ATP down on debut; new BroadSoft sees early add; Owens-Illinois better dollar neutral

By Rebecca Melvin

New York, June 15 - ATP Oil & Gas Corp.'s newly priced 8% convertible perpetual preferred shares were lower in first-day trading Wednesday after pricing at a discount ahead of the market open. The shares were down about 6.5 points on the day at 89 to 90 compared to the existing identical shares that were at 96.5 ahead of the new offering's advent, according to a market source.

BroadSoft Inc.'s newly priced 1.5% convertibles traded higher early to 101.5, but shares settled about 50 cents lower on the day than where that trade crossed.

Syndicate sources said they couldn't comment to Prospect News on where the new BroadSoft settled after first-day trade.

Owens-Illinois Inc.'s convertibles fell Wednesday but were higher by about a point on a dollar-neutral basis after the Perrysburg, Ohio-based glass container maker guided lower on second-quarter earnings due to higher-than-expected costs that will offset stronger global shipments.

Peabody Energy Corp.'s convertibles continued to trade lower on the day. But one New York-based analyst said the bonds were "really, really rich."

Overall the market seemed pretty soft again Wednesday with the Chicago Board Options Exchange Volatility Index or VIX, spiking up and "finally breaking 20," a New York-based trader said.

The broader markets skidded on a combination of fears surrounding the Greek debt crisis and a possible default and disappointing economic data in the United States.

A violent protest broke out in Greece against that government's latest austerity package, and the euro slid against the U.S. dollar and other currencies.

"I haven't seen any panicked selling. It's just that people are not adding risk at this point," a New York-based sellside analyst said about the convertibles market.

While European sovereign debt fears have been spooking U.S. markets intermittently for more than a year, the latest pummeling has the scent of something more serious.

"Look at the currency market, the euro is down massively," the analyst said, to underscore the significance of Wednesday's action.

"At some point it's not going to be a re-run, it's going to be the real thing," the analyst said. And there are "tons of implications for what a Greek default would mean: it would create a lot of stress globally, throwing the health of the European banks in questions and the U.S. economy would suffer," the analyst said. "You'd have huge problems on your hands."

ATP prices at discount

The newly priced ATP 8% convertible perpetual preferreds, which came at a discount to par of $90, traded early at around 90 and were later seen lower at 89 bid, 90 offered.

It had been talked at a discount to par of 90 to 91 ahead of final terms.

Shares of the Houston-based offshore oil and gas development and production company ended lower by 50 cents, or 3%, at $15.47.

One sellsider, who said his firm wasn't involved in BroadSoft because it was a small, $100 million deal, or in ATP because existing holders were likely dominating the new paper and it is not an attractive name, said he wasn't stepping in to start buying them.

The deal of the oil and gas company with operations in the Gulf of Mexico and the North Sea is identical to an existing perpetual convertible preferred that priced in September 2009, and given that the supply of that paper was increased, the new deal priced at a discount.

"It had been trading at 96.5 and now it's down 6.5 from where the existing ones were trading," a sellsider said of the existing and new preferreds.

Technically the new preferreds came at a 10% discount to the liquidation preference of $100 per share.

The registered, off-the-shelf deal is convertible at $22.20 per share.

They are non-callable until Oct. 1, 2014 and then mandatorily convertible if shares rise above 150% of the conversion price, or $33.30 per share.

Credit Suisse Securities (USA) LLC was the bookrunner of the deal, with Rodman & Renshaw LLC, a subsidiary of Rodman & Renshaw Capital Group Inc., acting as a co-manager. There is a $22.5 million greenshoe.

There is also standard dividend and takeover protection.

A portion of the proceeds will be used to buy a capped call transaction covering about 13.1 million common shares that can prevent dilution of outstanding stock up to a share price of $27.50.

The capped call transaction will have an initial strike price of $22.20 and an initial cap price of $27.50, each subject to certain anti-dilution adjustments.

Remaining proceeds will fund capital expenditures and be used for general corporate purposes.

BroadSoft adds early

BroadSoft's newly priced 1.5% convertibles due 2018 were quoted early at 101.5 bid versus a share price of $35.25.

Subsequently, the underlying shares of the Gaithersburg, Md.-based software maker sold off to trade as low as $34.45, and they ended at $34.72, which was down $1.09, or 2.9% on the day.

