Lehman declines, other financials weaken; Mylan, NVR expected to price offerings after the close

By Rebecca Melvin

New York, Sept. 9 - Lehman Brothers Holdings Inc. convertibles fell as its stock crumbled and credit default swaps rose after a report that talks about a potential investment by Korea Development Bank in the fourth-largest securities firm had broken down.

"All eyes on LEH," an East Coast-based sellside trader wrote via e-mail about Tuesday's market.

Other financials were also lower on the second day of trading after the government's seizure of troubled mortgage giants Fannie Mae and Freddie Mac, market participants said.

"I see dead people," a New York-based sellsider said, citing declines in the convertible preferreds of Citigroup Inc., Wachovia Corp. and Bank of America Corp. The source said the declines were "all related to Paulson's moves on FNM/FRE ...."

Meanwhile, the stock rally during the first day after the government Fannie and Freddie seizure brought a windfall of new deals to the convertibles market.

Two deals were seen pricing after the market close Tuesday, including Mylan Inc.'s $400 million of seven-year convertibles, talked to yield 2.875% to 3.375% with an initial conversion premium of 20% to 25%, and NVR Inc.'s. $325 million of 30-year convertibles- launched early Tuesday - which were talked to yield 1.5% at the midpoint, with an initial conversion premium of 25%, according to market sources.

Lehman slides

Lehman Brothers' 8.75% mandatory convertible preferreds slumped to a close of 341 versus a share price of $7.79 on Tuesday, compared to 564 versus a share price of $14.15 on Monday.

The slide started early in the session after a report that Lehman's talks with Korea Development Bank had ended. Later those reports were disputed and Lehman wouldn't comment on those developments, if any.

Early in the session the newer mandatory traded at 400 versus $10.00 a share, and the older 7.25% Lehman preferreds traded at 45 versus a share price of $9.50.

Lehman common stock (NYSE: LEH) plunged 45% in extremely heavy volume to close the session down $6.36 at $7.79.

"A lot" of Lehman traded, a New York-based sellside desk analyst said.

Speculation regarding Lehman's strategy or options for boosting liquidity following billions of dollars of write downs and credit losses has kept investors on edge.

Also on Tuesday, Standard & Poor's put Lehman's debt on CreditWatch Negative because of the steep stock decline, which means the agency may lower the company's ratings within months. Such a move would increase the amount of money Lehman pays to issue debt.

"The CreditWatch listing stems from heightened uncertainty about Lehman's ability to raise additional capital, based on the precipitous decline in its share price in recent days," said S&P credit analyst Scott Sprinzen.

Citigroup, other financials weaken

Citigroup's convertible preferred shares traded at 42.125 versus a share price of $20.00, which was lower by more than a point on a hedged basis compared with trades Monday at 43.375 versus a share price of $20.15.

Shares of the New York-based banking giant (NYSE: C) closed down $1.44, or 7%, at $18.88.

Bank of America's 7.25% series L convertible preferreds were seen closing at 906 versus a share price of $32.52 on Tuesday, compared to 945 versus a share price of $34.73 on Monday.

Shares of the Charlotte, N.C.-based bank (NYSE: BAC) ended lower by $2.21, or 6%.

Other names like the Wachovia Corp. preferred were also said to have come in significantly on Tuesday.

Meanwhile, Fannie Mae's 8.75% mandatory preferreds were said to be trading at parity but later in the session improved slightly to plus 0.25 point.

The paper traded at 2.16 versus a share price of $0.99, compared to a close on Tuesday at 1.6 versus a share price of $0.73.

The older Fannie Mae 5.375% series 2004-1 convertible perpetual preferred was indicated to close at 4,200 versus a share price of $0.99.

Shares of the Washington, D.C.-based mortgage company (NYSE: FNM) actually gained 35%, or 26 cents, to $0.99.

Mylan to price

The Mylan convertibles, which were seen pricing after the close, were referred to as having a "new structure" in which the paper converts into cash instead of into shares.

The implications of such a structure were raised. "I think it's meant for outright players," a New York-based sellsider said, arguing that if you're hedged you want the shares.

But a syndicate source said the structure wouldn't affect investors and that it was intended for both hedged and outright players. It's not that different from net share settlement in which the principal is settled in cash and the additional in shares.

A sellside analyst said, "It's not an unattractive feature."

The deal, which was being sold via Goldman Sachs and Merrill Lynch, suffers from reduced borrow, however, the analyst said.

"They didn't model well, and people aren't going to like seven-year paper," he said. "They looked 1% rich whereas without the borrow problem they would have modeled 3% cheap."

He used a spread that was wider than the underwriters' 500 basis points to 550 bps over Libor.

"This is a company with decent market cap at $3.5 billion; but it also has $5.5 billion in debt. It has $680 million in cash and $700 million in available, so its $1.3 billion in cash, versus $5.5 billion in debt, versus $3.5 billion in market cap. If it was at $1 billion market cap, it would be modeling at 900 bps," he said.

Mylan planned to price $400 million of seven-year convertible notes to yield 2.875% to 3.375% with an initial conversion premium of 20% to 25%.

There is an over-allotment option for an additional $60 million on the Rule 144A offering.

The paper is non-callable for life, with no puts. The convertibles will have a contingent conversion feature and will be convertible only into cash, which is "a different form of settlement that is newer to the market," a syndicate source said.

Mylan will also enter into separate cash settled convertible note hedge and net share settled warrant transactions.

Proceeds will be used to fund the hedge and warrant transactions, to pay down an outstanding Libor plus 250 bps senior secured revolving credit facility and senior secured term loan facilities that currently bear interest of Libor plus 300 bps to Libor plus 325 bps.

Shares of the Canonsburg, Pa.-based maker of generic drugs (NYSE: MYL) closed down $1.32, or 11%, at $11.10.

NVR to price

Homebuilder NVR Inc. plans to price $325 million of 30-year convertible senior notes, also after the close Tuesday, with the midpoint of talk at a 1.5% yield with an initial conversion premium of 25%.

Credit Suisse Securities (USA) LLC was the bookrunner of the deal, which was being sold under a shelf registration.

There is a greenshoe of up to an additional $48.75 million of notes.

The notes are non-callable for five years, with puts in years 2013, 2018, 2023, 2028 and 2033. There is also a put in the event of certain types of corporate transactions or other events constituting a fundamental change.

Proceeds are for general corporate purposes.

Reston, Va.-based NVR is a homebuilder operating in 12 states, primarily in the eastern United States. About 34% of its home settlements in the first six months of the year were in the Washington, D.C., and Baltimore metropolitan areas. The company also conducts mortgage-related services through mortgage banking operations.

Shares of NVR (NYSE: NVR) closed down $53.06, or 9%, to $565.00 a share.

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