New ON Semiconductor looks fair value to cheap; Frontier launches $1.75 billion mandatory

By Rebecca Melvin

New York, June 2 – Market players were sizing up two new deals in the U.S. convertibles primary market Tuesday, while a bumper crop of new deals materialized internationally.

ON Semiconductor Corp.’s planned $600 million of 5.5-year convertibles, launched after the market close on Monday for pricing Tuesday, was looking right about fair value to a little cheap at the talked terms, traders said.

“They model almost exactly fair value, but I think the deal will do well given the lack of paper in the market,” a New York-based trader said. A second trader said they were about 2 points cheap at the midpoint of talk, based on his assumptions.

Phoenix-based ON makes and sells semiconductors for electronic devices. ON Semi shares ended the session down 0.8%.

ON Semi’s existing 2.625% paper traded down 3.5 points on an outright basis to 132.627, according to Trace data.

Also early Tuesday, Frontier Communications Corp. launched an offering of $1.75 billion of convertible preferred stock in a registered deal talked to yield 11.125% to 11.625% with an initial conversion premium of 12.5% to 17.5%.

Frontier, a Stamford, Conn.-based wireline communication provider, is also pricing $750 million of common stock. The deals are earmarked to fund its previously announced acquisition of Verizon assets.

That deal is slated to price late Thursday, and at the end of Tuesday, the Frontier shares were up 1.6%.

Internationally, there were deals priced by Germany’s Salzgitter AG for €168 million of seven-year 0% convertible bonds with an initial conversion premium of 45%, and British Land Co. plc, a London-based real estate company, for £350 million of five-year 0% convertible bonds and a C$125 million bought deal of five-year debentures by Boralex Inc.

In Asia, real estate developer China Merchants Land Ltd. plans to price $250 million of five-year convertible bonds on Tuesday that were talked at a 0% to 0.5% coupon and a 20% to 25% premium; and real estate company lida Group Holdings Co. Ltd. plans to price ¥30 billion of five-year convertibles at 100.5% of par that were talked at a 0% coupon and a 25% to 35% premium.

ON Semi looks fair to cheap

ON Semiconductor’s planned deal of $600 million of 5.5-year convertibles looked to be fair value, or just under at 99.88 at the midpoint of price talk, using a credit spread of 300 basis points over Libor and a 33% vol., a New York-based trader said.

A second trader, this one based in Connecticut, said that using a lower credit spread of 275 bps over Libor and a 33% vol., the deal looked worth 103 at the midpoint of price talk.

The deal was talked to yield 1% to 1.5% with an initial conversion premium 37.5% and 42.5%.

The Rule 144A deal has a $90 million greenshoe and was being sold via J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC and BofA Merrill Lynch.

The bonds are non-callable and have no puts.

In connection with the pricing of the notes, the company plans to enter into convertible note hedge and warrant transactions, or a call spread.

Proceeds are earmarked to fund the cost of the call spread and to fund the repurchases of up to $100 million of ON Semiconductor common stock, up to $70 million of which is expected to be purchased from purchasers of notes in the offering in privately negotiated transactions concurrently with the pricing of the notes with the balance expected to be purchases in the open market, to repay $350 million of borrowings outstanding under its revolving credit facility and for general corporate purposes, including additional share repurchases and potential acquisitions.

Frontier to price

Frontier, the Stamford, Conn.-based wireline telecommunications provider, which has had a deal on the calendar for a long time attached to its planned acquisition of certain Verizon assets, launched the deal Tuesday for pricing on Thursday.

Price talk was for an 11.125% to 11.625% coupon with an initial conversion premium of 12.5% to 17.5%, according to market sources.

Frontier will also price $750 million of common stock in tandem with its mandatory convertible preferred shares.

Joint bookrunners of both deals are JPMorgan, BofA Merrill Lynch and Citigroup Capital Markets Inc.

Co-managers are Barclays, Credit Suisse Securities (USA) LLC, Morgan Stanley, Mizuho Securities, Deutsche Bank Securities Inc., Goldman Sachs & Co. and UBS Securities LLC.

Underwriters have an option to purchase up to an additional $175 million of the convertible preferreds and up to an additional $75 million of common stock.

Proceeds will be used to finance a portion of the cash consideration of its previously announced acquisition of Verizon Communications Inc. in California, Florida and Texas.

The mandatories have takeover and dividend protection and are expected to be priced after the market close on Thursday.

Mentioned in this article:

Frontier Communications Corp. NYSE: FTR

ON Semiconductor Corp. NYSE: ON

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