Navistar comes in on hedge; BioMarin expands; United Technologies plans $1 billion of units

By Rebecca Melvin

New York, June 12 - Navistar International Corp. swung to losses on Tuesday on news that a U.S. court ruled against the troubled Lisle, Ill.-based engine and truck maker on being able to sell engines that exceed emissions limits in lieu of a per-engine fine.

Navistar traded all over the place, traders said, and ended the day lower down several points outright to 93 and change, and by about 1.25 point on a dollar-neutral, or hedged, basis.

The convertibles of BioMarin Pharmaceutical Inc. were pulled into trade and expanded about 1.25 points on the day, a New York-based trader said, pointing to speculation about a potential takeout of the Novato, Calif.-based biopharmaceutical company.

In the primary market, focus was on a $1 billion deal launched by United Technologies Corp. and being sold by joint bookrunning managers J.P. Morgan Securities LLC, Bank of America Merrill Lynch, Citigroup Global Markets Inc., Goldman Sachs & Co., and HSBC Securities (USA) Inc.

The United Technologies offering of $50 par equity units was seen higher in the gray market at about 50.25 bid, 50.75 offered during the session, sources said.

"I believe it was well received, and they closed the books early," a trader said, adding that the paper was a half-point better in the gray.

Elsewhere, Mindspeed Technologies Inc. priced $32 million of five-year convertible senior notes, but the Rule 144A offering that was initially purchased by manager Raymond James & Associates Inc. was considered too small for many convertible players to be involved in.

Given the pickup in equity volatility, there have been some yield players stepping into the convertible space and picking up some yield names, a West Coast-based trader said. In addition, more balanced names have done well, he noted.

Still, the market in general has felt weak for a lack of buyers, and many things have come in because of a lack of buyers, he said.

Overall, Tuesday's session, a day in which equities rallied more than 1%, was pretty quiet, several market sources said.

Navistar in on hedge

The roller coaster ride that has marked trade of Navistar's 3% convertibles due 2014 continued on Tuesday with the bonds moving lower, to 93.625 versus an underlying share price of $26.70 late in the day.

The bonds had also changed hands at as low as 92. That compared to Monday, when the bonds traded at 96.75 versus an underlying share price of $29.75.

The decline represented a dollar-neutral drop of 1.25 points on a 25% to 30% delta, a New York-based trader said.

Shares plunged 10% in the early going on Tuesday, but ended down $1.59, or 5.5%, at $27.15 apiece.

The Navistar straight bonds suffered as well, with more than a $100 million of those trading and moving to as low as 90 from 98 before bouncing back to about the 94 mark, the trader said.

The spread on the straight bonds was 755 basis points over, he said.

The move reversed gains that the convertibles had notched on Friday and Monday following an earnings report induced plunge on Thursday.

Tuesday's drop was precipitated by more bad news.

The U.S. Court of Appeals for the District of Columbia Circuit vacated a ruling by the Environmental Protection Agency that allowed Navistar to sell heavy-duty diesel truck engines, which don't meet the latest standards for engine emissions.

The court found that the EPA didn't have good cause to issue an interim regulation in January that allowed Navistar to pay fines in order to continue to sell the noncompliant engines.

The court said that the health of Navistar's business was not justification for the EPA to issue the rule without following normal administrative procedures like going out for public comment on proposed rules.

The ruling is good news for Navistar competitors Cummins Inc. and units of Volvo AB and Daimler AG, which filed the lawsuits challenging the EPA rule.

That rule allowed Navistar to sell its model year 2012 and 2013 engines while paying a fine of $1,919 on each engine.

On Monday, the Navistar convertibles improved on speculation that Germany's Volkswagen auto company was looking at a potential stake in Navistar, which posted a surprisingly disappointing quarterly report and slashed full-year guidance last week.

United Technologies edges up

United Technologies' planned $1 billion of equity units were seen a half-point better compared to their $50 par in the gray market on Tuesday ahead of final terms expected to be fixed after the market close.

Final pricing wasn't available at press time.

The registered off-the-shelf deal with a $100 million greenshoe was talked to yield 7.5% to 8% with an initial conversion premium of 27.5% to 32.5%.

It was seen doing well within the talked price points using a credit spread of 500 basis points over Libor and 25% volatility, according to one market source.

An East Coast-based buysider said, "The deal will eventually trade rich to very rich. An investment-grade conglomerate with a stellar balance sheet and good growth prospects, what's not to like?"

He also said that he had heard high participation from players, including high-yield funds, equity income, equity, convert funds and hedge funds.

The equity units will initially consist of a contract to purchase United Technologies common stock and a 5% undivided beneficial ownership of $1,000 principal amount of notes due Aug. 1, 2022.

Under the purchase contract, holders are required to purchase United Technologies stock no later than Aug. 1, 2015. The notes may not be redeemed until Aug. 1, 2017.

There is a make-whole provision for certain cash mergers and change of control and full dividend protection in the form of a conversion rate adjustment.

Proceeds are expected to be used primarily to pay a portion of the cash consideration for the previously announced acquisition of Goodrich Corp. This merger is expected to be completed mid 2012. Remaining proceeds will be for general corporate purposes.

United Technologies has applied to list the units on the New York Stock Exchange under the symbol. "UTX PR A."

Hartford, Conn.-based United Technologies is a building and aerospace technology company.

Mindspeed prices

The $32 million offering of Newport Beach, Calif.-based Mindspeed, a maker of networking chips, priced to yield 6.75% with an initial conversion premium of 30%.

The notes are non-callable for three years until June 15, 2015, then provisionally callable if the company's shares are 150% of the conversion price for 20 out of 30 trading days.

Proceeds will be used for general corporate purposes, which may include capital expenditures, repayment of debt and working capital.

Raymond James was the manager and initial purchaser of the bonds.

Mentioned in this article:

BioMarin Pharmaceuticals Inc. Nasdaq: BMRN

Mindspeed Technologies Inc. Nasdaq: MSPD

Navistar International Corp. NYSE: NAV

United Technologies Corp. NYSE: UTX

© 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.