Planned Clean Energy, Alon in focus but quiet ahead of pricing; Titan Machinery weakens

By Rebecca Melvin

New York, Sept. 10 - Convertibles players eyed two new deals Tuesday that were quiet in the gray market ahead of final terms expected to be fixed after the market close. But the underlying stocks of both companies dropped during the session and the stock borrow was notably tough on at least Clean Energy Fuels Corp.'s $200 million of five-year convertible senior notes.

From a long-term perspective, the Clean Energy deal with its 5% to 5.5% coupon was intriguing given its fundamental story, market players said.

Clean Energy is as an owner and operator of fueling stations for natural gas-powered cars and trucks.

The second deal, Alon USA Energy Inc.'s planned $130 million of five-year convertibles, looked cheap given its 3% to 3.5% coupon and 27.5% to 32.5% premium, but it was very quiet ahead of terms being set and the underlying shares fell 7.5% during the session.

Back in established issues, trading volume picked up but was dominated by a few, short-dated issues and pricing was little changed. Archer Daniels Midland Co.'s 0.875% convertibles, which mature in February, were the top traded issue and remained pretty steady on recent levels at 101.75, and Alcoa Inc.'s 5.25% convertibles, which mature in March, were actively traded for a second straight day and were flat to slightly lower again.

"ADM was trading a ton," a New York-based trader said, adding that the issue was trading on an outright basis only.

"It was down only a little bit, but basically it's been a straight line for some time," he said of the ADM bond.

As for Alcoa, news for the New York-based aluminum producer on Tuesday was that it was one of three companies being dropped from the Dow Jones industrial average index.

The other two companies getting the ax are Hewlett-Packard Co. and Bank of America Corp. The three companies replacing them are Goldman Sachs Group Inc., Nike Inc. and Visa Inc.

"I think someone just blew out of the bonds," a trader said of the activity in the Alcoa convertibles.

Elsewhere, Titan Machinery Inc.'s 3.75% convertibles, which don't trade frequently, were down in good volume despite a gain in the underlying shares of the West Fargo, N.D.-based agriculture and construction equipment stores company.

Clean Energy's credit viewed

Clean Energy's planned $200 million five-year convertible senior notes was looking pretty interesting from a long-term perspective, but the underwriters' credit assumption of 800 basis points over Libor was eyed skeptically.

"Recognizing that there is not a normal borrow in any sense and arbitrarily capping the borrow at 3% (while still using a 36% volatility) leads to an option-adjusted implied spread of 1,124 basis points, according to Kynex," analyst David Epstein of CRT Capital Group LLC wrote in a note published Tuesday.

"That may seem a scant spread to anyone who has recollections of one of the previous waves of energy infrastructure that was built...ethanol plants. Many of those promptly went bankrupt. It may also seem scant in the context of the pain that has been caused in the past by betting on natural gas prices (TXU, GMXR, and the list goes on and on)," Epstein wrote.

The point being, Epstein said, that it's always dangerous to underestimate the volatility of energy prices.

The Seal Harbor, Calif.-based company owns and operates more than 400 natural gas fueling stations in the United States and Canada.

Nevertheless, Epstein still feels that for convertible arbitrage investors, the notes are still interesting if they can find borrow of reasonable size in the 3% range or below.

Another market source said he thought the deal, which was talked at a 5% to 5.5% coupon and a 22.5% to 27.5% initial conversion premium, should have a credit spread of 950 bps over Libor and a 30% vol.

"Basically, I think they would need to have an 11.5% type coupon at least for a high-yield deal; and they might not even be able to get that done," he said.

The Rule 144A offering has a $30 million greenshoe and was being marketed via joint bookrunners Citigroup Global Markets Inc. and Morgan Stanley & Co. LLC.

The notes are non-callable for three years and then are provisionally callable if shares rise to 160% of the conversion price.

The bonds will be physically settled.

Proceeds are expected to be used to fund capital expenditures and for general corporate purposes.

Alon looks cheap

The Alon $130 million of five-year convertibles was seen at 2%-plus cheap using some ballpark inputs such as a 700 bps credit spread and a 40% vol., a New York-based sellsider said.

He noted that it's a company with a pretty small market capitalization of about $700 million.

"The stock's got beaten up; it looks like guys were trying to get short ahead of it," the sellsider said.

The Rule 144A offering has a $20 million greenshoe and was being sold via Goldman Sachs and Barclays.

In connection with the offering, Alon planned to enter into privately negotiated convertible note hedge and warrant transactions with one or more affiliates.

Proceeds will be used to fund the cost of the note hedge transactions and to fund the repurchase of a portion of its outstanding senior secured notes due 2014 issued by Alon Refining Krotz Springs Inc., a subsidiary of the company.

Based in Dallas, Alon is a refiner and marketer of petroleum products.

Titan trades down

Titan's 3.75% convertibles due 2019 traded between 90.375 and 91.25 on Tuesday, which was down from 92.25 previously and down from 95 in the middle of July, according to sources.

Titan shares gained 57 cents, or 3.4%, on Tuesday to $17.31.

"Yeah, we're taking a look at that. It doesn't trade a ton, but it's an interesting story," a New York-based trader said.

A second trader echoed the sentiment. The bond was trading outright on Tuesday, and, in general, trades either outright or on a very light delta.

Mentioned in this article:

Alcoa Inc. NYSE: AA

Alon USA Energy Inc. NYSE: ALJ

Archer Daniels Midland Co. NYSE: ADM

Clean Energy Fuels Corp. Nasdaq: CLNE

Titan Machinery Inc. Nasdaq: TITN

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