Unisys to price $225 million mandatories; Affiliated Managers active after drop last week

By Rebecca Melvin

New York, Feb. 22 - Unisys Corp. got the convertible bond market going first thing Tuesday with a $225 million mandatory convertible preferred stock deal that was expected to price after the close, following the long holiday weekend for Presidents Day.

The Unisys mandatories were seen bid 100.5 in the gray market ahead of final pricing, and the deal was viewed as cheap at the midpoint of price talk and even slightly cheap at the rich end of talk, according to market sources.

Overall, the convertibles market was fairly quiet - typically the case after a holiday weekend - amid a sharp sell-off in stock markets and as oil prices and Treasuries jumped on concerns over unrest in Libya, whose leader Moammar Gadhafi vowed to fight to his "last drop of blood" against protestors of his regime.

The stock markets ended off their worst levels of the session but were nevertheless down by the biggest percentage declines in months.

The CBOE Volatility Index, or VIX, climbed 4.37 points to 20.80.

Affiliated Managers Group Inc. was active and steady on a dollar-neutral basis following a decline of about 2.5 points on swap last week - which puts the paper's price at a favorable spot for trading, a New York-based sellside trader said.

Affiliated Managers was the single most active name in the convertible market for awhile Tuesday, but it was replaced by EMC Corp. later in the session.

MF Global Holdings Ltd. was also seen in trade and lower in line with the broker-dealer's shares, although it wasn't very active, a New York-based sellsider said.

Despite generally higher energy names, Cameron International Corp. was lower in line with shares of the Houston-based oil and natural gas equipment provider.

There wasn't a lot of volume Tuesday, sources said, and 25% of that was dealer to dealer volume, a New York-based sellside trader said.

It wasn't very much amid "a big movement in the VIX, a big movement in the rates," he said.

Unisys 'plus a half' in gray

Unisys' planned $225 million base deal and $33.75 million greenshoe of mandatories were bid up 0.5 point in the gray market amid valuations that pointed to the paper looking cheap at the midpoint of talk and also a little cheap at the rich end.

The paper was talked to yield 6.25% to 6.75% with an initial conversion premium of 18% to 22%.

A New York-based sellsider used a spread of about 500 basis points over Libor, which is the equivalent of about 520 bps over Treasuries, with a vol. skew of 41% for the low strike and 39% for the high strike, with no borrow issue, putting the paper at fair value at about 103 on the expensive, or rich, end of terms.

A second sellsider, located in Connecticut, used a credit spread of about 450 bps over Treasuries and a 45% volatility at the low strike and 42% volatility at the high strike, with 50 bps for borrow cost, putting the paper at 102.89 at the rich end of terms and at 105.76 at the cheap end.

The first sellsider used a 2-point skew and the second one used a 3-point skew.

"I used a little higher [skew]," the Connecticut-based sellside analyst said. "I was looking at the historical volatility, and people looking at the implied volatility might be using just 2."

People using wider than 3 are more conservative, he said.

The 450 bps over Treasuries was about 50 bps wide of the company's 12.5% unsecured B rated notes due 2016 based on a rough level and 118 bps wide of the Bloomberg B rated composite.

Some of Unisys' straight debt is rated single B, the analyst noted.

Tech mandatory eyed

A New York-based buysider noted that Unisys, a Blue Bell, Pa., information technology services provider, is part of the technology sector, which hasn't been a significant issuer of convertible mandatories.

"It's very unusual for a tech company to issue a mandatory," the buysider said.

Unisys previously had conventional convertible preferreds, but they are no longer outstanding.

Goldman Sachs & Co. and Citigroup Global Markets Inc. are the joint bookrunners of the deal, with RBS Securities Inc. acting as the co-manager.

Proceeds of the deal will be used to repay debt.

Concurrently with the registered, off-the-shelf convertible offering, Unisys began a cash tender offer for its 14.25% senior secured notes due 2015 and 12.75% senior secured notes due 2014.

Given that the paper is a mandatory, the creditworthiness of the company is less significant than for a bond.

"Outside of Fannie Mae and Adelphia, no one has ever stopped paying. You're not getting principal back, it's a bet only on payments for three years," a New York-based sellside trader said. "So credit is not an issue."

Affiliated Managers active

Affiliated Managers' 3.95% convertibles due 2038, priced initially in 2008, traded during the session at 116.75 versus a share price of $108.50.

But the stock moved lower and the convertibles were seen at 116.25 versus a share price of $107.22 at the close, a New York-based sellside trader said.

Shares of the Prides Crossing, Mass.-based diversified asset management group fell nearly $5, or 4.4%, to $107.22.

The fact that that the asset manager was the most actively traded convertible issue was weird in itself, and the sellsider said that he believed that given the move last week, the paper had finally cheapened to the point that it was now in a favorable range for trading.

At the beginning of February, the 3.95% convertibles were better than 119 dollar neutral, the sellside trader said. "They've cheapened up in the last couple of weeks to the point where they're in a decent trading range."

He said there was a preponderance of buyers until early last week, and then profit takers took the paper lower by about 2.5 points on a dollar-neutral or hedged basis.

It has "favorable pricing" now, he said.

The convertibles of other asset managers like Janus Capital Group Inc. are very rich, he said.

A second sellside trader said the Affiliated Managers convertibles issue doesn't trade much and "there's not a lot of gamma there."

Mentioned in this article:

Affiliated Managers Group Inc. NYSE: AMG

Cameron International Corp. NYSE: CAM

EMC Corp. NYSE: EMC

MF Global Holdings Ltd. NYSE: MF

Unisys Corp. NYSE: UIS

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