Halliburton gains on oil prices; EMC rises outright on results; Lexington flat in gray; Covanta sets talk

By Kenneth Lim

Boston, Jan. 23 - Halliburton Co. led oil and gas convertibles higher on Tuesday as oil prices surged, while EMC Corp. improved outright but fell on a hedged basis following strong fourth-quarter earnings.

Lexington Realty Trust's planned $250 million of 20-year exchangeables was flat in the gray market, as critics described the deal as a tough sell to outrights and hedge investors.

Edge Petroleum Corp.'s $100 million of perpetual convertible stock had a better reception, with its offering seen as attractive albeit highly risky.

Meanwhile, Covanta Holding Corp.'s newly set price talk on its planned $325 million of 20-year convertible senior debentures was getting a mixed reception among analysts.

Halliburton rides oil prices higher

Halliburton's 3.125% convertible due 2023 rose about a point outright on Tuesday, lifted by a surge in oil prices.

The convertible traded at 163.15 against a stock price of $29.96. Halliburton stock (NYSE: HAL) rose 1.4% or 41 cents to close at $29.73.

"We saw a lot of Halliburton today," a buyside convertible trader said. "Oil spiked, and all the energy names were better to buy."

Houston-based Halliburton is an oil services contractor.

U.S. Energy Secretary Samuel Bodman said the U.S. will double the size of its Strategic Petroleum Reserve, adding fuel to expectations of rising demand amid cold weather in the country's northeast. The reserves will begin to buy about 100,000 barrels of crude oil a day in the spring in an effort to boost the Reserve's capacity to 1.5 billion barrels.

Crude oil futures for March delivery rose almost $2.50, to close at $55.04 per barrel in New York on Tuesday.

EMC better outright on earnings

EMC's 1.75% convertibles due 2011 and 2013 improved about an eighth point outright but fell about a quarter-point on a dollar-neutral basis on Tuesday, after the company reported better than expected quarterly results.

The 1.75% convertible due 2011 traded at 104.5 versus a stock price of $13.50, while the 1.75% convertible due 2013 was 104.4 at the same stock price. EMC stock (NYSE: EMC) closed at $13.55, up by 0.59% or 8 cents.

EMC on Tuesday reported fourth-quarter earnings of $389 million, or 18 cents per share, from $148 million, or 6 cents per share, in the year-ago period. Analysts were expecting 16 cents per share.

EMC expects 2007 earnings of 64 cents per share on revenue of at least $12.7 billion. The Street had forecast 63 cents per share and revenue just shy of $12.7 billion.

"I guess for EMC, even on earnings, the good news, some people were hoping that it would break through the technical barrier," a sellside convertible strategist said. "It did move around, but it was kind of range bound, maybe not the vol that some people were expecting."

But the strategist said EMC remains a strong credit.

"Credit wise it's still rock solid," the strategist said. "You can sort of make the case that it's still much less of a premium than Intel or SanDisk or other large tech names."

Lexington seen as rich, flat in gray

Lexington Realty's planned $250 million of 20-year exchangeable senior notes were at 99.875 bid, 100.125 offered in the gray market on Tuesday, ahead of pricing expected after the market closed.

The notes were talked at a coupon of 4.95% to 5.45% and an initial exchange premium of 17.5%-22.5%. Lexington stock (NYSE: LXP) slipped 3.44% or 75 cents to close at $21.04 on Tuesday.

The notes were offered at par. They are issued by Lexington subsidiary Lexington Master L.P., and guaranteed by the listed entity.

There is an over-allotment option for a further $50 million.

Lehman Brothers and Bear Stearns are the bookrunners of the Rule 144A offering.

Lexington, a real estate investment trust that focuses on non-residential properties, said the proceeds of the offering will be used to repay its secured debt.

A buysider said the deal did not look interesting from a hedged perspective.

"I don't find any value in it at all," the buysider said. "I don't know much about the credit - I'm assuming it's good, but even if it's stellar credit, it wouldn't be interesting. There's no yield advantage, it's a negative cash flow trade."

A sellside analyst said Lexington's credit was solid, and the new convertible could potentially be a low-risk instrument.

"It could be set up by hedge accounts without a lot of risk because it's a pretty good credit, and a delta neutral hedge is probably around 30%," the sellsider said. "But if you try to trade the stock and try to make money off the volatility, it's not going to be easy because there's just not enough there."

