New Comtech off with stock; International Game soars in gray; Kemet trades above tender price

By Kenneth Lim

Boston, May 5 - Comtech Telecommunications Corp. had a lackluster debut on Tuesday amid a quiet market session for convertibles, market sources said.

Comtech's new convertibles slipped below par despite arriving near the cheap end of price talk as the common stock declined, but observers say the paper is now fairly valued.

International Game Technology's planned five-year bullets shot up in the gray market, pulling up its older convertibles on optimism about a put play.

Kemet Corp. also jumped after the company made a tender offer for its convertibles, but the market could be expecting the company to pay more.

After the close, D. R. Horton, Inc. announced plans for a $400 million convertible senior notes offering.

Otherwise the convertible markets were relatively slow, with the uncertain equity markets leaving investors looking for direction, market sources said.

"We're not doing much at all," a sellside convertible trader said.

Comtech slips with common

Comtech's new 3% convertibles due 2029 were lower on their secondary market debut, but some observers saw some positive aspects to the deal.

"It's good for underwriting reputation," a convertible trader said. "If everything is coming so cheap, it means they're mispricing everything."

The new notes traded at 98.5 early Tuesday on its first day of trading on the secondary markets. The senior unsecured notes were sold at par.

Comtech common stock closed at $28.69, down by 3.37% or $1.

The $200 million deal priced with a 22.75% initial conversion premium. Price talk was for a coupon of 2% to 2.5% and an initial conversion premium of 22.5% to 27.5%.

The initial conversion price was $36.44 and the initial conversion ratio was 27.4395.

There is an over-allotment option for an additional $30 million. Merrill Lynch & Co. and J.P. Morgan Securities Inc. were the bookrunners of the Rule 144A offering.

Proceeds will be used to fund the company's acquisition strategy and for general corporate purposes.

Melville, N.Y.-based Comtech develops, makes and markets products, systems and services for advanced communications solutions, including telecommunications transmission, mobile data and RF microwave amplifiers.

The deal got a bad reception from investors during marketing, but the final pricing and company's fundamental strength may have helped to get the deal done, sources said.

"We were definitely shocked to see this one initially price where it was with such a low coupon," said a sellside analyst who saw the deal as about 1.5 points rich. "But at the same time they have an existing convertible that was called in February this year, which is probably why they got more favorable pricing relative to what we've seen lately."

Comtech has a good credit profile, and the convertibles could become attractive if they drop by just a bit, the analyst said.

"This isn't a bad credit at all," the analyst said. "Looking on a pro forma basis, they have double cash to debt, and their only debt is this new convertible. All their important trailing 12-month numbers, EBITDA, free cash flow, they were all up by pretty good margins year on year, so I think if these trade down a little more, if you build a little more yield in the name, they could be pretty attractive."

"The deal priced unfavorably for people who were getting new allocations, but from a credit perspective they're quite a good credit," the analyst added.

International Game seen cheap

International Game's planned $500 million of five-year convertibles jumped up in the gray market to around 104.5 bid, 106 offered with the deal seen as cheap.

"We modeled it, and it was about 7% cheap," one convertible analyst said.

International Game planned to price the deal after the market closed Tuesday. Price talk was for a coupon of 3.5% to 4% with an initial conversion premium of 27.5% to 32.5%.

The Rule 144A deal, being sold via Goldman Sachs & Co., Banc of America Securities LLC, Morgan Stanley & Co. Inc. and Wachovia, includes a $75 million overallotment option.

International Game intends to use part of the proceeds for hedging transactions. The company will use the remaining proceeds to pay down outstanding revolving debt under its senior credit facility.

International Game is a Reno, Nev.-based maker of gaming machines and systems.

Following the announcement of the new deal, International Game's existing 2.6% convertible due 2036 rose about 1.5 points outright to trade at 98.5 against a common stock price of $14.50. The common stock rose 6.05% or $0.86 to close at $15.07.

The older paper rose on expectations that the company was freeing up room on its revolver to fulfill a Dec. 15, 2009 put on the 2.6% convertible, the analyst said.

"From what I gather, this was done to basically pay down what's outstanding on the revolver, and then they're going to take the revolver, the capacity to pay off this put in December," the analyst said. "This is a good thing in terms of the 2.6% convert holders. Definitely good for the existing converts."

The deal is also beating expectations about the company's credit quality, the analyst noted. Standard & Poor's rated the new convertibles BBB, which is in line with International Game's company rating, the analyst said.

"In late April they put a negative outlook on the company rating," the analyst said. "I was worried that you'd see a BBB-."

There was also speculation earlier that, in order to fulfill its obligations, International Game would have to raise about $900 million at a 9% coupon, the analyst said. In light of those expectations, a deal coming at a coupon of 3.75% at the mids would not seem bad, even if the company will be paying a higher interest than the older notes.

"Maybe that's why you saw the stock's still doing pretty well today," the analyst said. "Usually you see the stocks get pretty beat up after a deal is announced."

Kemet jumps on tender

Kemet's 2.25% convertible due 2026 added about 10 points outright to trade at 32.25 after the company made a tender offer to buy back the notes at 30 cents to the dollar.

Kemet common stock closed at $0.79, up by 14.49% or $0.10.

"I heard about that," a sellside convertible trader said. "I think it's a smart move by the company. They'll get it back at a huge discount, and the holders get a pretty big premium. But these are putable in 2.5 years, so maybe some guys will ask for more."

The company on Tuesday offered to buy back all $175 million outstanding principal amount of the convertibles for $52.5 million, or $300 per $1,000 par note. The offer expires at the end of June 2.

The offer will be financed with a term loan for the full tender amount from K Financing LLC, an affiliate of Platinum Equity Capital Partners II, LP.

Kemet declined to comment, citing the quiet period ahead of its expected results announcement in two weeks.

One sellsider thought that the company can afford to pay $350 to $400, and the current market price of the convertibles suggests that investors expect more.

"KEME trading at 32.25 baby...2.25 points above the tender price," the sellsider said.

D.R. Horton plans deal

D.R. Horton plans to price about $400 million of five-year convertible senior unsecured notes, according to a press release.

There is an over-allotment option on an additional $60 million.

Citigroup is the bookrunner of the registered off-the-shelf offering.

Proceeds will be used for general coporate purposes, including repayment or repurchase of outstanding debt.

Fort Worth, Texas-based D.R. Horton is a homebuilder.

Mentioned in this article

Comtech Telecommunications Corp. Nasdaq: CMTL

D.R. Horton, Inc. NYSE: DHI

International Game Technology NYSE: IGT

Kemet Corp. OTCBB: KEME

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