Johnson Controls sells upsized $750 million of convertibles; Medtronic, Alliant better; Beazer down

By Rebecca Melvin

New York, March 10 - Convertibles players Tuesday sized up Johnson Controls Inc.'s dual offering of convertible bonds and mandatories, which represented the first real new deal to come to market since Newmont Mining Corp.'s convertibles priced on Jan. 28.

The new Johnson Controls three-and-a-half-year 6.5% convertible bonds priced at the tight end of talk and were upsized to $350 million from $100 million. The new Johnson Controls 11.5% mandatories priced at the wide end and remained at $400 million in size as expected.

In the secondary market, Medtronic Inc.'s convertible bonds were active and stronger after the Minneapolis-based medical device maker announced it was going to price $1.25 billion of straight senior notes to repay a portion of outstanding commercial paper.

The new debt, with maturities in 2014, 2019 and 2039, was viewed as favorable for the closer-dated convertibles, and pushed up their pricing.

Alliant Techsystems Inc., which has performed "quite well over the past few months," according to a market source, looked stronger yet again as the Minneapolis-based defense company's common shares jumped nearly 5% in better-than-average volume.

The whole equity market roared back, in fact, in a relief rally sparked by Citigroup Inc. saying that it was profitable in the first two months of the year. Citigroup's 6.5% convertible preferreds jumped 5 points to 17.58.

The Dow Jones Industrial Average soared 379.44 points, or 5.8%, to 6,926.49, while the S&P 500 index jumped 43.07 points, or 6.4%, to 719.60, and the Nasdaq Stock Market surged 89.64 points, or 7.1%, to 1,358.28.

But Beazer Homes USA Inc.'s convertible senior notes were active and lower by 2 or 3 points from recent quotes, a New York-based sellside trader said.

Johnson Controls upsizes

Johnson Controls' senior notes were upsized to $350 million from $100 million due to strong demand for the paper. That compared to Newmont Mining's upsized $450 million of three-year convertible senior notes that priced at the end of July. Those notes were priced to yield 3% with an initial conversion premium of 25%.

But it was the preferred shares, which stood pat at $400 million, which were reported up in the gray market around midsession. They were seen up slightly by 0.125 point to 0.5 point. Its fat coupon, talked at 11% to 11.5%, and a nice slim initial conversion premium of 15% to 20%, attracted interest, according to one sellsider.

But it was the notes, ranking above the junior subordinated preferreds, which attracted more interest in the end.

"We saw the seniors 5% cheap based using a credit spread of 1,030 basis points over Libor and capping volatility at 45%," a Connecticut-based sellside analyst said.

Our first thought when we heard about this deal was 'is it going to get done?" the analyst said.

The credit spread was determined using Johnson Controls' existing 4.875% paper and credit-default swaps, said the analyst, who didn't value the preferreds.

"We were looking at the preferreds as essentially equity," the analyst said.

The preferreds are subordinate to the senior notes, and given Johnson Controls' sectors in automotives and commercial buildings, there is definite scope for error, the analyst said.

"If anything grave did happen, you're more protected with the bonds," the analyst said.

Late in the day, the bonds were seen at plus one bid for small size.

Yet another source said, "You wouldn't get hit at plus one since offers are plus two."

"The preferreds at one point were offered at issue price, a New York-based sellside trader said right after the market close. "Last trade I saw was at issue price and left it bid there," the trader said of the preferreds.

"We don't love them, but we don't have them either. They're tied to the auto industry, and we don't like that at all," the Connecticut analyst said.

Nevertheless, the fact that Moody's Investors Services reaffirmed its rating removes a major risk.

If Moody's had downgraded Johnson Controls' commercial paper rating Tuesday, that would have put them in greater need of liquidity, and they probably would have needed to tap their $2 billion revolver," the analyst said.

As it stands now, Johnson Controls can leave that alone for now, the analyst said.

On the positive side, Johnson Controls is a rather large company with a big market capitalization, and although it's tied to autos and commercial building, at least it's largest division - its efficiency business - is poised to take advantage of stimulus spending and programs being pushed by the Obama administration like energy efficiency.

"The other half is tied to commercial building, and there are less buildings going up. No one's going to hire these guys to set up HVAC and things," the analyst said. "But the stimulus program should help out."

"We'll just have to keep an eye out and see what happens with GM and Chrysler," the analyst said.

Medtronic strengthens

The Medtronic 1.5% convertible due 2011 were bid higher at around 93, compared to where they had traded previously at 92.25, according to a New York-based sellsider.

The Medtronic 1.625% convertibles due 2013 were over 85 bid, up from 83.625 previously.

Medtronic common stock closed up 2.3%, or 55 cents, at $24.93.

Although Medtronic is a convertible stalwart, the medical device maker issued straight debt instead of another convertible, perhaps because of liquidity concerns, according to a New York-based sellsider.

"I think because in a lot of names there's cross-over interest and because of that you have greater liquidity in that space," the sellsider said.

Alliant Techsystems firm

Alliant Techsystems' 2.75% convertibles due 2011 were at 96.625 versus a stock price of $65.36, compared to 94.1455 versus a stock price of $62.35 on Monday.

The Alliant Techsystems' 2.75% convertible notes due 2024, which can be put back Aug. 15, were seen little changed at 100.25.

"Both are being talked about today," a Connecticut-based sellside analyst said.

The farther-dated paper didn't improve with its underlying shares, however.

Citigroup jumps with shares

New York-based Citigroup's 6.5% perpetual convertible preferred, which will soon be exchanged for 13.0769 common shares, jumped 5 points to 17.58, while its common stock surged higher by 38%, or 40 cents, to $1.45.

In a letter to employees Monday, Citigroup chief executive Vikram Pandit said the performance this year has been the bank's best since the third quarter of 2007, which was the last time the New York banking giant made a quarterly profit.

Based on historical revenue and expense rates, Citi's projected earnings before taxes and one-time charges would be about $8.3 billion for the full quarter, Pandit said.

But the chief executive declined to say how large credit losses and other one-time items have been.

Citigroup announced Feb. 27 that it would swap debt, including the 6.5% convertible preferred shares, for equity.

Mentioned in this article:

Alliant Techsystems Inc. NYSE: ATK

Beazer Homes USA Inc. NYSE: BZH

Citigroup Inc. NYSE: C

Johnson Controls Inc. NYSE: JCI

Medtronic Inc. NYSE: MDT

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