow while one trader described the day's action as "anticlimactic" as stocks zig-zagged in narrow ranges throughout the day, pressured by fresh concerns over inflation.

Testimony by Federal Reserve Board chairman Ben Bernanke did little to jolt the U.S. stock market. However, he did shed some light on the mindset behind the Fed's ½ percentage point cut, which was deeper than most had expected. Bernanke said the move was meant to avoid a repeat of the subprime mortgage meltdown by staying ahead of tightening credit conditions.

"We took that action to try to get out ahead of the situation and try to forestall potential effects of tighter credit conditions on the broader economy," he said in his prepared testimony in front of the U.S. House of Representatives financial services committee.

However, he also warned that while the Fed was taking steps to stymie the mortgage problem, there would be more disclosures and foreclosures to come.

But sources remarked that the market was unmotivated by his testimony as U.S. stocks turned lower on a mixed bag of corporate earnings, surging oil prices and a weaker U.S. dollar, which cut short the Fed-inspired two-day rally.

By the close, the Dow Jones Industrial Average index had given up 48.86, or 0.35%, for a close at 13,766.70. The Nasdaq closed at 2,032.61, a loss of 8.75, or 0.43%. And the S&P 500 inched 10.28 lower, or 0.67% to end at 1,518.75.

Proceed with caution

While the market cheered Tuesday's decision by the U.S. central bank to cut rates, by the time Thursday rolled around, there was no more juice left from the move.

On Tuesday, the convertible market flew higher, with notably higher returns on financials and housing paper.

The next day, the picture was more mixed, according to a desk analyst. And by Thursday, the market turned lower as a lot of those names gave back their previous gains, he remarked.

In fact, another analyst even questioned whether Tuesday's rally could be used as a gage for market sentiment, as he wondered if the market was actually inspired by the Fed reduction itself or if the was rally inspired by a bit of mob mentality.

As he put it, no one knows the extent of what was short covering, panic buying or fear of being left behind.

The crux of the problem is that the Federal Reserve has limited ability to shake the economy out of its subprime woes, he explained.

When the economy is overheating, the Fed can rein in inflation by upping borrowing rates. But making lending easier does little to help the original cause of the current problems, which was access to easy money.

Furthermore, the somewhat aggressive 50 bps cut could also suggest that the Fed is worried that a recession is on the horizon, which means that investors are "proceeding with caution," said one source.

Next catalyst

Last week trading held off in anticipation of the Fed, but now that the event has come and gone, the question is what will be the next trigger. And according to market sources, no one knows.

"There hasn't been any real wholesale selling," surmised the desk analyst, noting that it will take time for people to become comfortable with current market conditions.

But one thing that investors would like to see is more new issuance, he said, adding: "Give it a couple of weeks, corporates will come back into the market."

Countrywide gives up gains

What goes up must come down. And that is exactly what happened to convertibles as there was selling against previous gains.

One of the names heading downwards Thursday after the recent run up was Countrywide Financial Corp.., which saw its stock slip in trading.

The Calabasas, Calif.-based home lender saw its Libor minus 350 basis points series A convertible senior debentures due April 15, 2037 close at 92 3/8 versus a stock price of $19 7/8. They closed Wednesday at 92½ versus a stock price of $20.54.

Countrywide's Libor minus 225 bps series B convertible senior debentures due April 15, 2037 closed at 89.58 versus a stock price of $19 7/8 Friday after finishing Wednesday at 89½ versus a stock price of $20.54. Countrywide stock (NYSE: CFC) dove 98 cents, or 4.77%, on Thursday.

Meanwhile Atlanta-based home builder Beazer Homes USA Inc. saw its 4.625% convertible senior notes due June 15, 2024 close at $76.50 versus a stock price of $10.63.

They wrapped up Wednesday at 76.75 versus a closing stock price of $11.03.

Beazer stock (NYSE: BZH) remained in the red Thursday, giving up 0.60, or 5.44%.

Minneapolis-based US Bancorp, a commercial bank, also retraced gains.

US Bancorp's Libor plus minus 175 bps convertible senior debentures due Feb. 6, 2037 were spotted at 99.25 versus a closing price of $38.38.

They finished trading Wednesday at 99.45 versus a stock price of $33.98.

U.S. Bancorp stock (NYSE: USB) shed 0.60%, or 1.77% on Thursday.

Meanwhile Calpine Corp's convertibles moved higher in response to Wednesday's news that it addressed valuation concerns in its second amended plan of reorganization and related disclosure statement, according to another trader.

The 7¾% notes due 2015 were up 5 points at 90 bid, 92 offered while the 6¼% notes due 2014 gained 2 points, at 82 bid, 84 offered. And the 4¾% notes due 2023 added 2½ points at 91.5 bid, 93.5 offered.

Calpine, a San Jose, Calif., power company, filed for bankruptcy on Dec. 20, 2005.

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