American Express $1.8 deal billion lags around par in gray market; telecoms, techs slide with stocks

By Ronda Fears

Nashville, Nov. 17 - Some $2.375 billion of new deals are slated this week already, including $1.8 billion from American Express Co., and there could be at least $150 million more on the immediate horizon.

Dealers said there was considerable activity in the market, weighted toward selling, but attributed most of that to the big new deal calendar rather than the stock slide Monday that hit technology and telecommunications names particularly hard.

Advanced Micro Devices Inc. dropped on a dollar-neutral basis in tandem with the stock, despite getting applause on inking a deal with Sun Microsystems Inc. The deal was a positive, one dealer remarked, but investors are still concerned about valuations.

Advanced Micro Devices 4.75% convertible due 2008 lost 1.5 points to 107 bid, 107.5 offered, the dealer said, but was basically flat on swap; the stock ended down 50c, or 2.8%, to $17.36.

For the most part, convertibles held up well against the slide in stocks, but the market was weaker overall. In fact, another dealer commented that hedge funds were "very happy" Monday because the closely watched volatility index, VIX, gained 1.66 points, or nearly 10%. He added, though, that the 18.6 level was "nothing to get too excited about."

Besides, players were typically burying themselves in the two pending deals that were launched before Monday's open by American Express and Amerada Hess Corp., which together account for the bulk of this week's calendar so far.

Convertible players were grumbling about the American Express cash-to-zero high premium structure, which includes warrants and a variable conversion ratio, but by the end of the session market sources said it was fully subscribed.

"They answered the call for bigger deal sizes, but this [American Express] structure stinks," said one buyside trader.

"That said, though, the deal is apparently fully subscribed."

Before Monday's open, American Express launched the quick sale of $1.8 billion of 30-year cash-to-zero convertible notes talked to price for a yield-to-maturity of 1.35% to 1.85% with a 58% to 62% initial conversion premium, with warrants, for pricing after the close.

The issue will pay a cash coupon for three years, then become an accreting zero-coupon bond.

The issue also has a variable conversion ratio, moving up as the stock trades above the conversion price, but it is capped. Also, at year three, the convert will be re-marketed, if the stock is below the conversion price, into a straight bond.

According to the initial term sheet, assuming a 60% premium and $45.33 stock price, the conversion price of $45.33 would be adjusted to $72.53, which would put the conversion ratio at 13.7878. That would amount to 41.3633 warrants for a minimum of 13.7878 and maximum of 22.0604, which would be the cap.

Deutsche Bank Securities analysts put the American Express issue 0.32% rich to 1.75% cheap, using a credit spread of 25 basis points over Libor and a 19% stock volatility, plus accounting for the 0.88% common stock dividend yield.

Deutsche analysts modeled the issue's variable ratio with a long warrant position of three times the conversion ratios struck at the conversion price, and since the ratio increase is capped, included a short warrant position.

Thus, at the mid-point of terms investors are long 41.37 warrants struck at $72.53 and short 33.1 warrants struck at $90.68.

As a convertible bond only, Deutsche analysts put the American Express issue worth 96.36 to 97.99, or 3.64% to 2.01% rich. So, the warrants add considerable value to the issue.

In the gray market, buyside traders said the bid ended at around 99.75 of issue price with an offer at 100. One buyside trader said he saw a bid as low as 99.25.

American Express shares lost $1.40 during the session, or 3%, to close at $43.93.

"I have no appetite for American Express. That structure has no appeal to me [and] someone must agree, as it's offered in the gray below par," said Ted Southworth of Northern Trust Co.

"It looks like a typical arbitrage between the issuer and the hedge fund models, designed to show a low cost of capital on the one hand and a worthwhile hedge opportunity on the other.

"There's certainly no business reason that I can fathom for constructing such a piece of paper. And isn't it funny how no one talks about investing in a business anymore, just trading paper on the numbers."

Not all hedgies were overly enthusiastic about the American Express deal, though. It was also noted that the books on the deal were fully subscribed, not necessarily over-booked by any great amount.

"This American Express [deal] will be interesting," said a hedge fund manager based in Bermuda.

