Steady flow of new deals on the way; Citigroup, WaMu down; EMC, CA down as tech safe house falls

By Evan Weinberger

New York, Feb. 5 - Citigroup Inc. and Washington Mutual Inc. moved lower on a dismal day on Wall Street.

Standard Pacific Corp. convertibles traded higher on earnings.

Powerwave Technologies Inc. convertibles traded lower as earnings disappointed investors.

EMC Corp. and CA Inc. were both lower as investors tried to separate from technology convertibles, a buyside source said.

Overall, however, trading was light. A trader said the only sound he heard all day was "the sound of silence."

In the primary market, however, new offerings emerged from Chiquita Brands International Inc., GMX Resources Inc., RadiSys Corp., Qimonda Finance LLC and Flotek Industries Inc.

"Everything's either all bid or all for sale," the fund manager said. "Stuff isn't trading really. No one wants to make a market."

And the reason no one wanted to make a market was the collapse on Wall Street following a harrowing report on the shrinking of the service sector.

The Dow Jones Industrial Average fell 370.03 points, or 2.93%, to close at 12,265.13.

It got worse from there.

The Nasdaq fell 73.28 points, or 3.08%, to close at 2,309.57.

And the Standard & Poor's 500 hemorrhaged 44.18 points, or 3.20%, for a 1,336.64 close.

AAR not too rich, not too cheap

Wood Dale, Ill.-based defense contractor AAR Corp. was set to bring $175 million in convertible senior notes in two tranches Tuesday after the market close.

The first tranche of $87.5 million in convertible senior notes will be due in 2014. The first tranche is talked at a 1.25% to 1.75% coupon and a 27.5% to 32.5% initial conversion premium.

The second tranche of $87.5 million in convertible senior notes will mature in 2016. The second tranche is talked at a 1.75% to 2.25% coupon with a 27.5% to 32.5% initial conversion premium.

There was widespread ambivalence toward the deal.

"To me, it looks like the pricing on the deal is a little on the aggressive side," a sellside analyst said. "I haven't heard much noise, if any. I wonder if the pricing is keeping people out."

The analyst added that while the initial conversion premium on the deal was low, so was the coupon.

A general consensus grew around using a credit spread of Libor plus 425 basis points on the low end and Libor plus 450 bps and a vol in the high 30s to model the deal out, the analyst said. That brought the deal to slightly cheap to 1% rich. "It was more not cheap than rich," he said.

A fund manager concurred with that assessment. "The new pricing to me doesn't seem to me like that it's that compelling," he said.

The fund manager said AAR's existing 1.75% convertible senior notes due Feb. 1, 2026 looked better than the new deal. That issue closed Tuesday at 116.324 versus a closing stock price of $27.90. They closed Monday at 123.13 versus a stock price of $30.51.

AAR stock (NYSE: AIR) tumbled $2.61, or 8.55%, on the day.

That falling stock price certainly won't help valuations of the deal. Sentiment after a 370-point drop in the Dow doesn't help either.

The stock fall will work to potentially lower the conversion price as well.

"In this kind of market, what looks good in the morning may not look good in the afternoon," the analyst said.

The Rule 144A transaction carries a $25 million over-allotment option.

Both tranches have call protection through maturity, and there are no puts.

The convertibles carry a call spread overlay. They have full dividend and takeover protection and a net-share settlement.

There is a contingent conversion subject to a 130% hurdle.

AAR will enter into a series of hedge and warrant transactions with an affiliate of one of the bookrunners of the deal. The transactions are intended to lower any potential dilution of AAR common stock upon conversion of the notes. AAR expects that the transactions will raise the conversion price of the convertibles.

AAR plans to use the proceeds to repay short-term debt on its existing credit facility.

Bundle of new deals announced

Chiquita Brands International launched $150 million in convertible senior notes due Aug. 15, 2016. The convertibles are talked at a coupon of 4.5% to 5% and an initial conversion premium of 25% to 30%.

Goldman Sachs and Morgan Stanley are joint bookrunners of the Securities and Exchange Commission-registered transaction.

There is a $22.5 million over-allotment option.

The deal is expected to price Wednesday after the market close.

Chiquita is a Cincinnati-based fruit and vegetable distributor. The company plans to use the proceeds to repay a portion of the outstanding debt on term loan C of its senior secured credit facility.

GMX Resources launched $100 million in convertible senior notes due 2013. The convertibles are talked at a 4.5% to 5% initial conversion premium and a 37.5% to 42.5% initial conversion premium.

Jefferies Securities is the bookrunner on the Rule 144A transaction.

There is a $15 million over-allotment option.

The deal is expected to price Wednesday after the market close.

GMX Resources is an Oklahoma City-based oil driller. The company plans to use the proceeds to repay debt under its bank credit facility.

RadiSys launched $50 million in convertible senior notes due Feb. 15, 2013 Tuesday after the market close. The coupon is talked at 2.75% to 3.25%, and the initial conversion premium is talked at 23% to 27%.

Credit Suisse is the bookrunner on the SEC-registered transaction.

There is a $5 million greenshoe.

The deal is expected to price Wednesday after the market close.

