Goodyear slips; InterDigital up in gray; Mentor on tap; A123 short on borrow; Vertex rises

By Kenneth Lim

Boston, March 29 - Convertible investors focused on new issues Tuesday, as Goodyear Tire & Rubber Co. slipped slightly after coming near the middle of price talk.

InterDigital Inc. was seen a touch above par in the gray market, with investors praising the company's credit quality.

A123 Systems Inc. was quiet in the gray market, but early chatter revealed concern about the ability to borrow the common stock.

Mentor Graphics Corp. announced a new deal that drew concern about the high conversion premium, even as activist investor Carl Icahn, whose takeover bid for the company was rejected a day earlier, criticized the offering.

Trading activity in the convertible market was robust, although most of the flow was focused on recent new issues.

"Everyone's looking at the new paper coming out," one sellsider said.

The new Ares Capital Corp. 5.125% convertibles due 2016 slipped about a quarter point outright to trade at 103.75 versus a stock price of $16.60.

Ares common stock closed the day at $16.65, lower by 0.3%, or 5 cents. The company is a New York-based private equity firm.

Off the new-deal arena, Vertex Pharmaceuticals Inc.'s 3.35% convertibles due 2015 rose with the stock after the company reported encouraging results in a late-stage study for a cystic fibrosis treatment.

The convertibles changed hands at 122.5 against a common stock price of $49.00. Vertex common stock gained 3.3%, or $1.56, on Tuesday to close at $48.90.

Vertex, a Cambridge, Mass.-based biotech, said Tuesday that child patients treated with an oral cystic fibrosis drug showed enough improvements in lung function to meet the study's main goal.

"They're showing very promising results on a couple of drugs, which is going to be good for the convertibles and the stock," one sellside analyst said. "The converts are in the money, so they're going to do well when the stock does well, and this is a stock-positive event."

Goodyear slips on debut

Goodyear's new 5.875% three-year mandatory convertible preferred stock slipped slightly on Tuesday in a slightly disappointing start for the $435 million offering.

The deal arrived near the middle of price talk, with a dividend of 5.875% and a threshold appreciation premium of 25%.

The preferreds were sold at $50.00 apiece. Price talk was revised to a dividend of 5.75% to 6.25% from 6% to 6.5%; and a threshold appreciation premium of 25% from 20% to 25%.

The registered, off-the-shelf offering has an over-allotment option for an additional $65 million, or 1.3 million shares.

Proceeds from the offering will be used to redeem $350 million of Goodyear's 10.5% senior straight notes due May 15, 2016 at 110.5% of the principal amount plus interest. Remaining proceeds will be used for general corporate purposes, which may include repaying debt.

Goldman Sachs & Co., J.P. Morgan Securities LLC, Citigroup Global Markets Inc. and Credit Agricole Securities (USA) Inc. were the joint bookrunners for the offering, with BNP Paribas Securities Corp., HSBC Securities (USA) Inc. and Natixis as the co-managers.

Goodyear is an Akron, Ohio-based tire maker.

"The Goodyears didn't have a great day even though the stock was up, but I think they priced it extremely fair, which is to say the market didn't get the kind of discount it was hoping for," a trader said.

The fact that the offering comprised mandatories may also have limited interest from investors.

"There are some people who just don't like mandatories," the trader said.

One buysider who looked at the deal and liked it enough to buy thought that an outright investment case could be made for the preferreds.

"Fundamentally we quite liked the idea of Goodyear," the buysider said. "It's got good asymmetry and decent yields, and the stock looks like it could go higher, although there's not much there for a swap buyer."

InterDigital up

InterDigital's planned $150 million of five-year convertible senior notes were bid up by about 1 point in the gray market ahead of pricing after the close.

The deal was talked at a coupon of 2.5% to 3% with an initial conversion premium of 27.5% to 32.5%.

InterDigital common stock closed at $43.51 on Tuesday, lower by 1.89%, or 84 cents.

