March 3, 2010
There are opportunities in busted converts that mature in 2011 that trade in the mid 90s. Many companies, particularly high yield companies, have been calling or tendering for their debt that is coming due within 2 years. Companies have been especially active retiring debt before they have to be classified as short term maturities on the balance sheet. So as of today, that means any debt due or put in the 1H of 2011 will be prime targets.
The two that I like most are the UAUA and BZH converts because they have a significant cash cushion and are strong enough companies to carry out a refinancing right now.
United Airlines (UAUA)
4.5% subordinated converts 95.0625 ask $726M put at par 6/30/2011
5% senior converts 96.625 ask $150M put at par 2/1/2011
UAUA will end 1Q10 with $3.2B in unrestricted cash. Furthermore, the company will likely end 2Q with $4.4B in cash because they will settle a $700M debt offering secured by its Japanese routes. UAUA generated $443m of free cash flow in 2009 and is expected to generate $700m of free cash flow in 2010.
UAUA has $545M in amortizing capital leases due in 2010. These converts are the next debt maturities for the company after that. Both the 4.5% and 5% converts can be repaid using cash or common stock at the company’s option.
Equity analysts think UAUA will potentially take out both convertible issues because they are an overhang for the equity.
There is a good chance that UAUA will tender for both convert issues in March 2010 because 1) the bond market is wide open 2) the stock is at new 52 week highs.
March is also a window of opportunity because the company will report in April. UAUA is scheduled to speak at the JPM transport conference on March 9, which could be a good time for them to tender for the bonds.
I think there is a good opportunity to make a quick 3-5 points. I would think the company would take care of both convertibles at the same time due to the close proximity of their put dates.
Beazer Homes (BZH)
4.625% converts 95.75 ask $145m put 6/15/2011
On January 11, 2010, BZH called the $127m 8.625% straight bonds due 5/15/2011 with proceeds from a $50m mandatory and $90m equity issue. The company will also get a $101m tax refund in 1Q. Management has made it clear that their number one priority is to deleverage.
At the end of 1Q, BZH will have about $560m in cash. The next debt maturity is the $145m converts with a put at par on 6/15/2011.
BZH generated $61m FCF in FY 2009 (Sep) and is expected to generate $113m FCF in FY 2010. The FCF by quarter is very seasonal with the most recent Dec Q -65m FCF, March Q expected +69 FCF, June Q -30m, and Dec Q +$140m.