Nortel, Komag tightened amid high demand; Amerigroup on deck; Freeport gains in gray

By Ronda Fears

Memphis, March 22 - With two new additions Thursday, from Nortel Networks Corp. and Amerigroup Corp., the convertible market is looking at $7.15 billion of new paper getting put into circulation by week's end. But the surge in deals created a bit of softness in the secondary market.

"It's hard to get people to focus on anything else with all the new deals," one sellside trader remarked. "The secondary was a bit softer today, I'd say, possibly to free up some capital to play the new deals."

That said, he described Nortel's existing 4.25% convertible due 2008, which is slated at least for a partial redemption from the new deal proceeds, as trading up on the Canadian telecommunications networking gear maker's news. He said the 4.25% issue moved up to 99 bid, 99.125 offered on Thursday from a bid of 97 earlier in the week.

Otherwise, telecom and technology issues were hurt by a warning from cell phone maker Motorola Inc. that first-quarter sales would fall more than $1 billion short of earlier projections.

In addition to the Nortel and Amerigroup issues on tap after Thursday's closing bell, there was a jumbo mandatory from Freeport-McMoRan Copper & Gold Inc. and a tiny $75 million issue from Diversa Corp.

Not much was stirring on San Diego-based Diversa's 20-year bond issue, which is talked at a coupon of 5% to 5.5% and an initial conversion premium of 27.5% to 32.5%. But a buyside source said it was an interesting story and he reckoned the books were pretty heavy. Yet, because it is so small, he figures it will be placed in a handful of accounts.

Diversa is categorized as a biotech but it makes specialty enzymes to produce ethanol, cellulosic ethanol and biodiesel as alternative fuels. The company has earmarked proceeds in part to expand its biofuels business. In January, Diversa bought the Cambridge, Mass.-based ethanol company Celunol for $154.7 million in stock, plus debt financing.

Nortel bucks telecom trend

Despite the pressure Thursday from the Motorola news, Nortel launched a $1 billion of convertible senior unsecured notes before the opening bell and heavy demand lead to price talk on the two-part deal getting tightened by around midday.

It wasn't an altogether certain home run, however. One sellside desk analyst remarked, "Nortel did tighten. We'll see how it works out given the market pressure on tech names today, with Motorola leading the charge."

The $500 million five-year tranche was tightened to price with a coupon of 1.625% to 1.875% and initial conversion premium of 30%, versus original talk for a coupon of 1.875 % to 2.375% and an initial conversion premium of 25% to 30%. The issue is non-callable for four years; there are no puts.

The $500 million seven-year tranche was tightened to price with a coupon of 2.0% to 2.5% and initial conversion premium of 30%, versus original talk for a coupon of 2.25% to 2.75% and an initial conversion premium of 25% to 30%. The issue is non-callable for six years; there are no puts.

The notes are expected to price at par.

Both tranches have standard dividend and takeover protection, and will rank pari passu with Nortel's 10.75% notes due 2016.

There is a greenshoe for another $75 million on each tranche.

Toronto-based Nortel, a telecom networking equipment maker, said proceeds would be used to redeem at par up to a corresponding amount of its $1.8 billion of 4.25% convertible senior notes due 2008 on or about Sept. 1. Any remaining proceeds will be used for general corporate purposes.

Nortel shares (NYSE: NT) lost $1.53 on the news, settling at $24.58.

Amerigroup seen expensive

Amerigroup's deal was modeling fairly expensive, according to market sources, which probably accounted for its terms remaining unchanged.

The Virginia Beach, Va.-based manager of health care plans launched $200 million of five-year convertible senior unsecured notes on Thursday before the market opened with talked to price with a coupon of 1.5% to 2.0% and an initial conversion premium of 27.5% to 32.5%.

At the midpoint of the price talk, one market source pegged the deal 5.67% rich, using a credit spread of 211 basis points and 36.8% volatility.

The issue was a straight-forward convertible, but offered on swap with Amerigroup dedicating a portion of proceeds for hedge and warrant transactions concurrently with the pricing of the notes.

