KeyCorp deal eyed ahead of pricing; Lehman active; Coors slips on rival's buyout news; Invitrogen in line

By Rebecca Melvin

New York, June 12 - KeyCorp was a focus of the convertible bonds market on Thursday after the Cleveland-based regional bank unveiled a $1.5 billion offering of common shares and perpetual convertible preferreds expected to price after the close.

The convertibles were offered in the gray market at 100.5 early and 100.25 later, which indicated little more than that no one expected the price to jump significantly once the preferreds were released to the secondary market.

The KeyCorp preferreds were talked with a dividend of 7.25% to 7.75% and with an initial conversion premium of 20% to 25%.

Lehman Brothers Holdings Inc.'s two convertible preferred issues remained very active and "a little better on higher vol." Thursday as the investment bank's shares extended losses after it announced that it was replacing chief financial officer Erin Callan and chief operating officer Joseph Gregory.

The step was seen as a measure of accountability for the abysmal recent performance of its stock, particularly this week, after the bank priced common shares on Monday at $28, closing the deal Thursday, when the shares were subsequently $22 to $23.

The 8.75% mandatory convertible shares were also done at that time.

As for the overall session, "most things are tracing lower with the bond market," a New York-based sellside trader said.

Molson Coors Brewing Co.'s 2.5% convertible senior notes were stirred into activity by news of a bid for rival Anheuser-Busch, and the Coors paper was called lower by about 0.125 point.

Invitrogen Corp. convertibles were mostly quiet, but were seen lower in line with its underlying shares, after the Carlsbad, Calif.-based biotech company said it would buy out Applera's Applied Biosystems Group in a cash and stock deal worth $6.4 billion, or $38 per share.

The bid marked a 17% premium over Applera's previous closing share price. And the news hurt Invitrogen's stock but was seen mostly neutral to the credit.

The market was toying with the idea that Invitrogen would issue another convertible to finance the Applera deal.

In the primary market, three new deals were released for secondary trading, but little activity was seen in those issues.

Bristow Group Inc. priced $100 million of 30-year convertible senior notes to yield 3% with an initial conversion premium of 65%, which was at the rich end of talk. The deal had been valued 5% to 7% cheap prior to pricing.

Sotheby's priced an upsized $175 million of five-year convertible senior unsecured notes to yield 3.125% with an initial conversion premium of 32.5%, which was toward the cheap end of talk for the coupon and at the midpoint for the premium. The deal was initially expected to be $150 million in size.

Power-One Inc. announced and priced $75 million of five-year senior secured convertibles late Wednesday to yield 8% with an initial conversion premium of 19%.

Meanwhile, Insulet Corp.'s 5.375% convertible notes, released to secondary trading Wednesday, were quoted on Thursday at 102 bid, 103 offered versus a stock price of $15.60.

KeyCorp may not open locks

"They are going to have to improve the dividend and cut premium, if this one is going to fly," a Boston-based sellside trader said early Thursday of the KeyCorp preferred.

The trader pointed out that the dividend on the common, even though it was cut by half, was still around 5%, which wasn't much different than the 7.25% to 7.75% dividend talked on the convertible preferreds.

"I'm not interested in paying 18% for 2%," he said.

Huntington Bancshares' convertible preferred shares, which are similar to the KeyCorp offering, are at 82, he said, adding that KeyCorp had been saying that it wasn't in the same boat regarding loan losses as some other banks like National City Corp., but it turns out that they are, he said.

"Maybe they should merge with NCC, and strip out tons of cost savings. They have a lot of overlap," he said.

The KeyCorp offerings are an effort to shore up its capital and strengthen its balance sheet following accounting changes, the Cleveland-based regional bank said.

The company also said it will cut its dividend on common shares by 50%, starting with the third quarter. KeyCorp had been one of the few major regional banks that hadn't yet cut its dividend or raised capital from outside investors. And last month, the company said its "capital position provides sufficient flexibility" to allow it to keep paying dividends and possibly repurchase shares.

