Conexant, ArvinMeritor debuts lukewarm; auto plays beaten down; Huntsman under credit review

By Kenneth Lim

Boston, March 2 - After a week of strong starts by new issues, Thursday's debuts seemed slow off the blocks. Conexant Systems Inc.'s new 4% convertible bonds due 2026 opened slightly up but stayed below par, market sources said.

ArvinMeritor's upsized tranche of 4.625% convertibles due 2026 managed to gain above par, but reception for the securities were dampened by weakness across the automotive sector.

General Motors Corp.'s trio of convertibles all slid amid news of U.S. auto makers losing ground to Japanese brands in the most recent monthly sales data and credit trouble at parts supplier Dana Corp.

"The sector's obviously been quite vulnerable lately," said a buy-side analyst.

Intel Corp. was also in play, but stayed flat on mixed news concerning potential future orders.

Huntsman slid slightly in line with the stock after the company was put under a credit review by Standard and Poor's over concerns about the company's restructuring plans.

Conexant's new deal stays below par

Conexant's 4% convertibles due 2026, which were reoffered at 98.5% of par late Wednesday on the lower end of talk, had a lukewarm reception on Thursday. The securities were positive "for a brief moment, which helped people who had it and wanted to sell it," but fell back and ended around 99.5 points, said a trading source.

"They priced it below par, which is what they needed to do," the source said. "They did enough to clear the market. It wasn't significantly cheap, but it was enough."

Conexant stock (Nasdaq: CNXT) fell 11 cents, or 3.35%, to close at $3.17.

A convertible analyst said he felt the convertibles, which have an initial conversion premium of 50%, were "kind of weak."

"The premium that they assigned, I don't think the yield is there to compensate," he said, explaining that he thought that pricing at 96% or 97% would have been fair.

Talk for the reoffer price was 98.5 to 99.

But because Conexant is using proceeds from the offering to help reduce its outstanding debt - the company has 4.25% and 5.25% convertibles maturing in May - the deal could be seen to be positive for the equity holders. He said a better way to play the company would be to invest in the common stock, because they were better valued, and trading at levels below most of the other comparables in the sector.

"If I were an equity investor, I like this investment," he said. "But convertible holders aren't being compensated for the premium."

Conexant is a Newport Beach, Calif.-based developer of semiconductor system solutions used in broadband communications, enterprise networks and digital home networks. Lehman Brothers managed its new $200 million deal.

ArvinMeritor dragged by sector's woes

ArvinMeritor's newly priced 4.625% convertibles due 2026 were well received by investors before they were priced late Wednesday, but only managed modest gains over the day as market observers noted a slump across the automotive sector.

A sell-side trading source said the new securities were quiet in the morning, while one buy-side source said later in the day that he saw them bid at 0.625 points above par versus a stock price of $14.72.

The gray market on Wednesday had bid one million units at 2.5 points above par and offered at 3.25 points above par, and the deal had been upsized to $260 million from $200 million, while the greenshoe option was increased from $30 million to $40 million.

ArvinMeritor stock (NYSE: ARM) dropped 5.73%, or 89 cents, to close at $14.65 on Thursday.

A sell-side convertible analyst said that, in addition to concerns about the industry, interest in the convertibles was also affected by the fact that it priced at the rich end of talk and carried a long non-putable period of 10 years.

The put options kick in at years 10, 12, 14, 16 and 18, while the non-callable period lasts 10 years.

"At the rich end of pricing, they were about 1.2% cheap roughly, and that was using 40% vol and a spread of 450 [bps] over Libor," the analyst said.

"Valuation is reflective of the fact that the security is non-call 10 and putable only after 10 years," the analyst said. "A lot of investors are not willing to pay for 10 years of call protection, so even though the company is giving you 10 years of call protection, investors will model it as non-call seven or non-call five...which means that the theoretical value of the convertibles will be lower."

Auto plays skid on negative news

The analyst also noted that ArvinMeritor, a Troy, Mich.-based maker of car and truck parts, was affected by a bad day for the automotive industry.

Consumer Reports on Wednesday said Japanese vehicles swept all the top spots in 2006 for the purchasing guide's list of most highly recommended autos. It was the first time U.S. brands have been shut out of the top picks, the magazine said.