RadiSys and an affiliate of Credit Suisse will enter into a capped call transaction intended to reduce dilution of RadiSys stock upon conversion. The affiliate will then enter into hedge transactions.

RadiSys is a Hillsboro, Ore.-based computer systems producer. The company plans to use the proceeds for general corporate purposes, which may include buying back a portion of its existing convertible senior notes due 2023. A portion of the proceeds will go toward the costs of the capped call transaction.

Qimonda AG, launched $250 million in senior unsecured convertible bonds due 2013 through its subsidiary, Qimonda Finance, on Tuesday after the market close. The deal is talked at a 5% to 6% coupon and a 30% to 35% initial conversion premium.

Citigroup, Credit Suisse and Deutsche Bank are joint bookrunners of the SEC-registered transaction.

There is a $37.5 million over-allotment option.

The deal is expected to price Thursday after the market close.

Qimonda is a Munich, Germany-based semiconductor memory products producer. The company plans to use the proceeds for general corporate purposes.

Flotek Industries launched $100 million in convertible senior notes due Feb. 15, 2028 on Tuesday before the market open. The deal is talked at a 3.75% to 4.25% coupon and a 35% to 40% initial conversion premium.

Bear Stearns is the bookrunner on the SEC-registered transaction.

There is a $15 million greenshoe.

The deal is expected to price Feb. 11.

Flotek is a Houston-based oil and gas driller. The company plans to u se the proceeds to purchase wireless survey and measurement tools maker Teledrift Inc. That deal was announced Tuesday.

Both the analyst and the fund manager say that companies bringing new deals have to hope for better markets when they bring their deals to market. "I think when you've got a downdraft like that, I don't think anyone is going to want to put up new money," the analyst said.

Even with an improved climate, that may not be enough. "In this kind of environment, you have to come cheap," the fund manager said.

Financials move lower

As the markets sank Tuesday, so did financial stocks and convertibles.

New York-based Citigroup's 6.5% perpetual non-cumulative convertible preferred stock closed Tuesday at 53.402 versus a closing stock price of $27.05. They closed Monday at 55.65 versus a stock price of $29.22.

Citigroup stock (NYSE: C) fell $2.17, or 7.43%, on the day.

Seattle-based savings and loan Washington Mutual's 7.75% series R non-cumulative perpetual convertible preferred stock closed Tuesday at 1,085.1 versus a closing stock price of $18.08. They closed Monday at 1,138.2 versus a stock price of $19.16.

Washington Mutual stock (NYSE: WM) fell $1.08, or 5.64%, on the day.

Standard Pacific rallies on earnings

Irvine, Calif.-based Standard Pacific was one of the issues to break out of the downward spiral Tuesday.

The homebuilder announced steep losses for the fourth quarter, mostly driven by write-downs on the values of its inventory and land holdings. Without the write-downs, Standard Pacific actually earned 7 cents per share for the quarter, far outpacing Wall Street estimates.

The company said it expects improved earnings in 2008 despite the weakening housing market.

Standard Pacific's 6% convertible subordinated notes due Oct. 1, 2012 closed Tuesday at 73.125 versus a closing stock price of $4.96. They closed Monday at 68.1 versus a stock price of $4.60.

Standard Pacific stock (NYSE: SPF) jumped 36 cents, or 7.83%, on the day.

Powerwave disappoints

Last week, a sellside source said investors were looking forward to Santa Ana, Calif.-based Powerwave's fourth-quarter earnings report Monday after the close.

The earnings report came, and the wireless communications company disappointed those investors.

The company reported a loss of $188.4 million, or $1.44 per share, for the fourth quarter of 2007. In the same period in 2006, Powerwave lost $114.9 million, or 91 cents per share.

That was far beyond Wall Street expectations, and Powerwave felt it.

The company's 3.875% convertible subordinated notes due Oct. 1, 2027 closed Tuesday at 68.679 versus a closing stock price of $3.27. They closed Monday at 75.184 versus a stock price of $3.81.

Powerwave stock lost 54 cents, or 14.17%, on the day.

Tech strategy unwinds

A buyside source said he's seen a sizable decline in several technology-related convertibles in recent days.

"People have been hiding in tech," the buysider said. "That's just not working out. After Yahoo injected life into things, people are coming to their senses."

Two companies the source pointed to as being examples of the strategy, and its aftermath, are Hopkinton, Mass.-based computer memory producer EMC and Islandia, N.Y.-based business software maker CA.

EMC's 1.75% convertible senior notes due Dec. 1, 2011 closed Tuesday at 123.37 versus a closing stock price of $15.52. They closed Monday at 125.026 versus a stock price of $16.01.

EMC's 1.75% convertible senior notes due Dec. 1, 2013 closed Tuesday at 124.486 versus a stock price of $15.52 after finishing Monday at 126.7 versus a stock price of $16.01.

EMC stock (NYSE: EMC) fell 49 cents, or 3.06%, on the day.

CA's 1.625% convertible senior notes due Nov. 15, 2009 closed Tuesday at 129.584 versus a closing stock price of $24.52. They closed Monday at 134.482 versus a stock price of $25.67.

CA stock (NYSE: CA) slid $1.15, or 4.48%, on the day.

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