The turnaround on Thursday caused shares of KeyCorp (NYSE: KEY) to plunge $2.73, or 24%, to $11.98.

The registered convertible preferreds and common stock offerings were expected to price after the close of markets on Thursday. The convertibles, with a par price of $100 per share, will be non-callable for five years, with forced conversion thereafter at a price hurdle of 130%.

There will be no investor puts, and dividend protection is via a conversion rate adjustment off $0.1875 per quarter dividend threshold amount.

Takeover protection will be via a standard make-whole table. There is no net share settlement, with settlement via stock only.

Citigroup is the bookrunner, with KeyBanc Capital Markets, UBS, Merrill Lynch, Pierce, Fenner & Smith Inc. and Morgan Stanley the joint lead managers.

KeyBank said the steps announced Thursday are being taken to preserve and enhance capital strength in response to a previously announced ruling by a federal court in a dispute over tax treatment of a segment of KeyCorp's leveraged lease portfolio.

Lehman remains active

The Lehman Brothers' 8.75% new convertible preferred shares traded actively on Thursday and closed at about 834.577 versus a share price of $22.70, compared to a close of 919.5 on Wednesday versus a share price of $23.75. On Tuesday, a day after pricing, the paper was at 994.44.

Lehman's 7.25% series P convertible preferred closed Thursday at 839.95, compared to 879.0 on Wednesday and 934.147 on Tuesday.

Lehman seems to have lost credibility, sources said. And when it reports earnings on Monday it better sure match guidance for a $2.8 billion loss or else, one New York-based sellside trader said.

Lehman's stock has fallen 33% in the last week as investors question the firm's capital position and its transparency amid the ongoing credit crisis.

Banc of America Securities Thursday cut its price target on Lehman Brothers to $23 from $27, but said it was keeping its "neutral" rating, as it expects the stock to languish due to its still-sizable troubled asset exposures and the need to de-leverage, but didn't see the brokerage "going the way" of Bear Stearns. This is due to the available liquidity and absence of a sizable prime brokerage business that Bear Stearns had. But it expects Lehman's fixed-income sales and trading, which accounted for more than half of its revenue in 2007, to slow for the next few quarters.

Lehman is the most leveraged large investment bank in the fixed-income market, and with a more challenging fixed-income market, higher long-term interest rates, lower volatility and wider credit spreads, it could hurt the most.

Lehman shares (NYSE: LEH) lost $1.05, or 4.42%, to end at $22.70 on Thursday.

Coors lacks froth

The Molson Coors' 2.5% convertibles due 2012 closed at about 127 versus a share price of $57.97, compared to Wednesday's close at about 126 versus a share price of $56.62.

Shares of Denver-based Coors (NYSE: TAP) closed up $1.35, or 2.4%, at $57.97 as it moved higher with many beverage stocks on news that Belgian brewer InBev SA has bid to buy Anheuser-Busch Cos., the maker of Budweiser, Bud Light and other brands, for $65 per share in cash.

Invitrogen quiet, but in line

Invitrogen's 3.25% convertibles due 2025, which have takeover protection - not that it matters in relation to Thursday's news - closed at 105.4 versus a share price of $38.73, compared to 109.875 versus a share price of $43.35 on Wednesday.

It's 2% convertible senior note due 2023 settled at 123 and its 1.5% convertible senior notes due 2024 ended at 95.55, compared to levels at 134.4 and 100.8, respectively.

Invitrogen shares (Nasdaq: IVGN) sank $4.62, or $10.7%, to $38.73 after it announced its bid to buy rival Applied Biosystems.

"We traded some. It was not the most active, but in line," a New York-based sellside trader said. "Credit wise, it's not a huge positive or negative. The initial credit stays the same, although they could be doing another convert to finance it."

Another sellsider said that the bonds used to trade actively all the time, but more recently "they trade upstairs" for some reason, he said, referring to trading within accounts, rather than with Street brokers.

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