Covad upsizes, trades to 103.5; Willbros prices tight, goes to 103; Flextronics holders take profits

By Ronda Fears

Nashville, March 5 - Amid muted activity, convertibles were described as flat in a boring session outside of the froth created by celebrity homemaker Martha Stewart's guilty verdict. Looking ahead, capital markets sources say there is a healthy shadow calendar and another handful of deals are expected next week.

"The bankers are saying it's going to be really busy over the next couple of months," said a hedge fund manager, who runs a multiple strategy fund in New York.

The biggest stir in the convertible market Friday was Covad Communications Group Inc.'s upsized offering, which sold at the cheap end of talk and then traded well out of the gate, as the digital subscriber line service provider returned to tap convertible investors after having filed bankruptcy in 2001 just months after selling a convert.

Willbros Group Inc.'s tiny $60 million also did well, pricing tight and also gaining 3 points or better in the immediate aftermarket.

Flextronics International Ltd. was mentioned heading slightly south on some profit taking after the company gave an upbeat mid-quarter update after Thursday's close.

El Paso Corp. and Valero Energy Corp. announced the sale of El Paso's refinery in Aruba to Valero for an ultimate price tag of $627 million. El Paso was weak most of the session, but a dealer said bids were showing up late in the day. Valero firmed nicely on the deal, traders said.

Covad appeals to stock pickers

Covad sold an upsized $100 million of 20-year convertible notes, boosted from $75 million, to yield 3.0% with an 18% initial conversion premium. The notes priced at the cheap end of guidance for a 2.5% to 3.0% coupon and a 18% to 23% initial conversion premium.

"It was an interesting deal," said a source close to the deal. "Obviously, they have a lot of issues but a lot of potential, too."

The high volatility in the stock and intense equity sensitivity were the two biggest factors drawing in buyers for the deal, he said.

At the final terms, Deutsche Bank Securities put the new Covad convertible 2.89% cheap, using a credit spread of 1,200 basis points over Libor and 50% stock volatility.

It was a coup of sorts for Covad, managing to refinance 11% debt with the new 3% convertible. Buyers for the convert were typically not concerned with the income, buyside sources said, but rather were stock pickers.

"If you have a high delta strategy this will work for you," said a fund manager on the West Coast, whose firm runs both a hedge fund and outright convertible fund.

"It's definitely a bet on the stock. Otherwise, you're not getting paid much, although this is quite a bit more than what we've been seeing in the convertible market recently."

Aside from the Covad's history in the convertible market, hedge funds complained of a very tough borrow on the stock as well as the low stock price.

Covad's former convertible bond was erased by its 2001 bankruptcy a few months after the issue was sold. On exiting bankruptcy, Covad extinguished $1.4 billion of debt, paying bondholders $257 million, or 19 cents on the dollar, plus some 35 million shares of stock, or a 15% equity stake.

Bookrunner Banc of America Securities took the new Covad convertible out at 103.5 with the stock closing up a penny to $2.70. Before pricing, the deal was seen offered at 2 points over issue price in the gray market, with no bids.

Willbros also trades up to 103

Willbros' deal also traded very well out of the gate and priced tight to the indicative terms as sources involved with the deal said a fairly heavy book built up late Thursday.

The oilfield services company priced the $60 million of 20-year convertible notes to yield 2.75% with a 32% initial conversion premium. The notes priced at the aggressive end of guidance for a 2.75% to 3.25% coupon and a 28% to 32% initial conversion premium.

Just before the final terms were set, buyside sources expected the deal would get printed at or near the midrange of guidance.

At the final terms, Deutsche Bank Securities analysts put the Willbros deal right at fair value, using a credit spread of 450 basis points over Libor and 35% stock volatility.

With orders building late Thursday, a source close to the deal said it winded up being "multiple covered."

Bookrunner Bear Stearns & Co. Inc. closed the new convertible at 103 bid, 103.5 offered. Willbros shares ended up 4 cents, or 0.27%, to $14.79.

El Paso off, Valero up on sale

El Paso sold its Aruba refinery and related facilities to Valero Energy Corp. for $465 million plus $162 million for working capital at closing, for a total price tag of $627 million. In connection with closing, El Paso said it retired $366 million of lease financing associated with the properties.

"Valero is a hot name, we think, right now because of being in the refining space," said an outright holder.

"The big drawback is there's just no downside protection and no dividend protection like you see on all the new deals now."

Valero's 2% mandatory convertible due 2006 gained about 0.5 point on the day, the buyside source said, to 31.25 bid, 31.5 offered. Valero shares rose 93 cents, or 1.57%, to $60.24.

El Paso was finding a few bidders, as well, dealers said, as the transaction marked another notch in the power company's overall restructuring plan.

El Paso aims to reduce total debt to $15 billion by year-end 2005. So far, the company has announced or closed $2.9 billion of the $3.3 billion to $3.9 billion of asset sales targeted under the plan.

The El Paso 9% mandatory ended down by 0.5 point to around 30.375, a dealer said, but he added that there was some "bidders showing up late this afternoon."

El Paso shares closed down 12 cents, or 1.6%, to $7.40.

Flextronics

There were no surprises in Flextronics mid-quarter update with analysts on its conference call after Thursday's close, but traders said there was some profit taking in the name on Friday. The Singapore-based company is bullish on the uptick in technology spending; it makes cell phones for Sony Ericsson Mobile Communications AB, printers for Hewlett- Packard Co. and the Xbox game player for Microsoft Corp., along with other high-tech gear.

"Nothing was said really to move the bonds, we were just seeing some people pocket cash on these [converts]," a dealer said.

Flextronics said there continues to be a positive tone that supports its view of ongoing recovery in tech demand.

Chief executive Michael Marks said there is no change to the company's forecast for fiscal fourth quarter, which was raised when the company reported fiscal third quarter earnings. The company expects earnings per share of 9-11 cents, before charges, and forecasts revenue at $3.4 billion to $3.6 billion.

Projections do not include Flextronics' $500 million purchase of manufacturing facilities and inventory from Nortel Networks Corp., which is still in negotiations. Flextronics expects that deal could add $2 billion to its annual revenues. In January, Nortel announced plans to transfer most of its manufacturing to Flextronics.

The Flextronics 1% convertible due 2010 dropped 2 points, outright, to 139 bid, 140 offered while the stock closed down 44 cents, or 2.35%, to $18.26.

© 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.