Ciena's $250 million convertibles bid up to 101 in gray market; International Coal on tap

By Rebecca Melvin

New York, March 8 - Convertibles players were cheered to see two new-issue launches first thing Monday - marking a change from recent weeks in which new issuance has been in the doldrums with little or no action starting off the week.

Whether the launches signal a rekindling of the primary market remains to be seen. Some see economic recovery spurring issuance, and others say stock prices and interest rates will continue to prohibit issuance for awhile.

"There's a return of optimism among corporate managements/directors. It's starting with increased M&A activity, and eventually it will entail increased capex and hiring," a New York-based outright buyside portfolio manager said.

But others argued that without much more stock performance upside and higher interest rates, convertibles won't get a big cut of whatever capital markets activity there is.

Calendar builds

Ciena Corp. said it planned to price about $250 million of five-year convertible senior notes after the close of markets Tuesday. The new deal, which was talked to yield 4.25% to 4.75% with an initial conversion premium of 25% to 30%, was 101 bid in the gray market.

Ciena's existing convertibles didn't look to "have really moved much," a New York-based sellside trader said.

International Coal Group Inc. said it planned to price $75 million of seven-year convertibles, with proceeds of the new issue earmarked to fund a tender of International Coal's older 9% convertibles.

The International Coal deal, which was talked to yield 4% to 4.5% with an initial conversion premium of 20% to 25%, was expected to price after the close of markets Wednesday.

There was no gray market seen in the International Coal issue, but sellsiders said it was still early, and the convertibles market overall was pretty quiet on Monday.

Ford Motor Co.'s newer 4.25% convertibles were in trade at lower levels from where they popped a week ago.

Interpublic Group of Cos. Inc.'s 4.25% convertibles traded at 105 versus a share price of $13.85.

Hasbro Inc., which priced an issue of straight notes on Monday, plans to buy back its existing 2.75% convertibles due 2021, which remained little changed in trade on Monday.

The Hasbro convertible doesn't trade that often, and that was true on Monday as well.

"Given the convertible has soft call protection, which has long been satisfied, the bonds are a call risk and trade at parity, less accrued," a sellside analyst said.

New issuance

"The continued recovery in stock prices encourages issuance of convertibles specifically. The recent strength in smaller cap stocks affects a lot of small growth companies that traditionally issue convertibles. Perhaps the cessation of snow and cold in the Northeast has also taken the chill out of the convertible market," the convertible outright portfolio manager said.

But while there may be a spate of new issues tied to a few M&A transactions, "I wouldn't get carried away," a New York-based sellside analyst said.

"The smaller-cap out performance represented by the S&P 500, 400 & 600 indices in February and the first week in March can be attributed to the sector weightings within these respective index groups, including technology, financials, health care etc. What is more important would be the breadth of trading and performance, in other words, how many names in these indices are contributing to the advance," the analyst said.

"Also, you will need to see a lot more upside performance in stocks before you see a consistent new issue calendar," the analyst said.

"From a convertible market perspective, liquidity remains a problem. Sure, we had announcement of the Ciena and International Coal deals, but these are small deals. Also, when you factor in the impact of issues leaving the convertible market via maturities, tenders, calls and puts, you still have a shrinking market," the analyst said, referring in particular Hasbro's plan to buy back its $249.8 million principal amount of outstanding 2.75% convertible debentures due 2021.

So the Pawtucket, R.I.-based game and toy company's $250 million issue is "scheduled to leave the market, while Ciena and International Coal announce $325 million of new paper. So, from a market value perspective, it's a net loss to the market," the analyst said.

He said, "As a result of a year of cost reductions and capital structure fixes, companies have a lot more cash on their balance sheet that could be used for any future capex plan. Companies won't likely hire anytime soon, until they see a sustainable pick up in consumer demand.

"I don't see that happening in the near- to mid-term given the problematic job market coupled, with a very muted personal income growth."

New issue drought in Europe

The European market remained quiet on Monday, said a London-based trader, who remarked that there was "really nothing that riveting" happening.

But the drought in the primary market helped to push recently issued Vedanta Resources plc's 4% convertibles due 2017 slightly higher, the trader said.

"The deal that came last week continued to richen," the trader said. "There's now about 105.25 bid, 105.75 offered. That certainly has richened in part because there hasn't been a whole lot of other issuance."

