CMS trades up to 51.75 bid; Fairmont seen 2 points over par in gray

By Ronda Fears

Nashville, Dec. 2 - As expected, trading volume in convertibles picked up the pace Tuesday although no additional deals were thrown into the mix despite market buzz of a deal of "substantial size" in the works.

Capital markets sources said demand was very healthy on the deals from CMS Energy Corp., Fairmont Hotels & Resorts Inc. and Concord Communications Inc.

"After a break before the Thanksgiving holiday - nothing came to market that week - really it's been nearly two weeks since any new paper was introduced, so the market was definitely ready," said a convertible salesman involved in a couple of new deals this week.

"The secondary market has richened up so much that the most reasonable way to add to your portfolio right now is with a new issue, even if it would traditionally be considered expensive.

"A lot of the deals right now, where you see a double-C or even maybe a triple-C credit print a deal with a 1% handle or less, just look rich on an historical basis. Relative to the broader credit markets, convertibles are not getting done any more aggressive than any other bonds."

Final terms on the CMS Energy and Fairmont deals certainly seemed to confirm that demand was more than ample.

Both of those deals were upsized and priced rather aggressively, relative to guidance.

Canadian hotel chain Fairmont boosted its offering to $245 million from $225 million and priced the 20-year convertible notes at par to yield 3.75% with a 45% initial conversion premium - at the tight end of price talk for 3.75% to 4.25%, up 40% to 45%.

Lehman Brothers analysts put the Fairmont convertible 1.46% cheap, at the midpoint of guidance, using a credit spread of 250 basis points over Treasuries and a 20% stock volatility.

The credit assumption was based on the Lehman high-yield lodging index at an option-adjusted spread of 285 and the Starwood Hotels & Resorts Worldwide Inc. 0% convertible due 2021 trading at an option-adjusted spread of 225. Lehman analysts said they tightened the spread for Fairmont versus the lodging index given its decent financials but widened it from Starwood because of its smaller market cap.

A buyside trader said the Fairmont convertible traded at 2 points over issue price.

Fairmont shares on Tuesday dropped $1.22, or 4.48%, to $26.02 in the United States.

CMS Energy also bumped up its deal to $225 million from $200 million. The perpetual convertible preferreds were sold at par of 50 to yield 4.5% with a 30% initial conversion premium - at the middle of yield talk of 4.25% to 4.75% but aggressively outside premium guidance for 22.5% to 27.5%.

Sellside analysts had put the new CMS convertible, at the midpoint of price talk, at fair value to 2% cheap.

A name in convertibles for several years, CMS Energy was returning to tap convertible investors for the second time in just five months, earmarking proceeds to reduce debt, which at Sept. 30 stood at nearly $3 billion.

The new CMS convertible was closed by joint bookrunner Merrill Lynch at 51.75 bid, 52 offered, up 1.75 points from par and up 0.5 point from gray market levels just before pricing.

On tap for Wednesday's business, Concord Communications is planning $65 million of convertible notes talked to yield 3.0% to 3.5% with a 25% to 30% initial conversion premium.

Late in the day, Concord announced it had priced its offering at the rich end of talk, with a yield of 3.0% and a 30% initial conversion premium, and upsized it to $75 million.

Concord shares on Tuesday fell $1.89, or 8.38%, to $20.67.

Deutsche Bank Securities analysts put the Concord convertible 7.655% cheap, at the middle of price talk, using a credit spread of 750 basis points over Libor and a 50% stock volatility.

Lehman Brothers analysts put the Concord convertible 5.36% cheap, at the midpoint of guidance, using a credit spread of 800 basis points over Treasuries and a 45% stock volatility. Noting new deals have averaged 2.45% cheap over the past three months, Lehman analysts said the cheapness was warranted due to the small deal size and Concord being a small market cap company in the enterprise software space.

Elsewhere in convertibles, traders said the new deal activity helped flow, and many said there was good two-way action rather than just selling to make room for new paper. The backslide in stocks brought some issues down, one trader noted, but that also triggered some buying interest.

Six Flags Inc. had some tag-alongs from the convertible market participate in its new junk bond offering, a convertible dealer said, "or maybe it's the other way around, some of the junk bond guys play the Six Flags convert." In any event, he also noted that there was some buying in the Six Flags 7.25% convertible preferred due 2009, moving it up about 0.25 point to 21.5 bid, 22 offered.

Six Flags increased the junk bond deal to $325 million from $300 million, pricing the 10.5-year senior notes to yield 9.625%.

Six Flags shares closed off 5 cents, or 0.73%, to $6.80.

Traders also noted more selling pressure in Flextronics International Ltd., with the 1% convertible due 2010 losing 2.5 points on the day to 120.75 bid, 121 offered while the stock dropped 42 cents, or 2.68%, to $15.25 ahead of the mid-quarter conference call scheduled immediately after the market close.

In after-hours trading, the stock dropped another 3%, although the Singapore-based contract electronics manufacturer confirmed its outlook over the next six months.

Flextronics projects fiscal third-quarter earnings, excluding charges, of 13-15 cents per share on revenues of $3.6 billion to $3.9 billion. For fiscal fourth quarter, the company expects earnings, excluding charges, of 7-9 cents per share on revenues of $3 billion to $3.3 billion.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.