Morning Commentary: Market eyes Intelsat convertible notes offering; deal looks ‘way cheap’

By Abigail W. Adams

Portland, Me., June 11 – The convertibles primary market kicked Monday off with a new offering from a well-known name in junkbondland.

Intelsat SA plans to price $300 million of seven-year convertible notes after the market close on Monday with price talk for a coupon of 4.75% to 5.25% and an initial conversion premium of 17.5% to 22.5%, according to a market source.

The convertible notes are being offered concurrently with a $200 million common share offering.

The deal is being marketed with a credit spread of 1,200 basis points over Libor and a 45% vol., according to a market source.

The deal models “way cheap using that high a spread,” a market source said. Intelsat is a serial issuer of high-yield senior notes and has more than $13 billion of debt outstanding with a market cap of $2 billion.

The company deserves the wide credit spread given its exposure in the international markets, a source said.

However, other sources felt the credit spread was conservative. “It’s a tough one because there’s so much debt,” a market source said.

However, Intelsat’s outstanding debt has been trading OK and, with $13 billion outstanding, another $300 million bond “is a drop in the bucket,” the source said.

“In this situation, (the credit) doesn’t matter as much as the volatility and premium,” the source said.

The volatility on Intelsat stock “is through the roof,” the source said.

Intelsat stock has gained more than 300% in the past two months. The convertible notes offering “is the only way to play the stock,” a market source said.

However, the borrow “is a little funky,” the source said. There are only a couple million shares available for borrow on U.S. exchanges and the short interest is high, a source said.

The concurrent equity offering is a plus and will serve as a good stabilizing factor, the source said.

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