Barclays Capital Inc. is the bookrunner for the Rule 144A deal. The greenshoe is for an additional $22.5 million.

In connection with the offering, InterDigital plans to enter into convertible note hedge and warrant transactions with affiliates of the initial purchaser.

A portion of the proceeds and the proceeds from the sale of the warrants will be used to fund the cost of the call spread. The remainder of the proceeds will be used for general corporate purposes, including acquisitions of intellectual property-related assets or businesses or securities in such businesses; capital expenditures; and working capital.

King of Prussia, Pa.-based InterDigital develops digital wireless technologies for use in cellular and wireless related products.

The deal was likely to be upsized to about $200 million, while the coupon was expected to be lowered, one source said.

"I think the deal looks somewhat cheap," the source said. "It's not the most liquid stock, though, with a $2 billion market cap."

The source said the company had solid credit quality, with a spread assumption of 450 bps. The volatility assumption is a little trickier because volatility has been falling for the stock. The deal using a 450 bps spread and a 35% volatility looked cheap, but that volatility is probably aggressive, the source said.

"The theoretical cheapness hinges on the volatility assumption, but the credit is really quite good," the source said.

A123 borrow hard to get

A123's planned $125 million offering of five-year convertibles was quiet ahead of Thursday pricing, but observers were already raising concern about the ability to get borrow.

Price talk was at a coupon of 3.25% to 3.75% with an initial conversion premium of 20% to 25%.

A123 Systems also planned to price 18 million shares of common stock, which could free up some stock for hedge investors.

The convertibles offering has an $18.75 million greenshoe, and there is a greenshoe on the common stock of up to 2.7 million shares.

The registered, off-the-shelf deal is being sold via Deutsche Bank Securities Inc. and Goldman Sachs.

A123, a Watertown, Mass.-based developer and maker of lithium ion batteries and systems, has a market capitalization of $826 million.

"The borrow is impossible to get," one sellsider said. "I don't know how they're going to get the premium they're asking for."

A buysider said the hope was that the concurrent common stock sale would help with the borrow but noted that the early stage loss-making company may not be everyone's cup of tea.

"It's not the type of thing we love generally," the buysider said. "They're losing a lot of money, but we'll take a look at it anyway."

Mentor meets resistance

Mentor's planned $220 million of new 20-year convertible subordinated debentures on Tuesday were seen as cheap but possibly plagued by concerns about a high conversion premium and resistance from shareholders.

The deal, which was to price after the close, was talked at a coupon of 4% to 4.5% and an initial conversion premium of 37.5% to 42.5%.

There is an over-allotment option for an additional $33 million.

Citigroup and Merrill Lynch are the bookrunners of the Rule 144A offering.

Proceeds will be used to buy back up to $25 million of common stock, to repay an $18.5 million term loan due 2013 and to retire the company's existing 6.25% convertible subordinated debentures due 2026.

Mentor is a Wilsonville, Ore.-based software and hardware designer.

"Personally I don't really care for the 40% conversion premium, especially when the stock's just coming off a two-year high," a trader said. "But it looks cheap, and they're taking out a bunch of debt, which is positive for the credit."

The trader said unhappiness among shareholders about the deal may also depress the stock. Activist investor Carl Icahn, whose bid to take over the company was rejected by the board on Monday, on Tuesday said the convertible offering would make future acquisitions more difficult and dilute value for existing shareholders.

"In most cases, it's rational for shareholders to dislike convertibles because it's just like selling additional shares," the trader said. "So I'm not losing sleep over what Icahn's saying. I'm not saying it's insignificant, because it could keep the stock down, but the guy has an agenda."

Mentioned in this article:

A123 Systems Inc. Nasdaq: AONE

Ares Capital Corp. Nasdaq: ARCC

Goodyear Tire & Rubber Co. NYSE: GT

InterDigital Inc. Nasdaq: IDCC

Mentor Graphics Corp. Nasdaq: MENT

Vertex Pharmaceuticals Inc. Nasdaq: VRTX

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