USEC drops dollar neutral on Japan's nuclear crisis; Chesapeake up; Illumina, RAIT on tap

By Rebecca Melvin

New York, March 14 - Monday's session brought convertible paper for sale, but not a lot of volume, as market players, gripped by headlines related to a possible nuclear disaster in Japan, weighed uncertain scenarios.

A top Japanese official said that the fuel rods in three of the reactors of the country's most troubled power plant appeared to be melting down in the aftermath of Japan's 8.9 earthquake and tsunami last week, the Associated Press reported.

"It felt heavier, and it was better for sale, but there was not a lot of conviction either way," a New York-based sellside trader said of the convertibles market.

A second New York-based sellsider said there was "little activity at all....people are watching TV and doing little else."

Some of the trading that did occur was spurred by Japan's nuclear crisis. USEC Inc., a supplier of enriched uranium fuel for commercial nuclear plants, saw its 3% convertibles plunge more than 7 points outright and 1 to 2 points on a hedged basis, amid concerns about the future prospects of nuclear power programs both here and abroad.

Natural-gas producer Chesapeake Energy Corp. saw its 2% convertibles due 2037 (Cusip: 165167BZ9) trade actively and higher by 1.5 points outright to 110 amid prospects that natural gas could be a beneficiary of any disfavor that nuclear power suffers, a Connecticut-based sellside analyst said.

Elsewhere, Allergan Inc.'s 1.5 convertibles, which were called last week, remained active in trade, as well as other called issues.

One sellsider said that he believed there were investors shorting certain paper but that they were buying other issues like Cephalon Inc.'s 2% convertibles due 2015.

"Those are fair," the trader said of the Cephalon convertibles.

In the primary market, RAIT Financial Trust planned a $100 million offering of 20-year convertible senior notes and Illumina Inc. planned an $800 million offering of five-year convertibles, both seen pricing after the market close.

USEC drops

USEC's 3% convertibles due 2014 traded down to between 80 bid, 80.75 offered during the session, and they closed at 86.50 bid, 87 offered, according to market sources.

Shares of the Bethesda, Md.-based uranium supplier fell 57 cents, or 11%, to $4.59 in active trade.

"They moved down on a 50% [hedge]," a New York-based sellside trader said of the convertibles. And the lighter the hedge, the more the loss on hedge, another said.

Those notes were trading at about 90 at one point in February.

On a hedged basis, the paper looked to be lower by as much as 2 points, according to one sellsider, who said he was surprised they didn't do even worse given how the paper has been acting of late.

But a second sellside trader said the loss was probably only a point to 1.25 points, based on a 65% to 70% hedge.

"It was not good if you were on a lighter hedge," the second trader said.

On an outright basis, the paper was down 7 or 8 points.

He said USEC was in trade due to the prospects of the nuclear industry "getting hit."

During the session, USEC president and chief executive John Welch put out a statement in response to the situation in Japan.

He said, "Today our thoughts are with the Japanese people and nation. Our hearts go out to everyone affected by the natural disasters and especially those who lost their lives, their families and loved ones. We also offer our admiration for their courage in the face of great tragedy, including those at Japan's nuclear power plants who are working to protect the safety and well-being of all."

"Japan has long been a partner and a friend to USEC. As the Japanese government works to protect its citizens and restore and rebuild the country, USEC stands ready to assist," Welch continued.

"The ongoing reports of the devastation and human suffering caused by the earthquake and tsunami on Friday is of great concern. As a result, USEC employees have already begun to mobilize and are raising funds for the relief effort.

"We are monitoring the situation closely and will continue to work with our industry partners to ensure that all necessary support and assistance is provided," Welch said.

Chesapeake lifts

At least some of Chesapeake's convertible bond issues were in trade, including the 2% bonds of 2037.

"Nuclear and natural gas are traditionally thought of as environmentally safe, so it's natural that as nuclear suffers, natural gas benefits," a Connecticut-based sellside analyst said.

It will have a bigger effect on the LNG market, he noted, with the effect on the U.S. natural gas market less direct.

Nevertheless, the long-term repercussions will benefit natural gas. "Now we're less likely to develop nuclear power. Plants are going to have a harder time getting their licenses renewed, and it's a boost in the arm for natural gas, long term," he said.

Natural gas prices were up slightly during the session and looked to have settled little changed.

RAIT to price

RAIT Financial planned to price $100 million 20-year convertible senior notes to yield 5.75% to 6.25% with an initial conversion premium of 17.5% to 22.5%.

The notes are non-callable for five years, with puts in years five, 10 and 15. There is contingent conversion if shares rise to 130% of the conversion price.

There is full dividend protection via a conversion rate adjustment and change-of-control protection.

RAIT intends to use the proceeds to repay debt and for general trust purposes, including working capital.

There is a $15 million greenshoe for the registered offering, which is being sold via bookrunner Bank of America Merrill Lynch.

Philadelphia-based RAIT is a real estate investment trust focused on properties in Philadelphia and in the Baltimore to Washington, D.C., corridor.

Illumina to price

Illumina planned to price $800 million of five-year convertible senior notes, with the price talked at a discount of as much as 2.5 points.

"That's what we're going out with," a syndicate source said when asked if the par was talked at 98.5 to 100.

The coupon was talked at a fixed rate of 0.25% with a 30% initial conversion premium.

Illumina is a San Diego-based developer of genetic research tools.

The company said it will use proceeds of the Rule 144A offering to buy back common shares and convertible bonds and for general corporate purposes.

Morgan Stanley & Co. Inc. and Goldman Sachs & Co. are the bookrunners, with Bank of America Merrill Lynch as the co-manager.

The notes are non-callable and may not be put.

The convertibles have full dividend and takeover protection.

Mentioned in this article:

Allergan Inc. NYSE: AGN

Cephalon Inc. Nasdaq: CEPH

Chesapeake Energy Corp. NYSE: CHK

Illumina Inc. ILNM

RAIT Financial Trust Nasdaq: RAIT

USEC Inc. NYSE: USU

© 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.