HealthSouth up half point in gray; Mentor Graphics deal talked at 5.75%-6.25%, up 60%-70%

By Kenneth Lim

Boston, Feb. 27 - New deals coming from HealthSouth Corp. and Mentor Graphics Corp. generated the most buzz in what was otherwise a slow start to the week for the convertible bond market. American Tower Corp. lost some ground in line with the stock despite Bear Stearns raising its target for the underlying security, while Freeport-McMoran Copper and Gold Inc. lost about 1.5 points outright on further news of protests at its Indonesian operations.

Outside the United States, Nippon Sheet Glass Co. Ltd. priced ¥110 billion of zero-coupon three-year convertible bonds at a 20% initial conversion premium to finance its planned acquisition of British glassmaker Pilkington plc.

HealthSouth up ½ point in gray market

HealthSouth, whose planned $300 million of convertible perpetual preferred stock is talked to yield 6.5% to 7% with an initial conversion premium of 20% to 25%, has seen gray market bids a ½ point above par, said a market source.

The preferreds, which are being offered through joint bookrunners JP Morgan, Merrill Lynch and Citigroup, are to be priced this week. Syndicate sources could not confirm further details of the deal because it is distributed under Section 4(2), which is more akin to a private placement than a Rule 144A issue.

The lack of information from HealthSouth (HLSH) - which trades on the Pink Sheets and has been embroiled in lawsuits linked to an accounting fraud unearthed in 2003 - has kept analysts and traders wondering how to view the new convertible bonds.

"Just trying to figure out, guess at what their 2006 is going to be, it's just far to go," said a sell-side analyst who pointed out that the latest complete financial information for the company is for fiscal year 2004. "I think I understand what their new debt structure is, but without the cash flow I don't know the other side of the picture."

That may dampen interest in the new convertible bonds, the analyst said, because "it's tough to short the stock."

Trading in the secondary market could also be difficult if investors could not get a good sense of the securities' value, he added. "It two of the guys who were privately placed with the paper want to trade and they come to us... it makes it tough for us to go out and say it's a screaming buy or screaming sell."

A buy-side source, who said he was not involved in the deal, said there is nevertheless some sentiment in the market that the company is "wrapping things up pretty quickly" and moving on from its problems.

"I know people who have tried to look at their credit and the view is fairly positive," he said.

HealthSouth, which provides ambulatory surgery and rehabilitative health care services, is issuing the convertible bonds to reduce its outstanding debt.

Mentor Graphics to price $175 million deal

Mentor Graphics Corp.'s planned $175 million of convertible bonds due 2026 was talked to yield 5.75% to 6.25%, up 60% to 70%, according to market sources.

Syndicate sources could not be reached to confirm the price talk.

Bookrunners Merrill Lynch, Banc of America and UBS will also have a greenshoe option of $25 million.

Mentor Graphics plans to use the proceeds from the Rule 144A deal to repurchase its existing 6.875% convertible notes due 2007 and, if the greenshoe is exercised, to buy back part of its outstanding floating-rate convertible bonds due 2023.

The 6.875% notes, which are callable, changed hands on Thursday last week at about 100.875 points against a stock price of about $12.20. The floating-rate bonds, which have a 6.36% coupon, were marked at 93.63 bid, 94.13 offered at a major trading house, based on Monday's closing stock price of $11.23. Mentor Graphics stock (Nasdaq: MENT) ended the day down 93 cents or 7.65%.

Wilsonville, Ore.-based Mentor Graphics specializes in producing electronics design software for semiconductor chip giants such as Intel Corp.

A convertibles analyst who specializes in tech companies said that while the terms of the new convertibles and the ones they are replacing look similar, he felt that the new conversion premium was not cheap for the outrights.

"That's just a very high premium," he said. "I'm not sure that you're being compensated for that coupon at that premium."

He said he was concerned about the ability of Mentor Graphics to command that premium because he did not think the company was a high-growth story. For one, research and development budgets do not grow as fast as chip volumes, so Mentor Graphics is unlikely to grow as fast as its customers. Mentor Graphics is also much smaller than its customers, which puts it at risk of losing business if the customers decide to design their own software.

"Even though it's in the tech industry, it's not as high growth as the rest of the sector," the analyst said.

The analyst also said Mentor Graphics' strategy of focusing on the few segments in which they are leading, rather than diversify its product range, means there is "a danger that the company could miss out on some of the opportunities, or concentrate on the wrong areas as well."