"The market has not responded very well to this type of structure in the past and I expect it will go just as the others have gone," he added, referring to the Wells Fargo & Co. deal earlier this year that hardly ever trades and is pegged at around 99.

"American Express is a fine name," the manager said. "It's just the market does not value these structures kindly."

Amerada Hess' deal, though, was piquing some interest. It was also launched before the open, and evidence of interest was seen in the stock moving down $1.54, or 3%, to $48.43 on heavy volume, although there was no gray market activity noted.

The New York-based oil firm is pitching $500 million of three-year mandatory convertibles talked to yield 7.0% to 7.5% with an 18% to 22% initial conversion premium for pricing expected after the close Wednesday.

Deutsche analysts put the Amerada Hess mandatory 2.289% cheap at the middle of price talk, using a credit spread of 150 bps over Libor and a volatility skew of 22% to 24%, plus accounting for the 2.4% common stock dividend.

The company said proceeds would be used for general corporate purposes, including reduction of debt.

Separately, Amerada Hess announced that it intends to offer to purchase for cash up to $594 million in principal of its outstanding 5.3% notes due Aug. 15, 2004, 5.9% notes due Aug. 15, 2006, 9.25% notes due April 15, 2005, and the 8.875% notes due Oct. 1, 2007, of Triton Energy Ltd. and Triton Energy Corp. that were assumed by Amerada Hess.

Standard & Poor's assigned a BB+ rating to the Amerada Hess mandatory, with a negative outlook due to ongoing challenges to reverse steep production declines and high E&P operating costs, particularly in its Equatorial Guinea development and joint projects in Malaysia and Thailand.

Also, S&P noted that Amerada Hess is still in the midst of efforts to deleverage following its acquisition of Triton Energy Ltd. in mid-2001. To date, the company has relied heavily on proceeds from the sale of noncore assets as cash flow has been reinvested in its exploration and production assets, chiefly at its sizeable offshore Equatorial Guinea position.

"Although Hess's leverage measures are consistent with the BBB rating category, its short reserve life and operational difficulties place significant pressure on the company to generate improved internally generated reserve replacement to reduce reliance on pricey acquisitions," the S&P analyst noted.

S&P described its liquidity position as adequate, supported by an undrawn $1.5 billion senior unsecured bank facility maturing in 2006. The facility also has no ratings-linked termination or acceleration provision, but S&P noted there are rating-linked triggers in its hedging and trading agreements.

Also coming up this week is General Cable Corp.'s deal, the terms of which were tightened as many market players anticipated.

General Cable is pitching $75 million of redeemable convertible preferred stock as part of a $640 million refinancing plan, which includes a $240 million senior secured asset based revolving credit facility, $275 million of senior unsecured notes and $50 million of common stock.

The converts are talked with a dividend of 6.5% to 7.0% and initial conversion premium between 18% and 22%.

Price talk on the General Cable was tightened to a yield of 5.75% to 6.25% from 6.5% to 7.0%, but the premium is still expected in a range of 18% to 22%.

The convertible is pricing alongside $275 million of seven-year senior unsecured notes, which are talked to price in the 9.75% neighborhood.

A roadshow for the $275 million of senior notes due 2010 is expected to wrap up on Tuesday, with pricing soon thereafter. The convert is expected to price after Tuesday's close.

Also on the horizon sits Komag Inc.'s $70 million of 20-year convertible notes and 6 million shares of common stock, along with a possible deal from Roper Industries Inc.

Standard & Poor's on Monday assigned a preliminary BB- rating to Roper's shelf filing for $450 million in debt, and more specifically, a BB- rating to Roper's $150 million proceeds cash-to-zero convertible bond.

No indicative terms or timing for the Roper deal have emerged, but market sources said Merrill Lynch & Co., is believed to be the lead manager for it. Merrill did not confirm that, however.

According to S&P, Roper would use proceeds from the convertible bond, plus a new $625 million senior secured credit facility and a $200 million common stock offering, to finance the acquisition of Neptune Technology Group Holdings Inc.

Roper is expected to have about $600 million in outstanding debt upon the close of the transaction at the end of 2003.

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