Providian convertibles react flatly to Washington Mutual takeover; GM off before stockholders meet

By Ronda Fears and Rebecca Melvin

Nashville, June 6 - News of Washington Mutual Inc.'s agreed $6.5 billion takeover of Providian Financial Corp. caused mixed trading in Providian's convertible paper Monday, with price moves related, for the most part, to whether the bonds had takeover protection.

Seattle-based Washington Mutual, the largest saving and loan in the United States, which had been seen for months as a takeover target itself, saw its convertible tumble alongside the stock on the news. Providian also had been seen as a target for some time and its convertibles had already priced in a deal of some sort, traders said.

The rest of the financial sector was relatively unaffected by the merger news; and on the whole traders said it was a pretty quiet but reasonable trading day in convertibles.

General Motors Corp. was lower ahead of its annual stockholder meeting Tuesday, but traffic in the convertibles was very light. Ford Motor Co.'s convertible also headed south, while the stock gained slightly, as the United Auto Workers union gave a thumbs-up to its $1 billion bailout of parts supplier Visteon Corp., a former subsidiary.

Airline paper, however, was taking to the skies again, a sellside trader said, with Northwest Airlines Corp. and Delta Air Lines Inc. spearheading the move. "Everyone is chasing airline paper, despite the high oil prices," he said. They are "figuring the converts are cheap if they make it [without having to file bankruptcy]."

Meanwhile, new issues put into circulation last week were moving up. Symmetricom Inc.'s new 3.25% convertible hit 100.625 on Friday, according to a sellside market source, and on Monday traded in a range of about 100.75 to as high as 102, while the stock gained 15 cents on the day, or 1.58%, to close at $9.67. And, Cephalon Corp.'s new 2% convertible rose a half-point Monday to settle at 98.5 bid, 98.125 offered, although many biotech issues were beaten down.

Chiquita may get freshened up

Nothing popped up in the way of a new deal, but there may be hope for the Chiquita Brands International Inc. issue that has been sitting on the calendar for probably past its due date while the Cincinnati-based banana giant faced an investigation into business practices by the European Commission.

Or, some onlookers say, it may get quashed, or squashed, whichever you prefer as they both would suggest the deal dies out.

"Now that they have rescheduled a launch for the bank facility, we could see something determined on the convert, one way or the other. They may just scrap the deal, it is a tough market right now," said one sellside onlooker. "We've heard that they will bump up the junk bond and do away with the convert altogether. But it's tough to sell deals in the junk bond market now, too."

Chiquita is working toward funding the $855 million cash acquisition of the Fresh Express unit of Performance Food Group Co. announced earlier this year. Market chatter circulating recently in the convertible community speculated that the $75 million perpetual convertible preferred portion of the funding package would be trimmed down, but that has not been confirmed by the company.

Originally, Chiquita planned the convertible to be sold in conjunction with $150 million of senior bonds and a new $650 million bank credit facility, and to use at least $75 million of cash on hand to fund the Fresh Express purchase.

Now, the company is scheduled to hold a bank meeting on Wednesday to re-launch its proposed credit facility at a revised amount of $675 million. The original deal had been put on hold in April because of legal matters.

Chiquita relaunches loan

The revised bank facility consists of a $100 million five-year revolver secured by Chiquita assets, a $200 million seven-year term loan B secured by Chiquita assets and a $375 million seven-year term loan C1 secured by Fresh Express assets. All tranches are priced at Libor plus 275 basis points.

Previously, the $650 million original facility consisted of a $125 million five-year term loan A secured by Chiquita assets talked at Libor plus 175 bps, a $375 million seven-year term loan B secured by the Fresh Express assets talked at Libor plus 225 bps and a $150 million five-year revolver secured by Chiquita assets talked at Libor plus 175 bps with a 50 bps commitment fee.