Although there was "a bit of potential" for the company's credit to improve, the company's common stock appeared to be near a peak and did not appear interesting for outright investors, the sellsider said.

"If the target investors are going to be for hedge investors, the issue is they want to be able to set up positions but where's the volatility?" the sellsider said. "If they're targeting outright investors, where's the upside?"

Edge attracts but seen as risky

Edge Petroleum's planned $100 million of perpetual convertible preferreds stock was also expected to price Tuesday after the market closed, and the deal was widely seen as cheap but risky.

The offering was talked at a dividend rate of 5.75% to 6.25% and an initial conversion premium of 20% to 25%. Edge stock (Nasdaq: EPEX) gained 0.97% or 14 cents to close at $14.54.

The two million preferred shares in the offering will be sold at par of $50.

There is an over-allotment option for a further $15 million, or 300,000 preferred shares.

There will be a concurrent offering of 9.2 million shares of Edge common stock, with a greenshoe of an additional 1.38 million common shares.

JP Morgan and Raymond James are the bookrunners of the registered off-the-shelf offering.

Edge, a Houston-based energy company, said it will use the proceeds of the preferred and common stock offerings to finance its acquisition of oil and gas assets from Smith Production Inc. and to refinance its existing revolving loan. If the Smith acquisition is not completed, the proceeds will be used to reduce debt, fund Edge's drilling program, pay for possible other acquisitions and for general purposes.

A sellside convertible strategist said the offering "looked OK," and noted that the common stock hit a 52-week low on Tuesday.

A history of strong cash flows helps to make the risk more palatable, the strategist said.

"It's definitely on the far end of the risk curve," the strategist explained. "That being said, it does have pretty sizable cash flows the past couple of years, and given the strong gas prices, it's [the risk] somewhat mitigated."

Another sellside convertible analyst agreed that the offering looked "really cheap, even with what the underwriters are using" and even after trying to factor in the company's acquisitions and expected capital expenditures.

Although the analyst thought that "there's no reason for it to be going out of business," the structure of the offering made the deal riskier.

"What really makes this one risky is the perpetuality of the prefereds," the analyst said. "There's no maturity, no puts and it's a tiny market cap."

The two analysts had a credit spread of about 700 basis points to 750 bps over Libor for the deal.

A buysider, however, thought that the convertible preferred would be more attractive than investing in the common stock.

"It looks like a pretty good convert, a mediocre stock," the buysider said. "It's a perpetual preferred, so it will remain cheap. Optically it looks attractive...It's probably riskier from an equity standpoint."

Covanta sets talk

Covanta's planned $325 million of 20-year convertible senior debentures received mixed opinions on its newly set price talk on Tuesday.

The offering, which is expected to price Thursday, is talked at a coupon of 1% to 1.5% and an initial conversion premium of 17.5% to 22.5%.

The debentures will be offered at par.

There is an over-allotment option for a further $48.75 million.

Lehman Brothers, JP Morgan and Merrill Lynch are the bookrunners of the registered off-the-shelf offering.

Covanta, a Fairfield, N.J.-based waste disposal, energy and specialty services company, plans to use the proceeds of the deals and cash on hand to buy back its outstanding notes. Covanta is concurrently tendering for $195.8 million of 8.5% senior secured notes due 2010 of MSW Energy, $224.1million of 7.375% senior secured notes due 2010 of MSW Energy, and $211.6 million of 6.26% senior notes due 2015 of subsidiary ARC Holdings.

"It's a good business proposition," a sellside convertible analyst said. "This whole waste energy business, and clearly in an environment where landfill space is limited...The company's also streamlining their capital structure, which I think it good because they're de-levering and it should reduce their interest expense."

But the analyst said the offering appeared more attractive for outright investors than for hedge investors.

"I don't think it's cheap either," the analyst said. "It's just that for outrights it had a better upside-downside profile...the borrow's fine, though."

Another sellsider had the offering a point cheap at the midpoint of talk.

"Maybe my credit might be a little tight...but they've got a fair amount of cash, a fair amount of EBITDA for '06, they're refinancing and reducing leverage slightly, so it appears to be a positive credit transaction," the sellsider said.

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