Lehman soars on debut; Alpha Natural Resources up in gray; SVB seen as cheap; Globalstar plans deal

By Kenneth Lim

Boston, April 1 - New issues kept the convertible market active on Tuesday, with Lehman Brothers Holdings Inc.'s fresh paper shooting off the charts on a spectacular debut.

Alpha Natural Resources Inc. was bid up in the gray market on views that its proposed convertible appeared cheap for hedge investors.

SVB Financial Group was quiet in the gray market, but its offering also received positive reviews from the buy side.

Globalstar Inc. announced a $135 million convertible offering after the market closed that comes with concurrent share lending agreement aimed at improving the borrow.

Lehman charges ahead

Lehman Brothers' upsized $4 billion offering of perpetual convertible preferred stock leapt more than 15 points on its first day of trading, leading to speculation that the deal may have priced wrongly.

The deal priced at the midpoint of price talk to yield 7.25% with an initial conversion premium of 32.5%. The convertible closed at 115.25 offered, 115.75 bid against a stock price of $42.85 on Tuesday. Lehman common stock (NYSE: LEH) closed at $44.34, up by 17.8% or $6.70.

"The Lehman this morning was just crazy," a buysider said. "It was very cheap and there was a lot more demand than they'd expected. People just went crazy. They ended up being very rich."

The original size of the deal was $3 billion with an over-allotment option for an additional 450,000 shares, or $450 million, which has already been exercised.

Lehman Brothers Inc. was the bookrunner of the registered shelf offering.

The series P preferreds were sold at par of $1 apiece and a liquidation preference of $1,000 per preferred share. Price talk was for a dividend rate of 7% to 7.5% and an initial conversion premium of 30% to 35%.

Lehman, a New York-based investment bank, said the proceeds of the deal will be used to bolster its capital and increase financial flexibility.

The buysider said that despite the strong interest in the convertible, only a handful of investors managed to get their hands on the new notes.

"It was upsized, but it was apparently very tightly placed," the buysider said. "It's now 117.5. It just went nuts. It's incredible demand, but I haven't heard or talked to anybody who actually got it."

The buysider speculated that the deal may have been mispriced.

"Probably they could have priced it richer, but they probably priced it to make sure that it was all going to be taken," the buysider said. "But probably when they saw how much demand there was for it then they started to play games with where it was placed. Hedge funds were mostly shut out, and then it ended up mostly with big investors who wouldn't flip it."

But a sellside trader said it may not have been possible for the issuer and the bankers to know how much interest there was in the market until the overnight deal began to trade.

"You know what, that's a foolish statement because until it was so successful it wasn't priced wrong," the trader said. "I think it's silly to make that statement because you're putting the cart before the horse...At 8:30 a.m. they were 7 points bid, 106.5 bid at 8:16 a.m. It was probably priced 5% cheap, not 17% cheap."

The trader added that part of the notes' gains on Tuesday came as a result of sharp increases in Lehman's common stock.

"The stock was already at $41 before it opened, so you knew it was going to be up a few points straightaway," the trader said. "It followed the stock."

Alpha up in gray

Alpha Natural Resources' planned $250 million offering of seven-year convertible senior unsecured notes was bid at 100.5 to 100 in the gray market on Tuesday.

The deal, which was expected to price after the market closed, was talked at a coupon of 2.375% to 2.875% and an initial conversion premium of 30% to 35%. The notes were offered at par.

There is an over-allotment option for a further $37.5 million.

Citigroup and UBS Investment Bank are the bookrunners of the registered shelf offering.

There is a concurrent $150 million common stock offering with a $22.5 million greenshoe. The pricing of the stock offering has not been set.

Alpha Natural Resources, an Abingdon, Va.-based processor of steam and metallurgical coal, said it will use the proceeds of both offerings to buy back up to $175 million outstanding principal amount of its subsidiaries' 10% senior notes due 2012 and for other general purposes.

A sellside convertible analyst said the deal looked more than 5% cheap on a hedged basis.

"I think hedgies would be more interested in this," the analyst said.

But Alpha Natural Resources' stock has climbed considerably over the past year . The common stock (NYSE: ANR) closed at $41.29 on Tuesday, just shy of its 52-week high of $44.58 and more than double its year-ago price of $15.63.

"From looking at the stock, it appears fair to overvalued, so the outright guys may not find it that attractive," the analyst said.

The analyst noted that new convertible issues have been coming cheaper because of current market conditions.

"A lot of deals are coming this way," the analyst said. "The hedgies are like, 'Ooh! I don't really care what the company does.'"

A buysider said the relative cheapness of the new deals is mostly influenced by the structure and the nature of the issuers.

"Recent deals, like the MGIC, when the structure is a problem, or when the issuer is like Ambac, those obviously come very cheap," the buysider said. "Those that are attractive, they'll model cheap but not as much."

Buysiders are enjoying the cheapness of the new paper coming to market, but only to a certain extent, the buysider said.

"In terms of looking forward and having cheap merchandise, yes, but there's a reason things are so cheap," the buysider said. "It's cheap because of what the market's gone through, and a lot of funds have had to shut down. It's not the way I would have liked to get cheap merchandise, but going forward it looks pretty good."

SVB seen cheap

SVB Financial's planned $200 million offering of three-year convertible senior unsecured notes was quiet in the gray market, but the deal appeared to be well received on Tuesday.

The deal, which was to price after the market closed, was talked to yield 3.375% to 3.875% with an initial conversion premium of 22.5% to 27.5%.

The convertibles were offered at par.

There is an over-allotment option for a further $50 million.

JPMorgan is the bookrunner for the Rule 144A offering.

SVB, a Santa Clara, Calif.-based financial services company, said it will use $150 million of the proceeds to cash settle or repay its outstanding 0% convertible subordinated notes due June 15, 2008. It will also use the proceeds for convertible note hedge transactions and for general purposes.

"I think it's good," a hedge analyst said. "I like the fact that it's short and it's a good credit. I think it's priced pretty attractively. It's got everything. It's got a good structure."

Given SVB's credit strength and the tenor, the deal is coming at a decent discount, the analyst said.

"This is only a three-year paper, and it's a good credit, a name that people know," the analyst said. "This is an investment-grade issuer...and still it's coming at around 3.5%, up 25% probably or something around there."

SVB would probably have been able to price it richer if it had done the deal earlier, the analyst said.

"That's very different from what the same issuer would have gotten if it had done it this time last year," the analyst said.

Globalstar plans offering

Globalstar said it plans to price $135 million of 20-year convertible senior notes on Wednesday after the market closes, talked at a coupon of 5.25% to 5.75% and an initial conversion premium of 45% to 50%.

The convertibles will be offered at par.

There is an over-allotment option for an additional $15 million.

Merrill Lynch and Deutsche Bank are the bookrunners for the registered shelf offering.

To facilitate the borrow on its stock, Globalstar will enter into a concurrent share lending agreement involving about 15 million to 20 million common shares with a Merrill Lynch affiliate.

Globalstar, a Milpitas, Calif.-based provider of satellite voice and data services, said it will use part of the proceeds to buy government securities through an escrow account to fund the first six semiannual interest payments. It will also use the proceeds to help buy and launch Globalstar's second-generation satellite and related ground facilities and for other general corporate purposes.

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