Ford deal surges in the gray; Acadia bid higher in pre-market; First Potomac upsizes, prices offering

By Kenneth Lim

Boston, Dec. 5 - The convertible bond market focused on new deals, as Ford Motor Co.'s massive $3 billion offering received strong interest from investors.

Ford's deal, which is expected to price Wednesday after the market closes, was bid more than 3 points above par in the gray market on Tuesday, as investors described the offering as cheap and likely to be upsized.

Enthusiasm about Ford's new issue eclipsed the two real estate investment trust offerings expected to price Tuesday after the market closed. Acadia Realty Trust drew a small bid that was above par, while First Potomac Realty Trust did not attract any bids in the gray before it priced.

Ford deal jumps in gray

Ford's planned $3 billion offering of 30-year convertible senior notes were bid at 103.5 in the gray market on Tuesday, with price talk largely seen as cheap.

The offering is being offered at par. Price talk is at a coupon of 4.75% to 5.25% and an initial conversion premium of 23% to 27%.

"They are good," a buyside convertible bond trader said. "They're very good. They're cheap, they have a nice coupon, a nice carry, a low premium, just a nice structure."

There is an over-allotment option for a further $450 million.

Citigroup, Goldman Sachs, JP Morgan, Deutsche Bank, Lehman Brothers, Merrill Lynch, Pierce, Fenner & Smith and Morgan Stanley are the bookrunners of the registered off-the-shelf offering.

The convertibles will have dividend and takeover protection.

Dearborn, Mich.-based Ford, an auto maker, said on Nov. 27 that it was raising money through the convertible offering and another $15 billion of senior secured debt to address near- and medium-term negative operating-related cash flow, fund restructuring and to provide a liquidity cushion against unexpected events.

The buyside trader, who was assessing the deal on a hedged basis, reported robust demand in the market for the offering.

"I'm quite certain they will exercise the greenshoe and upsize the deal," the trader said.

Ford's existing 6.5% convertible preferred came in slightly early Tuesday, but recovered over the session to close at 33.35 against the closing stock price of $7.68, a decline of 0.69 point or 2.03%. Ford stock (NYSE: F) slid 2.66% or 21 cents.

"As long as the borrow in the Ford common stays top rate, any outright equity investor would be better buying either the Ford preferred or the new convertible bond," the trader said. "Demand will be off the charts."

A sellside convertible bond analyst said one of the key aspects of the deal was that Ford's "liquidity's going to be excellent after they do this." The analyst said Ford expects to have $20 billion in cash at the end of the year.

"Liquidity is what they need right now," the analyst said. "The preferreds are far enough out that if Ford makes it, good, and if they don't, well, that's bad. But with this fundraising they're getting quite a bit of liquidity that gives them more breathing room."

The analyst also noted that the liquidity added by the convertible offering and the other $15 billion in debt does not need to be used so soon.

"What I thought was really interesting is that they expect to use only $3.1 billion over the next five years," the analyst said. "The convertibles, although it's senior unsecured, behind the revolver and term loans, but it is also one of the first debts maturing."

The company also outlined its restructuring plans in a call with investors, the analyst said.

"The CEO, he seemed to have a pretty compelling plan of stabilizing the core operations," the analyst said. "He thinks they'll be profitable by end '09. They're need to burn about $10 billion in operating cashflow between now and then, and another $7 billion in cash restructuring, but it's a crapshoot when you're talking billions of dollars. If anything, it [the fundraising] provides more liquidity. Frankly, right now the better the liquidity, the better it is."

All three credit agencies assigned low junk ratings to the convertible on Tuesday. Moody's Investors Service assigned a Caa1 rating with a loss-given-default assessment of LGD4 (62%) and a negative outlook.

Standard & Poor's rated the offering CCC+, while Fitch Ratings assigned a B rating with a recovery rating of RR4 and a negative outlook.

Acadia deal up in gray

With all eyes on Ford, Acadia's planned $100 million of 20-year convertible senior notes nevertheless attracted a positive bid in the gray market on Tuesday. The paper, expected to price after the market closed, saw a small bid of 102 in the gray.

"I see a +2 bid, but it's for something small, but there's nothing else, really," a buyside convertible bond trader said.

Acadia's offering will be offered at par, and was talked at a coupon of 3.5% to 4% and an initial conversion premium of 20% to 25%. Acadia stock (NYSE: AKR) closed at $25.72, down by 1.83% or 48 cents.

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

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

Acadia, a White Plains, N.Y.-based real estate investment-trust focused on retail properties, plans to use the proceeds of the deal to repay outstanding debt, fund capital commitments and for general purposes.

"At par that one would be a couple of percent cheap," a sellside convertible bond analyst said.

"It's slightly less cheap than the other one [First Potomac], although, judging from the terms, you can probably figure that out. The Acadia, at the midpoint, it's 3.75%, up 22.5%, and they're bringing it at par. The other one is 4%, up 20%, and it's being reoffered."

First Potomac silent in gray

First Potomac's $110 million of five-year exchangeable senior notes was not seen in the gray market on Tuesday, but the deal was upsized and priced after the market closed.

The offering priced with a coupon of 4% and an initial exchange premium of 20%. Price talk was at those terms, with a reoffered price between 99.25 and 99.75. First Potomac did not say where the notes were reoffered.

The size of the deal was originally $100 million. The over-allotment option remains at a further $15 million.

Wachovia was the bookrunner of the Rule 144A offering.

The notes were issued by First Potomac operating partnership First Potomac Realty Investment LP, and exchangeable into common stock of the listed company. The holding company will also guarantee the notes.

First Potomac, a Bethesda, Md.-based real estate investment trust that owns industrial and flex properties in the Washington metropolitan area, Virginia and Maryland, will use the proceeds of the deal to repay outstanding debt, fund hedging transactions, and for general purposes, including future acquisitions.

A sellside convertible bond analyst said the offering looked fair at the midpoint of the reoffered range.

"It's more of a high-yielding REIT...and it's a little higher vol than most other REITs have been coming, at 19% vol," the analyst said. "It looks fair, most likely will come at 99.25."

Another sellsider said the deal looked about 2% cheap at the midpoint of the reoffered range, and noted that First Potomac and Acadia were smaller than some of the earlier REITs that have issued convertibles.

"They look kind of unremarkable to me," the sellsider said. "We're getting into smaller, less capitalized REITs here. They're not necessarily bad ones, but a little bit more marginal than some of the others we've seen."

The sellsider added that interest was muted with the primary market more focused on Ford's offering.

"This is an unfortunate day to be putting out a REIT convertible, when there's like five million of them and you're adding two more and there's this Ford deal," the sellsider said.

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