Under the revised facility, there is also a $150 million one-year term loan C2 secured by Fresh Express assets that would be available if the company is unable to issue $225 million of unsecured senior notes at the parent holding company level. Proceeds from the notes would be used to replace the term loan C2 and reduce the term loan B by $75 million.

Chiquita revealed on Friday that the internal investigation showed that some of its employees had shared pricing and volume information over many years with competitors in Europe and may have engaged in other conduct in violation of European competition laws and company policies.

The European Commission was notified by Chiquita of these wrongdoings, and because of this voluntary notification and cooperation with the investigation, the European Commission has granted Chiquita immunity from any fines related to the conduct, conditioned on continued cooperation, among other things.

WaMu off on Providian buy

Washington Mutual, the largest saving and loan in the United States, saw its 5.375% convertible trust preferred lose 1.20 points to 51.35 bid, 52.80 offered, while its stock lost $1.03, or 2.48%, to $40.54.

WaMu, which was itself considered a potential takeover candidate targeted by Citigroup earlier this year, has agreed to pay $6.45 billion in cash and stock for Providian, a California-based credit card company. WaMu chief executive Kerry Killinger said in a conference call that the deal "jump starts" his company's credit card lending capability and broadens its mid-market lending. The acquisition also provides Washington Mutual with a "very seasoned management team" from Providian, Killinger said.

The transaction is expected to close in the fourth quarter and add to profit within one year.

Standard & Poor's affirmed its ratings on WaMu (A-) and put Providian (B) on positive watch, remarking that WaMu was much larger than Providian and that Providian has recently gained stability by redirecting its business strategy away from the deep sub-prime customer.

"The successful implementation of the revised strategy is evident in the progress Providian has made to date in improving asset-quality metrics specifically, and more generally, overall financial performance," said S&P credit analyst John K Bartko.

Providian takeover protection key

However, the buyout premium, at $18.71 a share, or 4.2% over Providian's closing price on Friday, was low, and Providian stock and 4% convertibles followed it lower while its newer 2.75% issue rose slightly.

One sellsider said that because Providian was seen as a takeover target, the bonds had run up in recent times in anticipation of a deal.

"Everyone knew these guys were getting acquired. They had set themselves up for this," the sellside trader said. "A lot of the juice was gone."

Providian's 4% convertibles due 2008 were down nearly 10 points on Monday at 136.94 bid, 137.44 offered. Providian shares ended Monday at $17.63, down 33 cents on the day. But the credit card company's 2.75 convertible due 2016 generated some interest from buyers and was up a point at 122.875 bid, 123.375 offered.

Some market players attributed the gap in reaction between the Providian convertibles to takeover protection.

"This is the first time, or one of the first times, that there has been a takeover that kicks in the takeover protection provision," said one buysider in Connecticut.

The 2.75s came to market a little more than a year ago and it was one of the first to include this protection, the buysider said. At that time the San Francisco company was pegged as a possible takeover candidate, as reported in the June 14, 2004 issue of Prospect News' Convertible Daily.

With this protection "you are guaranteed that if a takeover happens you will be refunded a certain amount of the premium that you prepaid," he said. Most issues getting done now have takeover protection included. "Otherwise buyers won't touch them," the buysider said.

Two other Providian convertible issues, which are out-of-the-money converts - a 0% due 2021 and a 3.25% due 2005 - were both slightly higher on the day.

GM convertibles edge lower

General Motors, however, was lower ahead of its annual shareholder meeting Tuesday, with investors braced for some inkling as to whether billionaire investor Kirk Kerkorian will put a heavier chunk of his fortune into the world's largest automaker or not.

A signal from Kerkorian earlier this year sent GM securities zooming, a sellside desk analyst commented, but recent reports have indicated that he has rethought such a move and steered away from GM.

GM convertibles traded lower Monday by as much as around a quarter-point, but volume was very light. The stock ended the day off by 48 cents, or 1.55%, to close at $30.45.

GM's annual shareholder meeting is scheduled to be held in Delaware.

Sara Rosenberg contributed to this story

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