Vedanta, a London-based mining company, priced an upsized $805 million of seven-year convertible bonds near the cheap end of talk with an initial conversion premium of 37.5% on March 2.

Price talk was at a coupon of 3.5% to 4% and an initial conversion premium of 35% to 40%.

The size of the deal was originally $775 million with an over-allotment option of an additional $75 million. The greenshoe is now $78 million.

There was more activity seen coming out of Asia, where investors are looking for ways to benefit from Indian regulators' decision in mid-February to allow issuers to reset conversion prices to be closer to current stock prices, the trader said.

Indian convertibles such as Pune, India-based Suzlon Energy Ltd.'s zero-coupon convertibles due June 2012 and October 2012 have been active since the company said it wants to lower the conversion prices for the notes.

"There has been circulation that there are some other names that could be doing this as well," the trader said.

But the trader said the activity has mostly been centered on lower-quality names, because those companies are seen as more likely to be willing to risk diluting their equity in order to boost their balance sheets.

"The point worth making is that companies that have less flexibility are more likely to use this...better-quality names are less likely to do so, but we might see some opportunistic moves," the trader said.

Ciena begins to be bid up

The new issue of convertibles that Ciena launched Monday was seen starting to be bid up. The plus one bid was seen low, given that final pricing wasn't seen until after the market close on Tuesday.

Ciena's 0.875% convertibles due 2017 were seen little changed at 68.57, according to a sellside pricing source. Also Ciena's 0.25% convertibles due 2013 were seen at 83.67, which was up about a point.

Morgan Stanley and Deutsche Bank are joint placement agents. Due to the nature of placing of a 4-2 deal, the banks are not bookrunners but placement agents. After pricing, however, the issue will trade as a Rule 144A issue, with a Rule 144A Cusip, according to a syndicate source.

MasTec Inc.'s $100 million of 4% convertibles that priced last June was also a 4-2 deal, the source said.

The new Ciena notes will be non-callable for three years and then will be provisionally callable at a 150% price hurdle. If they are called early, there is a coupon make-whole feature. Conversion settlement will be only stock settled.

Ciena, a Linthicum, Md.-based supplier of communications networking equipment and software, intends to use proceeds to replace its existing contractual obligation to issue $239 million in 6% senior convertible notes due 2017 as part of the purchase price for its pending acquisition of optical networking and carrier ethernet assets of Nortel's Metro Ethernet Networks business.

Ciena's agreement to acquire Nortel's assets permits Ciena to replace the $239 million in 6% senior convertible notes due 2017 that are to be issued as part of the purchase price with cash equivalent to 102% of the face amount of the notes replaced, or $243.8 million.

Remaining proceeds, if any, will be used to reduce the amount of cash on hand that it needs to fund the $530 million cash portion of the total purchase price for the Nortel acquisition.

International Coal to price

International Coal's existing 9% convertibles due 2012, which will be tendered with the proceeds of the new issue, traded a little lower on Monday but were still above par as the underlying shares fell 10% after news of the stock and bond issues the Scott Depot, W.Va.-based coal producer is planning.

Concurrently, International Coal is going to tender for its existing 9% convertible notes due 2012 and its existing 10.25% senior notes due 2014.

There is also a concurrent offering of 21.2 million shares of its common stock and $200 million of senior secured second-priority notes due 2018.

None of the offerings is contingent upon the completion of the others.

The registered, off-the-shelf convertible is being made via Morgan Stanley & Co. and UBS Securities Inc. as joint bookrunners.

The convertibles, which were expected to price Wednesday after the close of markets, will be non-callable for life.

Proceeds from the stock and convertibles, together with cash on hand, if needed, will be used to tender for up to $139.5 million principal amount of its 2012 convertible notes.

Proceeds from the senior notes offering, together with cash on hand, if needed, will used to finance the cash tender offer of up to $175 million of its 2014 notes. Any excess proceeds will be used for general corporate purposes.

Kenneth Lim contributed to this article

Mentioned in this article:

Ciena Corp. Nasdaq: CIEN

Ford Motor Co. NYSE: F

Hasbro Inc. NYSE: HAS

International Coal Group Inc. NYSE: ICO

Interpublic Group of Cos. Inc. NYSE: IGP

MasTec Inc. NYSE: MTZ

Suzlon Energy Ltd. Bombay: SUZLON

Vedanta Resources plc London: VED

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