Outlook 2010: Citigroup, Ford, Intel, General Cable among 2009 convertible bond highlights

By Rebecca Melvin

New York, Dec. 31 - Despite its size, Citigroup Inc.'s mega $3.5 billion of three-year mandatory convertibles was not one of 2009's impressive deals, and it isn't likely to be representative of the bulk of new deals coming to the convertible market in the future, market sources said.

Citigroup's Dec. 17 deal wasn't impressive from the perspective it was very equity like, and its regulatory treatment will be just like that of equity, a New York-based sellside analyst said.

Also "it was a rather complicated structure, and I doubt we are going to see more deals like this. Although there might be some other banks that follow if they need to repay TARP," the sellside analyst said.

In addition, Citi priced at the rich end of talk, and that may have cut back some of the demand from investors, he added.

The same cannot be said of Ford Motor Co.'s $2.5 billion of seven-year convertible senior notes that priced Nov. 3.

The Ford deal, which was a decent size, priced reasonably, with very strong subscription, and good secondary market performance so far, was quite impressive, the sellsider said.

The stock has increased since pricing, and the credit spread has tightened from about 1,100 basis points at pricing to about 900 bps or south of 900 bps, currently.

"The credit worked out," the sellsider said.

In the first couple of days in trading in the secondary market, people sold Ford to take a couple of points, and the paper went into stronger hands. Outright players are peeling out of Ford, and hedge players are coming in, the sellsider said in favor of Ford.

The first couple of days the Ford deal was trading 4% cheap and that cheapness went away. Right now Ford, with its low-dollar stock price, has a lot of delta and the 4.25% convertibles are in the money.

Intel size good, but vol low

Intel Corp.'s 3.25% convertible issue due 2039, which priced in July, was another notable deal being that it was a large, $1.75 billion deal and it is a well-known name with a solid credit. However, volatility in the name is low.

Intel shares have not moved significantly in five years, sticking between $17 and $21, so the convertible doesn't trade on as high of a delta, a sellsider mentioned.

Intel priced its upsized deal at the midpoint of talk, which was 18% to 22% for the premium. It is non-callable for 10 years and provisionally callable after that at a 150% price hurdle. The 10-year call is double what has become commonplace in the market in the last year. Many deals come with five-year terms, or five years to the first call.

General Cable exchange

Also interesting in the convert space in the last year were the exchange deals. General Cable Corp.'s 1% convertibles gained following word that the cable and wire manufacturer was starting an exchange offer for the senior convertible notes due 2012.

The company began an exchange offer with a step down on Oct. 28. In December, the exchange for General Cable's 1% convertibles was extended and its final terms set at $925 principal amount of its new subordinated convertible notes due 2029 for each $1,000 principal amount of its outstanding 2012 notes. General Cable will also pay accrued interest.

Until Nov. 15, 2019, the 2029 notes will bear interest at the rate of 4.5% per year, and after that date, the notes will bear interest at 2.25% per year.

"That's done now, and General Cable was a 'win win,'" a sellside analyst said. Investors took a new bond, very equity sensitive, and they are not taking any loss, because the fair value of the new bonds makes them whole. Meanwhile the company is getting favorable tax treatment.

This year, companies may be encouraged to issue Copa bonds for the tax treatment. There is no longer favorable tax treatment for exchange bonds, a New York-based sellside analyst said.

Mentioned in this article:

Citigroup Inc. NYSE: C

Ford Motor Co. NYSE: F

General Cable Corp. NYSE: BGC

Intel Corp. Nasdaq: INTC

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