GenCorp, Conseco in trade; NII Holdings edges up; Sterlite sells convertibles to yield 4%

By Rebecca Melvin

New York, Oct. 15 - Convertibles trading on Thursday was "average," with the typical large, liquid issues dominating action, according to market sources.

Other than the "usual suspects," which include such names as Medtronic Inc. and Transocean Ltd., defense company GenCorp. Inc. was in trade after a Standard & Poor's outlook raise, which was based on the company's good niche position, backlog and the likelihood that it will be able to pay off a January 2010 put if its current cash balance is maintained.

Conseco Inc.'s existing 3.5% convertibles also continued to trade actively in follow-through from earlier in the week when the company said that it plans to tender for those bonds.

NII Holdings Inc.'s 2.75% convertibles due 2025 were in trade amid no particular news. NII is one of the more frequently traded names in the convert space, although it's not as active as a Micron Technology or Medtronic, a New York-based sellside trader said.

The NII 2.75s were last sold at 99.45, which was better by 0.45 point compared to 98.85 bid, 99 offered on Wednesday, and in tandem with higher shares.

"It's a picked over market, with all the yield stuff getting toward par," a sellsider said.

Advanced Micro Devices Inc. was also a name in trade ahead of its earnings report, which was posted after the close of markets to reveal a narrower third-quarter loss on sales that were better than expected.

Overall liquidity in the convertibles space is "not the best" right now, a West Coast-based sellsider noted, adding that "everyone is a better buyer," which keeps prices going up.

Volume for the day was average, but it was mostly concentrated in the same narrow breadth, sources agreed.

"The stuff that trades every day is the liquid, high-grade stuff. The rest of it is pretty quiet," a sellsider said.

In the primary market, Sterlite Industries (India) Ltd. announced plans during the session to price up to $500 million of convertibles senior notes after the close.

Those notes did in fact price to yield 4% with an initial conversion premium of 37.5%, which was at the cheap end of talk for the coupon and near the rich end of talk for the premium.

For the year to date, new deal volume in the convertibles market stands at $27.323 billion in 91 deals, compared to $61.825 billion in 106 deals for the same period last year. That compares to year-to-date new deal volume in high yield that stands at $107.892 billion in 252 deals, up from $69.2 billion in 128 deals for the same period last year.

Financial earnings dominated news headlines on Thursday. Citigroup reported a net loss of 27 cents a share for the third quarter. And Goldman Sachs said its third-quarter profit rose to $3.19 billion from $810 million a year earlier, beating expectations by a wide margin.

Bank of America Corp. reports quarterly results on Friday.

GenCorp in trade

GenCorp 2.25% convertibles due 2024 traded at 88.5, which was up 2 points from previous levels. Shares of the Rancho Cordova, Calif.-based defense company closed up 8 cents, or 1%, at $7.13.

"It's an improved credit story. It's had a heck of a ride, and now there are some sellers," a sellsider said.

Standard & Poor revised its outlook on the company, which makes aerospace and defense products and systems, to "positive" from "developing" and affirmed the ratings, including its CCC+ corporate credit rating.

The ratings reflect its constrained liquidity; highly leveraged financial profile due to high debt and weak profitability; limited diversity; and modest scale of operations compared with competitors, the agency said.

Good niche positions in aerospace propulsion, a solid funded backlog position, and significant real estate holdings that could be monetized partially offset these weaknesses, S&P noted.

"If GenCorp can maintain its current cash balance, it appears likely that the company will be able to pay off, if required, the $125 million in notes that can be put to the company in January 2010," said S&P credit analyst Lisa Jenkins in a news release.

Conseco continues in trade

Conseco's 3.5% convertibles due 2035 continued to trade at just under par.

The Carmel, Ind.-based insurer plans to tender for the bonds soon and announced an offering of $293 million of new paper, with which to repurchase the outstanding issue.

"It's not going to get too close [to par]; it's the element of timing," a sellsider said.

Sterlite prices after the close

After the market close, Sterlite priced a $500 million issue of five-year convertible bonds to yield 4% with an initial conversion premium of 37.5%, according to a syndicate source.

The registered deal was being sold by joint bookrunners Deutsche Bank Securities Inc. and Morgan Stanley & Co. Inc.

The notes looked to be priced reasonably attractively, sources said.

There was a plus 1.75 point offer in the gray market ahead of pricing, one source said.

"It's not a familiar credit; and as far as comparables, there are not a lot of companies of India that trade here. But it looks like a single B credit, and people are using credit spread of 600 basis points over [Libor]," a sellsider said. But market participants apparently disagreed on the volatility input, he said.

"Depending on the vol. attached in valuation models, the paper may have looked cheap at the mids or better," the sellsider said.

The premium was based on the volume weighted average price of the stock, which, given that shares fell 10% after the deal was announced, posed a problem.

"The stock sold off once they announced the deal in the afternoon. But the price is going to reflect the morning pricing, which will raise the premium by about 3 percentage points,' a sellsider said.

"The premium is going to be higher than it might have been, and it's going to be hard to get a short off," the sellsider said.

The notes, which will be convertible into Sterlite's American Depositary Shares, will be non-callable for three years and provisionally callable thereafter at a 130% trigger.

Closing is seen by Oct. 29.

Mumbai, India-based Sterlite operates an international non-ferrous metals and mining company.

Being a mining company in the commodities arena made them interesting for investors.

"It makes sense. With the dollar selling off, commodities become more attractive," a sellsider said.

Mentioned in this article:

Advanced Micro Devices Inc. NYSE: AMD

Conseco Inc. NYSE: CNO

GenCorp Inc. NYSE: GY

NII Holdings Inc. Nasdaq: NIHD

Sterlite Industries (India) Ltd. NYSE: ADRs: SLT

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