AIG, SBA Communications gain on debut; Fannie Mae mandatories add, EDS slips to par; AMD stronger

By Rebecca Melvin

New York, May 13 - American International Group Inc.'s new $5.4 billion issue of three-year mandatory convertibles dominated action in the convertible bond market on Tuesday, with the units adding 2 points or better in active trade, convertibles players said.

Late in the session the new AIG 8.5% mandatories were at $77.75 bid, according to one source. But they closed at $77 versus a stock price of $39.16, a syndicate source said. The units have a par value of $75 each.

SBA Communications Corp.'s new $500 million of five-year convertible senior notes also gained on their debut in the secondary market, adding about a point to 101, but action was more muted in the name, sources said.

Fannie Mae's 8.75% mandatory preferred shares, which priced last week, were also active in trade, gaining 0.5 point or better as the mortgage lending firm raised more capital Tuesday, including $3 billion in benchmark notes and $2 billion in perpetual preferred securities, which is in addition to the $2.25 billion of convertibles issued last week.

Electronic Data Systems Corp. saw its convertibles ease back to par after rising to 101 on Monday on rumors - later confirmed - that Hewlett-Packard Co. was making a bid for the Plano, Texas-based information-technology consulting and outsourcing services company. HP plans to pay $13.9 billion to acquire EDS.

Meanwhile, Advanced Micro Devices Inc.'s 5.75% convertibles were up about 0.25 point on a hedged basis, while its sister 6% convertibles held steady after expanding on Monday.

Overall, the market was described as quiet but stable. "It looks like we kind of hit a bottom last week and prices have stabilized from there," a Connecticut-based sellside trader said.

AIG gains 2 points

The upsized issue of AIG 8.5% mandatory convertibles traded actively after pricing at the cheap end of talk for the coupon, which was 8% to 8.5%, and at the midpoint of talk for the initial conversion premium, which was 18% to 22%.

"It traded a lot in the secondary," a syndicate source said. Citigroup and JPMorgan were joint bookrunners, with Banc of America Securities, Merrill Lynch, Morgan Stanley, UBS and Wachovia acting as co-managers.

Concurrently, AIG priced a $6.5 billion issue of common stock for a combined $11.9 billion total of capital raised, which was upsized from a previously announced $7.5 billion.

The three-year units are non-callable, with dividend protection via a conversion ratio adjustment and make-whole change-of-control protection.

The AIG mandatories are "a different flavor" from the recently priced Fannie Mae mandatory preferred stock, which lacks the debt component that the mandatory equity units contain. When the debt portion is remarked in 2011, which is when the mandatory equity units mature, AIG has the leeway to do a 30-year bond or something shorter, like two or five years.

But the theme is that the financial firms are raising money to deleverage their balance sheets, a New York-based sellside analyst commented.

AIG said it intends to use proceeds from both the equity units and common stock for general corporate purposes.

New York-based AIG is a provider of insurance and financial services. Its shares (NYSE: AIG) added 79 cents, or 2.06%, to $39.16.

AIG has applied to list the equity units on the New York Stock Exchange under the symbol AIG-PrA.

SBA adds a point

SBA Communication's new 1.875% convertibles moved up about a point from issue, while its underlying shares gained 1.3% for the day.

The Boca Raton, Fla.-based owner and operator of wireless communications infrastructure priced $500 million of five-year convertible senior notes at the cheap end of talk to yield 1.875% with an initial conversion premium of 20%.

The notes are non-callable, and there are no puts. There is contingent conversion subject to a 130% hurdle.

In connection with the offering, SBA has entered into convertible note hedge transactions and intends to use about $74 million of the proceeds from the notes plus proceeds from warrant transactions to pay for the hedge transactions.

The SBA 1.875% convertibles, which didn't trade too actively late in the day, were 101 versus a stock price of $34.50 earlier in the day.

Shares of SBA (Nasdaq: SBAC) were off that level but still higher at $35.00, up 45 cents, or 1.3%.

Fannie Mae expands

Fannie Mae's new 8.75% mandatory convertible preferreds traded higher to about $50.75 as its stock remained mostly flat amid additional capital raising for the company on Tuesday. The preferred shares have a par price of $50.

Its sister issue, the older 5.375% series 2004-1 convertible perpetual preferreds were seen higher as well at 71.933, compared to 71,921 on Monday.

Washington, D.C.-based Fannie Mae shares (NYSE: FNM) close down 46 cents, or about 0.5%, at $28.12.

Put value pressures EDS to par

The EDS 3.875% convertible due 2023 traded around par as traders eyed the par put that they will be able to exercise if the proposed deal with Hewlett-Packard is inked.

Sometimes an issue with a par put will trade up [above par] if there are make-whole shares, which would cause it to trade above, but this is an old issue, and there is no make-whole provision.

Hewlett-Packard plans to acquire EDS for $25 in cash per share for a total transaction of 413.9 billion at a premium of 33% to the May 9 closing price of EDS.

The transaction will be funded with cash and debt, and the companies have had conversations for several months, according to the merger conference call, Lehman Brothers' convertibles analysts reported.

The companies expect the transaction to close in the second half of 2008. According to the convertibles prospectus, holders of the 3.875% convertibles will be entitled to a change-of-control put plus accrued interest to the fundamental change purchase price, the Lehman analysts said in a report Tuesday.

Holders are not required to exercise the purchase right. If holders don't exercise the purchase right, or the put, and the deal closes, we assume that the notes will become a debt obligation of HP, the acquirer, the analysts said.

Then the next put date on the 3.875% convertibles is July 1, 2010.

The EDS 3.875% convertibles were down by about a point Tuesday versus its stock price, which added 26 cents, or 1.1%, to $24.34.

The report notes that Lehman Brothers is acting as a financial adviser to Hewlett Packard in its potential acquisition of EDS.

AMD 5.75s move up

The AMD 5.75% convertibles traded at 78.5, up 0.25 point on a delta neutral basis, versus a share price of $7.16, while the 6% bonds held steady at 68.5 bid, 69 offered after gaining on Monday, a sellside source said.

Investors are weighing whether the Sunnyvale, Calif.-based semiconductor company is going to sell assets, which would free up cash and allow it to pay down some debt, thereby helping its credit, he said.

"AMD is a good one to watch to weigh market sentiment," a sellside trader said, adding that the upward movement is a favorable signal. "Also the market is swallowing some of these new issues, which is always a decent sign too."

Recently management indicated that it needed to relook at its business and cut costs, including possibly spinning off some of its fabrication assets. "They call it their asset light strategy," a New York-based sellside trader said.

AMD's 5.75% convertible traded at 78.5 versus a stock price of $7.16, compared to a trade at 77.75 versus a share price of $7.00 on Monday.

Shares of AMD (NYSE: AMD) closed up 3 cents, or less than half a percentage point, at $7.19.

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