Another analyst, from the sell-side, said "Libor plus about 450-ish, and 32 vol models fair" for Mentor Graphics and he did not find the new issue exciting.

"There are other people who are bigger and better capitalized, Cadence Design being one of them," he said.

Cadence Design Systems Inc., which is based in San Jose, Calif., also has a zero-coupon convertible due 2023. The security was marked at 116.98 bid versus a $17.89 stock price. Cadence Design stock (Nasdaq: CDNS) closed Monday at $17.89, down three cents or 0.17%.

American Tower down despite raised target

American Tower's convertible bonds lost about 2.5 points outright on Monday, in line with the stock's slide, despite a bullish research note from Bear Stearns and the recent report of a better than expected fourth quarter.

The Boston-based wireless transmission tower operator's 3% convertible due 2012 was marked at 164.78 bid, 165.03 offered against Monday's closing stock price of $31.79. The 3.25% convertible due 2010 was 267.38 bid, 267.56 offered, while the 5% due 2010 was 98.5 bid, 99.5 offered versus the same stock price.

American Tower stock (NYSE: AMT) slid 42 cents, or 1.3%, on Monday.

"The tower stocks have done pretty well as of late, they're at 52-week highs, I think up here it's probably attractive for a number of investors," said a sell-side analyst. "But the stock already had its run up, the outrights are probably selling. It's more of your vol-type traders now."

Still, the analyst thought American Tower's credit was "fairly decent."

Bear Stearns analyst Jim Ballan also thought well of American Tower, writing in a research note that he was raising his price target for the stock to $37, from $34, based on an expected free cash flow yield of 4.1%.

"The company has repurchased 5.9 million common shares for $169 million since the announcement of its $750 million share repurchase program that it intends to complete by the end of 2006," the analyst also wrote. "Although this is on pace to fulfill the repurchase program, it was also deleveraging in the quarter. The company continues to refinance its debt structure, and we believe the further optimizing of the company's balance sheet will cause the discount at which the stock trades to decrease."

American Tower said last week that it had lost $87.3 million, or 21 cents a share, in the fourth quarter, compared to $74 million, or 32 cents per share, in the year-ago period. It also guided for a loss from continuing operations of $3 million to $5 million for the first quarter, and a loss of $25 million to a profit of $10 million for 2006.

Freeport-McMoran shaken by unrest

The Freeport-McMoran Copper and Gold 7% convertible bond due 2011 was seen down about two points at about 174.50 on Monday, said a sell-side source, while the stock fell $1.41, or 2.67%, to close at $51.46. A trading shop marked that security at 172.55 bid, 173.55 offered versus the closing price, while the 5.5% convertible bond due 2049 was marked at 1,149.74 bid, 1,154.74 offered.

New Orleans-based Freeport-McMoran (NYSE: FCX) has been the target of recent protests in Indonesia over environmental issues, and has also been the involved in controversies in Indonesia over payments to security forces at the company's metal mines.

On Monday, police in Indonesia fired tear gas to disperse hundreds of protestors, who had smashed the ground-floor windows of the Jakarta building where Freeport-McMoran's Indonesian operations are housed. Meanwhile, about 100 protestors gathered near the company's Grasberg mine, but did not disrupt mining operations.

Nippon Sheet Glass prices ¥110 billion bonds

Japan's Nippon Sheet Glass Co. Ltd. has priced ¥110 billion of zero-coupon three-year convertible bonds at a 20% initial conversion premium, based on last Friday's closing stock price.

The bonds, which mature on March 13, 2009, will be sold at par of ¥100. The initial conversion price of ¥581 works out to an initial conversion ratio of about 0.17 shares per bond.

Daiwa Securities SMBC Co. and UBS AG London Branch are managing the deal.

Nippon Sheet Glass (TSE: 5202) was up one yen, or 0.19% in early trading in Tokyo.

Nippon Sheet Glass, which makes flat glass products and is headquartered in Tokyo and Osaka, is raising about ¥109 billion in net proceeds from the offering to finance the acquisition of British glassmaker Pilkington Plc. The total acquisition will cost $3.14 billion for Nippon Sheet Glass, which already owns 20% of Pilkington. If the acquisition does not proceed, Nippon Sheet Glass will cancel the issue or, if the convertible bonds have already been issued, redeem them.

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