Hedge players win on Wyndham tender; Kodak reverses course; MF Global steady to higher

By Rebecca Melvin

New York, Feb. 9 - Wyndham Worldwide Corp.'s convertibles jumped by more than a point over parity Wednesday - representing a win for hedge players - after the hospitality company announced that it had begun a cash tender offer to purchase the bonds for about a 5-point premium.

The Wyndham convertibles, which are better than double par and held on a very high delta, or hedge, had stood at 4 points over parity before the tender was announced, a New York-based sellside desk analyst said.

Wyndham shares contracted on earnings, which was also announced Wednesday, and between shares moving lower and the bonds moving higher on the tender, hedge players were able to win on both sides, a second New York-based sellside analyst said.

"It was a home run for hedge players," the second analyst said.

But the first analyst said he would have characterized the tender action as "a mild win."

Eastman Kodak Co. was also better Wednesday amid no particular news, trading up to around 90 and seeing a 3-point rise in two days, a Connecticut-based sellside trader said. The bonds were said to be recovering from sharp losses suffered in response to earnings posted Jan. 31.

MF Global Holdings Ltd.'s newly priced 1.875% convertibles were steady to higher in active trade Wednesday, trading at 100.25 versus a share price of $8.13, and seemingly more comfortable there after trading at that level Tuesday, but coming off and settling lower on their debut in secondary market dealings.

Other names that continued to see strong activity included Beckman Coulter Inc. which was active for a third straight day after news that Danaher Corp. agreed to buy the maker of diagnostic research equipment; and Chesapeake Energy Corp.'s convertibles, which have strengthened after the Oklahoma City-based natural gas company said it plans to sell more than $5 billion in assets, of which about half of the proceeds will be used to pay down debt.

In the overall convertibles market, however, amid a continuing climb in equities and lower volatility, activity was seen as lackluster.

The equity markets were mixed to unchanged even thought the Dow Jones Industrial Average eked out its eighth straight gain. Convertible players have been standing pat with the steady rise in equities and as volatility remains low.

The Nasdaq Stock market ended down Wednesday by just 8 points, or 0.3%, at 2,789.07; the S&P 500 stock index ended down 3.7 points, also a 0.3% slip; but the DJIA edged up 6.7 points for a 0.06% add and a 12,239.89 close.

The CBOE Volatility index stood at 15.87 at the close, which was 0.06 higher.

Wyndham wins points

Wyndham's 3.5% convertible senior notes due 2012 traded up 5 points to 5.5 points and were bid higher than the 5-point premium of the tender inducement for at least part of the day.

The strength was attributable to the Parsippany, N.J.-based hospitality company's cash tender offer for those bonds, which represents a 5-point premium. Prior to the tender news, the bonds stood at a 4-point premium.

The premium above 5 points was an indication that investors feel that they may be able to get more out of the company in its effort to tender for the bonds, a New York-based sellside desk analyst said.

The convertibles stood at a price of 246 at the beginning of the day and actually ended lower at about 240; but that move represented an expansion of premium because the stock dropped. That drop meant that parity moved down to 235.5.

The convertibles have a delta of 98.9%, a New York-based sellside analyst said. They traded during the session between 239.973 to a high print of 250.49.

Shares of the company closed down $1.17, or 3.8%, at $29.68 in heavy volume.

The company announced, concurrently with reporting earnings, that it wants to tender for cash the remaining $115,780,000 principal amount of 3.5% convertible notes outstanding.

The tender will be hinged on the average volume weighted average price of the company's common stock (meaning the sum of the VWAP for each day of the averaging period divided by 15). multiplied by the fixed share amount plus a fixed cash amount of $50, consisting of $5 in cash as compensation for the quarterly dividend on the company's common stock, which is expected to increase by $0.03 per share, that is expected to be declared Feb. 25 and paid March 25, plus $45 in cash as additional tender compensation, provided that in no event will the purchase price per $1,000 principal amount be less than $1,878.65.

The fixed share amount is equal to 79.5745, the conversion rate. The notes will not be convertible into shares but will be settled solely in cash.

Deutsche Bank Securities Inc. and Goldman Sachs & Co. are the dealer managers for the tender.

In connection with the tender, the company intends to enter into agreements with the counterparties to the cash spread hedging arrangements that were entered into by the company at the time the convertible were issued.

Wyndham maintains outlook

In addition to the tender, Wyndham reported fourth-quarter earnings that represented a 2-cents-per-share beat over analysts' estimates but were viewed as disappointing because the company maintained its 2011 outlook revenue of about $4 billion to $4.2 billion. Analysts expect revenue of $4.1 billion for the year.

Wyndham's EBITDA was in line with analysts' expectations, and the company did not raise its outlook of EBITDA of $925 million to $955 million for 2011.

Wyndham reported fourth-quarter earnings of $78 million, or 43 cents a share, compared with earnings of $73 million, or 40 cents per share, last year. Excluding items, it earned 46 cents a share, beating analysts' estimates of 44 cents per share.

Revenue rose 3% for the three months ended Dec. 31 to $937 million, which was up from $913 million a year earlier.

MF Global steady to higher

MF Global's 1.875% convertibles due 2016, which debuted Tuesday, traded at 101.25 versus an underlying stock price of $8.13, a level that was unchanged compared to trades Tuesday.

But later Tuesday the notes were marked lower.

Shares of the New York-based dealer-broker edged up 4 cents on the session, or 0.5%, to $8.17.

MF priced $250 million of five-year convertible senior notes at par to yield 1.875% with an initial conversion premium of 27.5%.

The bonds were purchased initially by both outright and hedged players.

The bonds have settled in at the 101.25 area, a syndicate source said, in line with valuations that put them 1% to 1.5% cheap, and they aren't likely to change much until the stock moves one way or the other.

"The stock hasn't done anything and the bonds haven't done anything either," the sellsider said.

Mentioned in this article:

Beckman Coulter Inc. NYSE: BEC

Chesapeake Energy Corp. NYSE: CHK

Eastman Kodak Co. NYSE: EK

MF Global Holdings Ltd. NYSE: MF

Wyndham Worldwide Corp. NYSE: WYN

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