Heidelberger Druck €260 million convertible talked to yield 2.625%-3.125%, up 50%-55%

By Ronda Fears

Nashville, Feb. 2 - German printing equipment maker Heidelberger Druckmaschinen AG launched €260 million of seven-year convertible bonds with a 0.875% coupon talked at a 2.625% to 3.125% yield to maturity and 50% to 55% initial conversion premium.

Deutsche Bank AG is lead manager for the offering, which was expected to price Wednesday.

The bonds are non-callable for four years, then with a 140% hurdle. There also is a put in year five.

The bond has a few interesting features, noted Barclays Capital Markets analysts Luke Olsen and Haidje Rustau.

First, the analysts pointed out that the conversion premium range is exceptionally high at 50% to 55%, versus a median conversion premium among European issuers of 30% in 2004. They also pointed out that, given the accreting redemption price, the conversion premium would rise to an effective 71% to 83% at maturity, using the indicative yield and premium ranges.

Additionally, they noted the shares underlying the convertible represent around 1.5 months of average trading volume, "which leads us to believe that strike pinning could be a negative pricing factor with this issue (as with the existing €460 million RWE-Heidelberger 0% 2007 exchangeable)."

Assuming a €26.5 Heidelberger share price, a 0.85% credit spread, a 0.75% stock borrow and no dividends, the Barclays analysts calculate an implied volatility of 22.8% on worst indicated terms and 18.0% on best terms. That compares to a 21.2% implied volatility for the existing RWE-Heidelberger exchangeable.

The analysts said they think that the new Heidelberger convertible should trade at a lower implied volatility, taking into account its higher conversion price of around €40.0 at issue, which effectively accretes with time, versus €35.775 for the existing issue, reflecting the skew. This together with the pinning risk and the fact that 100-day historical volatility has been about 17% during January this year, they said, motivated a 19.5% implied volatility assumption.

"We would therefore consider the bond expensive if it prices on worst terms (theoretical value 98.2) and attractive on best (theoretical value 100.8)," the analysts said in a report Wednesday.

"Additionally, we note that the valuation is dividend sensitive and that adding a dividend yield of 0.5% would raise implied volatility by 1%. Overall, we think that the bond could appeal to outright investors who want exposure to Heidelberger credit but also to hedge funds if it priced at the cheaper end of the indicative range."

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