BroadSoft priced $100 million of the seven-year paper after the market close Tuesday at par to yield 1.5%, with an initial conversion premium of 17.5%, which was at the midpoint of coupon talk and at the cheap end of premium talk.

In valuations, some people thought the credit spread should be wider than the 600 basis points spread that several analysts used.

If the spread was widened to 700 bps over Libor, then cheapness comes out of it, a trader said, who put the deal at 3% cheap.

"There's not a lot of value to extract from it. There's nothing wrong with the company, but it's a small company...with a little bit of push back on the credit assumption," the trader said.

He said he assumed 600 bps over Libor and 40% volatility and it modeled fair. But "people don't agree with the credit assumption. Some people are using 700 [bps], and that's going to make people want to own it a little cheaper," the trader said.

With such a small coupon, there wasn't much downside protection seen for outright holders, and the trader said there was no incentive to hold the convertible compared to the underlying shares.

"You're kind of owning an equity substitute," he said.

The stock was seen a little overvalued, and the paper itself a little bit too long-dated at seven years.

The stock weakened through the day Wednesday after rallying back after early weakness in the shares on Tuesday after the deal was launched.

The Rule 144A deal, which has a $20 million greenshoe, came at the midpoint of coupon talk, which was 1.25% to 1.75%, and at the cheap end of talk on the initial conversion premium, which was 17.5% to 22.5%.

Goldman Sachs & Co. and Jefferies & Co. were the joint bookrunners of the deal.

The bonds will be non-callable for four years and then provisionally callable subject to a 140% price hurdle with a coupon make whole. There is dividend and takeover protection and also contingent conversion at a price hurdle of 140%.

Proceeds are earmarked for general corporate purposes, including potential acquisitions.

Owens-Illinois adds

Owens-Illinois' 3% exchangeables due 2015 were seen at the end of the session below par at about 99 bid, 99.5 offered. During the session the Owens-Illinois paper traded at 100 versus a share price of $26.80.

On June 2, the Owens-Illinois convertibles traded at 104.25 versus a share price of $31.00, and the day before on June 1 it changed hands at 104.5 versus a share price of $32.10.

The paper is generally held on a 40% delta.

Owens-Illinois' shares fell $4.00, or 13.5%, to $25.54 in ultra-heavy volume on Wednesday.

The exchangeables were "right below par," at the close.

"On a dollar-neutral basis, those bonds are actually up, meaning that the bonds are outperforming the down move in the shares," an analyst said.

The company said that contrary to when it entered the second quarter and expected results would be in line with the prior year, it now expects second-quarter adjusted net earnings will be lower compared to that period.

Nevertheless, Owens-Illinois continues to expect global shipment levels will increase between 5% and 10% in the second quarter, compared to the prior year, driven primarily by several acquisitions made in 2010.

"Demand remains strong across most markets and end-use categories, with the notable exceptions of Australia and New Zealand and beer in North America. Yet, higher than expected costs will more than offset the benefit of stronger global shipments," Owens-Illinois said in a release.

"While significant cost inflation was already anticipated heading into the second quarter, Owens-Illinois also has incurred additional manufacturing and delivery costs, as a result, Owens-Illinois will not fully realize the operating leverage expected from higher production levels in the second quarter of 2011.

The company said it continues to face challenging market conditions in Australia and New Zealand, citing appreciating currencies in those countries for part of the problem.

In the second quarter, stronger currencies have negatively impacted exports, including wine, which is one of Owen-Illinois' key end-use categories in those two countries, the company said.

In addition, beer consumption in Australia is down as consumer sentiment "is extremely conservative due to high interest rates leading to lower disposable incomes," according to the release.

While the company anticipated lower wine and beer bottle shipments, demand trends have deteriorated further over the course of the quarter, it said.

In response, the region has temporarily curtailed production to balance supply with lower demand. This curtailment has resulted in unabsorbed manufacturing costs that were not anticipated entering the second quarter.

Mentioned in this article:

ATP Oil & Gas Corp. Nasdaq: ATPG

BroadSoft Inc. Nasdaq: BSFT

Owens-Illinois Inc. NYSE: OI

Peabody Energy Inc. NYSE: BTU

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