The previous day, monthly sales figures showed General Motors and Ford Motor Co. declining.

"I think the other day we were using a 400 over Libor spread [for ArvinMeritor], and now we're using 450," the analyst said. "The outlook is still very cloudy for U.S. auto makers."

A buy-side analyst also said sentiment in the sector was hit after Toledo, Ohio-based auto parts supplier Dana Corp. said Thursday that it failed to make $21 million in bond interest payments on Wednesday and has a 30-day grace period to fulfill its obligations. Dana, which restated its earnings in 2005, is also speculated to be facing bankruptcy after it was reported to have hired a restructuring firm a week ago. Dana does not have any convertible bonds trading, but its straight bonds have been pummeled the past week by investors.

General Motors, which saw its issuer default and senior debt rating downgraded to B from B+ on Wednesday by Fitch Ratings, slipped on all the negative news. The Detroit auto maker's 4.5% convertibles due 2023 (NYSE: GXM) fell to 22.52 on Thursday, down 0.23 point or 1.01%. The 5.25% convertibles due 2032 (NYSE: GBM) were closed at 15.15, lower by 0.05 point or 0.33%. The 6.25% convertibles due 2033 (NYSE: GPM) lost 0.11, or 0.67%, to end at 16.28. General Motors stock (NYSE: GM) slid back 23 cents, or 1.16% over the day to close at $19.67.

Intel flat on mixed news

About 2 million units of Intel Corp.'s 2.95% convertibles due 2035 were seen at 89.5 bid, 89.825 offered against a stock price of $20.80 on Thursday, said a sell-side source. That was similar to levels on Wednesday, when a major trading shop marked the securities at 89.49 bid, 89.62 offered against the same stock price.

Intel stock (Nasdaq: INTC) closed at $20.49 on Thursday, down 31 cents or 1.49%.

One buy-side analyst said the convertibles were "up on the bond market, but flat on a valuation basis," and did not think the activity was significant.

Intel got a boost Thursday when Hewlett-Packard Co. and Oracle Corp. lent their support to the chip maker's Itanium processors during a conference. Intel chief executive Paul Otellini said Thursday its new Itanium processor, named Montecito, would be launched in a few months and four versions of the chip are under development.

But a research report by Morgan Stanley published this week said that Google Inc. could be choosing servers from Intel rival Advanced Micro Devices Inc., which could mean the smaller competitor is gaining more market share.

A convertible analyst said he was not too concerned about the challenges posed by AMD, calling Intel "an 800-pound gorilla" with huge resources and new management. Intel also has a new relationship with Apple Computer Inc. and a development program aimed at digital home entertainment. Microsoft Corp.'s new Vista operating system, which is expected to be launched this year, "may also be a catalyst" for Intel.

"The No. 1 reason I like them [Intel] is that, historically, all the bad news is in the stock already, but the good news is not," he said.

Huntsman loses ground

Huntsman's 5% mandatory convertibles due 2008 slid slightly in line with the stock on Thursday after the company's BB- corporate credit rating was placed on CreditWatch with developing implications by rating agency Standard and Poor's.

The securities were marked at 44.43 bid, 44.48 offered against a stock price of $20.35 at a trading house. Huntsman stock (NYSE: HUN) slid 12 cents, or 0.59%, to close at $20.38 on Thursday.

Standard and Poor's said the review was prompted by Huntsman's plans to review its corporate structure, which could result in a spin-off to shareholders of its $6 billion base chemicals and polymers operations.

If Huntsman spins off the operations, the amount of debt that will be placed on each business, the ownership of the various assets and the structure of the plans will be factors in the review, the agency said.

A buy-side convertible analyst who covers the sector said the chemicals manufacturer's management has been frustrated that even though about 75% of the company's earnings come from higher-margin specialty chemicals, investors still saw the company as a trader of lower-margin commodity chemicals.

The analyst said he does not think the restructuring will happen until the second half of the year, but noted that the Huntsman management has many options to achieve its objective of spinning off the commodity-chemical business, so the situation presents a "value opportunity" to investors.

Still, he thought that the stock stood to gain more than the convertibles from any restructuring.

"The owners of the common probably have an opportunity to see better returns, on the convertible side there could be some caveats," he said.

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