Sonic Automotive looks cheap; Eastman Kodak to price; D.R. Horton rises; AGCO falls on view

By Rebecca Melvin

New York, Sept. 16 - Convertible bonds remained strong on Wednesday, riding upward amid a combination of equities that continue to climb and very taunt bond supply that has paper going from strength to strength, market participants said.

"Every time I think that stuff may 'come in' a little, it goes up again," a New York-based sellside trader said, suggesting that market steam is coming from a lack of new issuance.

"People expected more new issues in September and set money aside, so now they're coming into the secondary," the sellsider said.

Another New York-based sellsider said it was a technical bid - with holders often unwilling to give up paper - reflective of the strength with the high-yield market.

The level of new issuance has been disappointing so far this month. With September half gone, there have been only three new issues, totaling $375 million in the U.S. convertible market.

But after the close of markets Wednesday, Eastman Kodak Co. launched a $300 million offering of 7.5-year convertible bonds in a Rule 144A deal that was expected to price late Thursday or early Friday.

Also on Thursday, final pricing is expected on Sonic Automotive Inc.'s $125 million of 20-year convertibles, which were seen very cheap, and bid plus one and plus two in the gray market; although no trades were seen.

In secondary dealings, D.R. Horton Inc. saw its convertibles gain in active trade as its shares moved higher.

Bell Microproducts Inc., with shares that trade in the pink sheets, saw its convertibles trade up 5 points to 73, which represents a 27.5% yield to put.

But AGCO Corp. convertibles moved lower amid a 9.6% drop in their underlying shares after the farm-equipment maker cut its 2009 earning forecast, citing weak sales in Europe, and said it may post a net loss for the third quarter.

Sonic seen cheap

Sonic Automotive's registered deal, which was talked to yield 5.5% to 6% with an initial conversion premium of 22.5% to 27.5%, was seen 12% to 15% cheap, using a credit spread of 900 basis points over Libor and capping vol. at 45%, according to one sellsider.

Another sellsider said, "These will trade well unless they change the terms and really up it. We have a plus one bid."

Although the company's sector in auto retailing might be considered less desirable than most, Sonic is a known convertibles name, and the paper was being carefully watched.

Speaking of new issues in general, a New York-based sellsider said, "All the deals that have come have been small, off-the-run issues that have been snatched up by outright buyers."

'Comfortable' with pricing

Convertibles have already come back dramatically from depths plumbed in 2008, and with pricing having rebounded so far, some wonder if a leg down should in the offing.

But Bill Feingold, co-founder and managing partner of Hillside Advisors LLC, a consulting firm, said he is comfortable with valuations where they are.

"The returns this year certainly aren't going to happen again next year, so it's understandable if people start to take a little off the table. But I am comfortable with valuations where they are right now. I bought stuff cheaper, but I'm going to leave it."

Market players took notice of a news report Wednesday that said hedge fund giant Citadel Investment Group is adjusting its strategy to cut holdings for two of its funds, including in convertible bonds.

So far however there is no evidence of profits being taken off the table. "Stuff is so much richer, and it just keeps getting better," a sellsider said. "The whole market is bid for, and all we keep hearing from holders of securities is that they are not going to sell it."

Horton higher, AGCO lower

D.R. Horton's 2% convertibles due 2014 traded at 126.5 versus a stock price of $13.60, which was about 4 points higher than previous prints.

But AGCO's 1.75% convertible senior notes due 2036, which are deeply in the money, looked to trade at 137.25, which was down about 10 points from previous levels. And the AGCO 1.25% convertible senior notes due 2033 traded at 94.5, which was down 7 or 8 points from 102.5 previously. But the 1.25% bonds pared losses to end at 98, which was down only about 4 points.

AGCO said that falling demand for equipment in Europe has hurt its performance this year, and it reduced full-year adjusted earnings to $1.30 per share to $1.50 per share, below analysts' average forecast of $2.06 per share.

The Duluth, Ga.-based company also said it expects third-quarter sales to be down 30% to 35% from the year-earlier period, with net income at or below break-even.

Bell Micro adds 5 points

Bell Micro's 3.75% convertibles due 2024, which are putable in March 2011, traded at 73 versus its shares that trade over the counter and which gained 10%.

The San Jose, Calif.-based distributor of storage and computing technologies filed its 10-Qs for the first and second quarters, with results that were better than expected, a sellsider said.

"This is in-line with the company's commitment that these would be filed in September. The results came in stronger than I expected," the sellsider said, pointing out that pro forma EBITDA for the first half was $41.627 million (actual $24.5 million) and pro forma free cash flow for the first half of 2009 of $100.5 million (actual $83.4 million) was tracking ahead of his expectations.

Debt is coming down and liquidity remains solid, he said.

Mentioned in this article:

AGCO Corp. Nasdaq: AGCO

Bell Microproducts Inc. Pink Sheets: BELM

D.R. Horton Inc. NYSE: DHI

Eastman Kodak Co. NYSE: EK

Sonic Automotive Inc. NYSE: SAH

© 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.