Legg Mason, Synnex up on debut; Enzon slips on spin-off; Fannie Mae quiet; Transocean, Cheniere gain

By Kenneth Lim

Boston, May 7 - Legg Mason Inc.'s new convertible equity units gained on their first day of trading on Wednesday while the convertible market in general had another quiet day.

Legg Mason was higher after the deal priced within talk. Observers said the offering benefited from the company having a relatively easy to understand credit quality and rumors that it could be selling assets to increase liquidity.

Synnex Corp.'s new convertibles were also higher as analysts said the company had good credit and strong fundamentals.

Enzon Pharmaceuticals Inc. was lower dollar neutral after the company said it would be spinning off its research and development business.

The convertible market in general had another lackluster session.

"The stock market's selling off," a sellside convertible trader said. "I think financials are overbought.

"There was a lot of euphoria yesterday after Fannie Mae was allowed to lower its capital surplus...Financials soared, there's was irrational euphoria, and today we're back to reality. There's been a sell-off in financial stocks today. The bond market, I believe, has been oversold. But there's nothing moving."

Fannie Mae's planned $2 billion offering of three-year mandatory convertible preferred stock remained quiet in the gray market on Wednesday. The deal was expected to price Thursday after the market closes.

Oil and gas holds firm

Oil and gas names continued to hold after oil prices continued to rise.

Cheniere Energy Inc.'s 2.25% convertible note due 2012 gained about 3 points to trade at 60 against a stock price of $8. Cheniere common stock (AMEX: LNG) rose 4.81% or $0.35 to close at $7.62.

Cheniere is a Houston-based operator of liquefied natural gas terminals and pipelines.

Transocean Inc. also gained outright after the company beat expectations for its first-quarter earnings.

Transocean's series A 1.625% convertible due 2037 was a point better outright at 115.5 versus a stock price of $160. Its series B 1.5% convertible due 2037 also added a point outright at 116.75 against the same stock price, while the series C 1.5% convertible due 2037 improved a point to 117.75 versus the same stock price.

Transocean common stock (NYSE: RIG) closed at $157.40 on Wednesday, lower by 0.29% or $0.45.

Transocean on Wednesday reported a first-quarter net profit of $1.19 billion, or $3.71 per share, beating Street estimates of about $3.33 per share.

Transocean is a Houston-based offshore drilling contractor.

Legg Mason up on debut

Legg Mason's new 7% mandatory convertible equity units due June 2011 made a strong start Wednesday, benefiting from a strong common early in the day.

Legg Mason priced the $1 billion offering at the midpoint of talk with an initial conversion premium of 20%. Price talk was for a distribution rate of 6.75% to 7.25% and an initial conversion premium of 17.5% to 22.5%.

The 20 million equity units were offered at par of $50. They traded on Wednesday at 50.375 against a stock price of $56.10, and were bid as high as 51.25 early in the day. Legg Mason common stock (NYSE: LM) hovered above $56.50 for most of Wednesday, but slipped into the red in the afternoon to settle at $56.01, lower by 0.52% or $0.29.

Citigroup Global Markets Inc., Merrill Lynch & Co., Goldman Sachs & Co. and J.P. Morgan Securities Inc. are the bookrunners of the registered shelf offering, while Citi and Merrill are global coordinators and structuring agents. There is an over-allotment option for a further $150 million, or 3 million units.

Legg Mason, a Baltimore-based asset management firm, said proceeds will be used for general corporate purposes, which may include support of liquidity funds managed by its subsidiaries, financing acquisitions and repayment of outstanding debt.

The deal saw good interest in the market, a sellside desk analyst said.

"There's quite a bid of demand on it," the analyst said. "I think people saw it as a much cleaner picture than some of those other financial companies. They did have some SIVs, but those are pretty much taken care of now."

The credit of the company was easy to understand, the analyst explained.

"They're a fund management company, right?" the analyst said. "If they can post a decent performance, their assets under management is going to go up. It's really simple."

A New York-based trader also noted that there was speculation that Legg Mason, which reported a fiscal fourth-quarter loss of $250 million a day earlier, could be looking to sell some of its units to improve liquidity.

Synnex gains in start

Synnex's new 4% convertible senior note due 2018 was seen bid at 101 against a stock price of $21.70 on Wednesday as the upsized deal arrived to a warm reception.

The convertibles were offered at par. Synnex common stock (NYSE: SNX) closed at $20.86, lower by 4.27% or $0.93.

The $125 million deal priced with an initial conversion premium of 35%. Price talk was for a coupon of 3.5% to 4% and an initial conversion premium of 35% to 40%.

The size of the deal was originally $100 million. The over-allotment option was increased to an additional $18.75 million from $15 million.

Banc of America Securities and UBS Investment Bank are the bookrunners of the Rule 144A offering.

Synnex, a Fremont, Calif.-based business process services company, said it will use the proceeds for general corporate purposes and to reduce outstanding balances under certain credit arrangements.

"I thought it was interesting," a convertible analyst said. "It was definitely a very solid company."

On a credit basis, the company is on firm ground and the new convertibles did not affect the company's credit spreads significantly, the analysts said.

"They were just doing the convertibles to replace their short term bank debt, it wasn't raising leverage," the analyst said.

Synnex also appears to have strong fundamentals.

"The company has an excellent track record of increasing margins and growth and all of that," the analyst said.

One sellsider said the deal's small size may have limited the amount of interest in the market, while the analyst said its business may also have turned off some investors.

"Some people just don't like these [outsourcing] companies," the analyst said. "Some people are concerned about the potential downturn that we might be facing, but they've been through cycles before and they've been doing fine. If a company like this begins to lose revenue because of a poor market, they can always monetize their working capital. I thought it looked cheap to me, definitely."

Enzon mixed on spin-off plan

Enzon's 4% convertible due 2013 fell outright and on a dollar-neutral basis after the company said it planned to spin off its "novel biotechnology business" into an independent public company.

The convertible dropped about a point outright to trade at 110 against a stock price of $9.375. Enzon common stock (Nasdaq: ENZN) gained 0.98% or $0.09 to close at $9.26.

Enzon said it expects to spin off its research and development business while retaining its currently marketed products, royalty rights to its PEGylation technology and its manufacturing facility. Enzon will retain the functional support associated with those operations, and expects to capitalize the new company with about $150 million in cash. The convertibles will remain with Enzon.

Market sources said the bonds may have slipped on a hedged basis because of uncertainty about the access to stock borrow after the spin-off, which will likely take a significant chunk out of Enzon's current market capitalization of about $410 million.

But the move in general could also improve the eventual Enzon's credit, an analyst said. The research and development business tends to drain cash, and separating that from the parts of the business that is already earning revenue could improve the company's bottom line.

"It sounds like anything that's not on the market will go to the new company, and the converts will stay with what's on the market making money," the analyst said.

But the analyst said it remains to be seen how the convertibles and Enzon will ultimately be affected by the move. The key will be to see how Enzon structures the spin-off, the analyst said.

"I don't have any detail except I think it's going to give them some seed capital," the analyst said.

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