FiberTower soars on debut; Red Hat better hedged on Oracle rivalry; Kemet, Wesco higher in the gray

By Kenneth Lim

Boston, Oct. 26 - The new $350 million offering from FiberTower Corp. dominated the convertible bond market on Thursday, trading north of 10 points above its offered price amid questions about whether the deal was mispriced.

"It was a very popular deal and a very good deal," a buyside convertible bond trader said. "I haven't seen anything like this in 10 years."

Meanwhile, Red Hat Inc. improved on a dollar-neutral basis but fell outright after the stock crumpled on news that Oracle Corp. was launching a new, aggressively priced set of services to rival Red Hat's offerings.

Kemet Corp.'s planned $160 million offering was bid higher in the gray market as investors said the price talk looked attractive.

Wesco International Inc.'s $250 million deal was rose above par in the gray market, although the deal was seen as relatively less exciting compared to Kemet.

FiberTower skyrockets

FiberTower's new 9% convertible due 2012 soared on its debut amid speculation that, while the deal had to be priced cheap to attract interest, it may have been mispriced on the cheap.

The unusual convertible, which had a relatively high coupon coupled with a modest initial conversion premium of 15%, was bid around 101 to 103 before the market opened, but ended the day north of 110 as bidding rose rapidly over the day. The convertible's gains were even more spectacular after taking into account that FiberTower stock (Nasdaq: FTWR) showed a 2.08%, or 15 cent, decline to $7.06 at the close.

FiberTower priced the $350 million offering at price talk on Wednesday after the market closed. The convertibles were offered at par.

There is an over-allotment option for a further $52.5 million.

Jefferies & Co. was the bookrunner of the Rule 144A offering.

The convertibles will accrue interest on a semi-annual basis, and FiberTower will escrow enough to pay the first two years' interest in cash. The company may also pay the third and fourth years' interest in the form of additional notes bearing a coupon of 11%. Interest will be payable in cash only after that.

FiberTower, an Iselin, N.J.-based provider of backhaul and access services to communications companies and companies, said part of the proceeds will be used to fund its capital expenditures to expand its existing network footprint and open new markets.

A buyside convertible bond trader thought the deal may have been mispriced, even though the offering would have had to be cheap for investors to want to get involved.

"It was a big deal, a $375 million deal for a company that has $100 million in revenue," the trader said. "The company basically has no revenue, and there's no borrow on the stock, which is another reason it had to be cheap."

The trader said because there was no borrow, investors who got in on the deal did not hedge it.

"Most people who have it are just long it," the trader said.

Even the marketing of the deal was unusually low key. The company announced earlier in the week that it was considering selling notes and said only that they could be convertible. Few analysts and traders outside of the deal even knew FiberTower was planning anything. Market sources said investors who took part in the deal may have been required to keep mum over the details.

"They did a lot to keep it quiet," a sellsider said.

A convertible fund manager said the offering was highly unusual, partly because of FiberTower's credit quality, or lack of it.

"This doesn't look a lot like a bond," the fund manager said. "It looks like a company that has no revenue or profit and no cashflow, and it probably doesn't have assets...it's a little like an equity offering, and just as IPOs are expected to go up a lot on the first day of trading."

Red Hat hedged better

Red Hat's 0.5% convertible due 2024 lost about 6 points outright but improved slightly on a dollar-neutral basis after the stock retreated in the face of a new challenge by Oracle.

The convertible was 93.25 against a stock price of $14. Red Hat stock (Nasdaq: RHAT) fell 23.99% or $4.68 to close at $14.83.

"Those were a little better dollar-neutral, those were pretty active," a sellsider convertible strategist said.

Red Hat stock dived on Thursday after Oracle said it will offer maintenance services for Red Hat products at a 50% discount to what Red Hat is currently charging. Raleigh, N.C.-based Red Hat develops free open-source software and charges for maintaining and supporting that software.

Rumors started circulating earlier in the year that the larger Oracle would start offering competing services, and Red Hat stock has already been trading well off highs of around $32 from the middle of the year.

"It's a huge hit to the stock, but the stock's always been vulnerable to any bad news," a convertible bond analyst said. "The same things that I was worried about Red Hat when they first started haven't changed. Even though the company's perfectly fine. They're a well-run company, they generate a lot of cash, they're very conservative in their spending, but the reason why no one else had done the same before was no one had deep enough pockets to do it. To their credit, they've taken an open-source product and become quite successful with it."

A buyside convertible trader said the bonds looked expensive after Thursday's moves.

"I think it's very rich at these levels now," the trader said.

The convertible strategist agreed that the convertibles are not cheap now.

"I've always thought that they should be a little cheaper," the strategist said. "They don't have takeover protection, so they should be cheaper especially since a takeover is definitely a possibility."

Kemet higher in gray

Kemet's planned $160 million of 20-year convertible senior notes were bid at 101.25 in the gray market on Thursday, as investors it appeared the more interesting of the two deals pricing after the market closed.

"It's just priced more attractively," a buysider said.

Kemet's deal, which was offered at par, was talked at a coupon of 2.25% to 2.75% and an initial conversion premium of 25% to 30%. Kemet stock (NYSE: KEM) closed at $7.46, down by 6.28% or 50 cents.

There is an over-allotment option for a further $15 million.

Credit Suisse and Deutsche Bank are the bookrunners of the Rule 144A offering.

Kemet, a Simpsonville, S.C.-based maker of capacitors, said the proceeds of the deal will be used to buy back up to $25 million of its common stock, to fund any future acquisitions and for general purposes. Kemet swung to a profit of $840,000, or a penny per share, for its second quarter.

Investors said the Kemet deal seemed cheaper than Wesco's.

"The best one of the two is the Kemet deal," a sellsider said. "It looks like they priced it attractively. It's a point or two cheap even at the aggressive end. That will be a good deal."

A convertible bond analyst agreed that the deal seemed attractive, even if Kemet was "not the most exciting company in the world."

"It's a solid-enough business, and the big risk is that they're going to take most of the proceeds and use them for a possible acquisition," the analyst said. "Otherwise they're doing reasonably well."

The acquisition is the key wild card in the deal, the analyst said.

"When they say they may use the proceeds in part to fund additional acquisitions, it means two things," the analyst said. "A portion of the cash balance that they now have may be gone in a couple of quarters, and that entails extra risk."

Wesco bid up in gray

Wesco's planned $250 million of 20-year convertible senior debentures were bid higher by about 0.375 point in the gray market ahead of pricing expected after the market closed.

The convertible, which was offered at par, was talked at a coupon of 1.625% to 2.125% and an initial conversion premium of 32.5% to 37.5%. Wesco stock (NYSE: WCC) fell 2.65% or $1.78 to close at $65.30 on Thursday.

There is an over-allotment option for a further $50 million.

Lehman Brothers is the bookrunner of the Rule 144A offering.

Wesco, a Pittsburgh-based distributor of electrical construction products and supplies, said the proceeds of the deal will be used to help finance its previously announced acquisition of Communications Supply Holdings Inc.

"It looks OK," a sellside convertible bond trader said. "It's a better credit [than Kemet] but it's not a very exciting company."

A sellside convertible bond analyst said the deal was only around fair value at the mid-point of price talk.

"I think people will be more interested in Kemet."

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