There is a $20 million greenshoe.

Amerigroup said some proceeds also would be used to repay a portion of its new senior secured credit facility or other financing arrangements in order to post a bond in connection with the appeal of its Illinois litigation.

Komag juice squeezed out

Demand for Komag's deal was high, market sources said, even though on the face of the indicative terms it looked astonishingly expensive because of a whopping conversion premium. But it was modeling cheap, much to the surprise of some players, and with the high demand the price talk was tightened further and the size boosted well ahead of pricing after Thursday's close.

After Wednesday's close, the storage device maker launched $200 million of seven-year convertible senior subordinated notes talked to price at par with a coupon of 2.375% to 2.875% and an initial conversion premium of 73% to 77%.

"What stuns me is that the models say the Komags are cheap," one source commented. "I am a dinosaur I guess."

But the juice was squeezed out by the revised price talk.

With the books filling up rapidly with orders, the deal was boosted to $220 million and the price talk revised to show a coupon of 2.125% to 2.375% and initial conversion premium of 75% to 77%.

At the midpoint of the tightened price talk, he pegged the Komag issue about 0.88 rich, using a credit spread of 486 basis points and 31.7% volatility.

The issue includes embedded warrants equal to 0.75 times the number of underlying shares.

There is dividend and change of control protection, including compensation for warrants as well.

Komag plans to use proceeds to buyback common stock in connection with the deal, as well.

Otherwise, the company said it will use proceeds to redeem any of its 2% convertible subordinated notes due 2024 not converted, and any remaining proceeds for general corporate purposes, which may include additional stock repurchases.

Komag raises 1Q outlook

Market sources said interest in the San Jose, Calif., data storage device maker's deal was significantly helped by the company saying Wednesday after the close that it expects first-quarter sales to come in better than expected due in part to the sale of precious metal inventory.

Komag said it now expects first-quarter revenue to be slightly above the $255.9 million posted in fourth quarter. The company previously forecast first-quarter sales to decline 2% or 3% sequentially from fourth quarter.

In the face of the new deal, Komag shares (Nasdaq: KOMG) gained 23 cents, or 0.71%, to close Thursday at $32.80, which followed a 4% advanced on Wednesday.

Vornado price cut to sell

The market's appetite for REIT paper, however, was dwindling, remarked one convertible trader when asked about how the new SL Green Realty Corp., ProLogis and Extra Space Storage Inc. deals were trading. He said those were all trading sideways, at about issue price, on Thursday. That, he said, could be why the Vornado Realty Trust reoffer price had to be slashed.

Vornado priced $1.4 billion of 20-year convertible senior debentures on Thursday before the market opened with a coupon of 2.85% and initial conversion premium of 30%. The issue was reoffered at 97.5, according to market sources, which would be cheaper than price talk for a reoffer price of 98 to 98.5.

In November, the New York-based diversified REIT brought a $1 billion exchangeable at 3.625%, up 30% and it was reoffered at 97.5.

"Apparently no one wanted to pay any more now than they did then," the trader said, observing that the reoffer price of late has been in the 98 to 98.5 area, where Vornado was originally shopped.

Vornado's new issue also traded sideways from the issue price, traders said, but one remarked that there were more offers in the paper than bids.

Freeport deal seen boosted

Interest in Freeport's mandatory surged as the pricing approached, market sources said. The deal was heard to have been upsized from the $1 billion planned, but that was not confirmed by bookrunners on the deal.

Traders said the new issue did mark a big surge in the gray market, however. It was last seen near the closing bell bid at 1.5 points over issue price with an offer of 2.125 points over. That compares to a bid of 0.75 point over around noon, and Wednesday's bid of a half-point over.

Freeport's three-year mandatory is talked with a dividend of 6.75% to 7.25% and an initial conversion premium of 18% to 22%.

The New Orleans, La., mining concern, said the proceeds of the deal will be used to repay two outstanding term loans due 2012 and 2014 that were used to help fund its acquisition of Phelps Dodge Corp., which was consummated Monday.

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