Planned Meritor talked with outsized coupon, discount and premium; Knight Capital jumps

By Rebecca Melvin

New York, Nov. 28 - Meritor Inc. launched a $150 million offering of convertible bonds Wednesday that was seen pricing after the market close at a large discount and with outsized coupon and premium values.

The deal's talked terms were seen by market players as somewhat unconventional, with a 13.5-year term - but including a "normal" put after year eight, a discounted price of 90, and at a 7.5% to 8% coupon and an initial conversion premium of better than 170%.

Market players chalked up the terms of the Troy, Mich.-based truck parts maker's deal to a dire need for financing. Earlier this month, the company announced layoffs related to lower demand for its parts, particularly in slowing international markets like China.

"This is what they had to do to price it," a New York-based trader said of the terms, adding that the huge premium was not unprecedented, as premiums of that size were known to occur in the 1990s.

The new Meritor paper wasn't heard in the gray market ahead of final terms being fixed. But both existing Meritor convertibles were higher in trade, with the Meritor 4.625% convertibles adding better than 4 points to 91.25 bid, 91.50 offered and the Meritor 4% convertibles adding about a point to 76.

Knight Capital Group Inc.'s convertibles jumped another 3.5 to 4 points but stopped shy of par after word that the Jersey City, N.J.-based electronic trading firm had received a cash and stock offer worth about $1 billion from Getco LLC, a Chicago-based high-frequency trader.

The deal doesn't trigger a change-of-control put because it is not all stock, a New York-based trader said.

Small deal flow seen

The Meritor $150 million offering Wednesday was the first new paper of the week. The trickle of new issuance that has priced in the convertibles market in the past two months leaves 2012's total issuance about 25% lower than volume for the same period of 2011. Whether the 2012 total can close the gap by year's end is unlikely.

"There are small deals that might come, but that is likely to stop by the second week of December. So in reality, you have about two-and-a-half weeks," a New York-based syndicate source said.

For the year to date, there has been $19.37 billion in new issuance, including the Meritor deal, in 75 deals, compared to $25.70 billion in 82 deals for the same period in 2011 and $25.93 billion in 84 deals for all of 2011, according to Prospect News data.

"With the high yield breaking materially below 6% [coupon], and into the 4s this year, a lot of issuance would have been directed to the term loan or high-yield market," the syndicate source said.

He added that until interest rates revert, most expect to see the convertibles market remain a "specialized market" that will work in limited circumstances for companies that don't have or want to maintain ratings or that want flexibility in covenants.

Planned Meritor in focus

Meritor launched a private offering of $150 million of 13.5-year convertible senior notes, which will be coming at a discounted price of 90 after the market close Wednesday, and were talked to yield 7.5% to 8%.

With an initial conversion price on the notes set at $12.00, the deal is also seen to have a premium of better than 170%.

The lion's share of convertible bonds has coupons below 5% and premiums in the 25% to 35% range. Discounts if they are part of the deal are typically only for 1% or 2%. In addition, this bond's 13.5-year maturity was seen as something of an oddity, although the eight year call and put were more in the normal range, a New York-based syndicate source said.

"It's a dodgy situation - seems like a lot of moving parts and work to do," a West Coast-based trader said of the deal. But an East Coast-based buysider said his firm liked the deal.

In addition to the big coupon that offsets the huge conversion premium, the deal starts with a 10% pop right off the bat, which is like a 10% coupon to start the deal, the syndicate source noted.

"It is unusual; there is immediate yield captured immediately in which you collect 10%, in addition to all the yield in cash coupons," the source said.

"They have to price it this way," a New York-based trader said, quipping that "They are pricing them down so that when they are trading at 80, you don't feel so bad."

Troy, Mich.-based Meritor Inc., which was formerly ArvinMeritor Inc., said earlier this month that it is planning on cutting 800 jobs out of 10,000.

Reduced infrastructure spending and higher levels of dealer inventory in China have led to lower production of cranes, loaders and other excavating equipment, the company said.

In addition, commercial truck production in North America was expected to fall 12% to 420,000 units in the fiscal year starting Oct. 1, while off-highway production in China was likely to drop 8% to 10%.

Sales at Meritor's industrial business, which gets about half of its revenue from China and India, dropped 17% in the quarter ended September.

The new convertible deal has a $22.5 million greenshoe and was being sold via joint bookrunners BNP Paribas, UBS Investment Bank, J.P. Morgan Securities LLC and RBS Securities Inc.

The bonds are non-callable for eight years, until Dec. 1, 2020, with a put in year eight. There is dividend and takeover protection.

Proceeds will be used to repay debt and for general corporate purposes.

Meritor is a Troy, Mich.-based auto components maker.

Existing Meritor bonds add

Meritor's 4.625% convertibles due 2026 traded last around 91.25 bid, 91.50 offered, which was up about 3.85 points from 87.125 previously, a trader said.

Meritor's 4% convertibles due 2027 traded up about a point to 76. That compared to previous levels of 75.125 and before that at 74.5.

Knight Capital jumps on bid

Knight Capital's 3.5% convertibles due 2015 traded higher for the third time this week, to 97.75 bid, 98 offered, by midday Wednesday in active trade, up from 94 on Tuesday and 92.75 on Monday.

Knight Capital shares surged 40 cents, or 13.4%, to $3.37 on top of similar gains on Monday and Tuesday.

"The KCGs didn't go up to par because you don't know the status of the deal, and it's not all cash, so it won't trigger the put," a New York-based trader said.

The bonds have a change-of-control put at par.

Getco has offered to pay Knight shareholders $3.50 a share, which was an 18% premium from Tuesday's close, and a 41% premium from Nov. 23 when takeover rumors began to circulate.

Knight would keep its public listing, but Getco chief executive Daniel Coleman would be the head of the new company and Knight chief executive Thomas Joyce would be non-executive chairman.

A second firm, Virtu Financial LLC, is also working up a bid for Knight, and its offer is said to be all cash for about $3 per share, according to reports.

Getco is proposing a two-step reverse merger in which Knight would be reorganized as a holding company with Getco receiving 242 million newly issued shares and warrants to buy 69 million more. The company would then make a tender offer for up to 154 million Knight shares - about half those outstanding, excluding Getco's stake - at $3.50, or about $539 million. Getco's existing stake in Knight, about 57 million shares, would be retired.

Knight Capital, a provider of market-access and trade-execution, suffered a debilitating blow last summer when a software installation glitch caused hundreds of trades to be erroneously executed, costing Knight about $440 million to rectify.

A $400 million cash infusion of convertible preferred debt was provided by a group of six investors, including Getco as well as Jefferies Group, Blackstone Group LP, Stephens Inc. TD Amertrade Holding Corp. and Stifel Financial.

Mentioned in this article:

Knight Capital Group Inc. NYSE: KCG

Meritor Inc. Nasdaq: MTOR

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