International Game moves up strongly on debut; D.R. Horton adds in gray; US Airways to price

By Rebecca Melvin

New York, May 6 - The bases were loaded in the convertible bond market on Wednesday, with a new issue debuting in the secondary market, a second issue pricing after the close of markets, and a third issue emerging after the close.

"The market is very strong, and I think it will remain that way for quite a while," a New York-based syndicate source said of new issuance.

International Game Technology Inc.'s newly priced 3.25% convertibles traded up strongly in active dealings upon release to the secondary market as its shares pulled higher.

D.R. Horton Inc. was getting the once over from investors and traded up in the gray after word that the Fort Worth, Texas-based homebuilder planned to price $400 million of five-year convertible senior notes after the close Wednesday.

After the close, US Airways Group Inc. announced that it plans to price $75 million of five-year convertible senior notes and about $75 million of common stock.

The US Airways notes were talked to yield 7% to 7.5%, with an initial conversion premium of 15% to 20%, according to a syndicate source.

The new deals keep rolling in, and all of them with the exception of this week's Comtech Telecommunications Corp. have priced within talk or beyond the tight end of talk, and have traded higher out of the chute.

International Game sports strong gains

International Game's newly priced 3.25% convertibles traded at 109 versus $16 on its first day in the secondary market. The offering, which was upsized to $725 million from $500 million, kept traders busy, a New York-based sellside desk analyst said.

The deal priced through the tight end of talk on the coupon, which was 3.5% to 4%, and at the tight end of talk on the premium which was 27.5% to 32.5%.

The new paper spurred activity in International Game's previously existing 2.6% convertibles due 2036, which were last at 98.5 versus a closing share price of $16.02.

The older paper is putable in December, and the new deal makes it substantially more solid in terms of credit.

The Rule 144A deal was sold via Goldman Sachs, Bank of America, Morgan Stanley and Wachovia.

Part of the proceeds will be used for hedging and warrant transactions, with the hedging transactions raising the effective conversion premium for the issuer to 100%.

Remaining proceeds will be used to pay down outstanding revolving indebtedness under its senior credit facility.

International Game is a Reno, Nev.-based maker of gaming machines and systems.

D.R. Horton prices upsized deal

After the close, D.R. Horton priced an upsized $450 million of convertibles to yield 2% with a 21% initial conversion premium. That was at the tight end of talk for the coupon, which was 2% to 2.5%, and near the cheap end of the talk for the initial conversion premium, which was 20% to 25%.

The D.R. Horton convertibles were reportedly getting a good response from investors despite disappointing earnings posted by competitor Pulte Homes Inc., which put pressure on homebuilder equities.

Pulte's earnings might have been a concern for some outright players, but there was still a lot of demand, a source said.

D.R. Horton is considered one of the stronger players in the homebuilding sector, a syndicate source said. "We are seeing substantial demand."

The D.R. Horton paper was seen in the gray market prior to final pricing in the 102 bid, 105 offered range.

Pulte posted a narrower net loss of $514.8 million, compared to a loss of $696.1 million in the year earlier period. Consolidated revenue fell 59% to $587.4 million.

But the Bloomfield Hills, Mich.-based homebuilder's results disappointed investors who had been watching analysts estimates which expected a smaller $604.8 million loss.

Pulte president and chief executive officer Richard Dugas said in a release: "The operating environment for housing remained very difficult during the first quarter of 2009."

He cited rising unemployment, tight mortgage availability, increased foreclosures, and declining home prices as factors behind the harsh environment.

A syndicate source said the Pulte earnings were a negative for the stock, but not much of a concern to investors. "There is substantial demand," the source said.

"Demand is quite incredible," he said, citing other deals in recent days including large ones from the likes of United States Steel and International Game.

Comtech was the only disappointment. It priced beyond the cheap end of talk at 3% for the coupon, which had been talked at 2% to 2.5%.

"I looked at the stats; and that one was the only one that priced wider than the marketing range since September. The bookrunners were too aggressive on the terms and the deal size was too large relative to the company's market cap," a syndicate source said.

Comtech priced $200 million of five-year convertibles on Monday.

In its prospectus, D.R. Horton warned that the U.S. homebuilding industry "continues to be challenged by the difficult homebuilding market downturn."

Factors hurting demand for new homes include high inventory levels of both new and existing homes, elevated cancellation rates, low sales absorption rates and overall weak consumer confidence.

Reduced credit availability in mortgage markets, high levels of home foreclosures and severe shortages of liquidity in the financial markets have heightened the effects of the other factors, D.R. Horton said in the prospectus.

"The overall economy has weakened significantly and is now in a recession marked by high unemployment levels, deterioration in consumer confidence and reduced consumer spending. These factors have caused our sales volume to be significantly reduced from prior years."

"We continue to remain cautious regarding our outlook for the homebuilding industry. We believe that housing market conditions may continue to deteriorate, that challenging conditions will persist for some time and that the timing of a recovery in the housing market remains unclear," the homebuilder said.

US Airways to price

US Airways' $75 million of five-year convertible senior notes were expected to price after the close Thursday. They were talked to yield 7% to 7.5%, with an initial conversion premium of 15% to 20%, according to a syndicate source.

The air carrier plans a concurrent offering of 15.2 million shares of common stock.

Citi and Morgan Stanley are the joint bookrunners for both offerings.

The off-the-shelf offerings aren't contingent upon one another.

The notes are non-callable for life and have no puts. Dividend and takeover protection provisions are standard.

The Tempe, Ariz.-based air carrier has existing 7% convertible notes due 2020. There is only $73.75 million left outstanding of the original $143.75 million issue that priced in 2005 after the carrier emerged from Chapter 11 bankruptcy.

The notes were last seen on Trace at 59. Shares of US Airways closed at $5, which was up 5 cents, or 1%, on the day.

Mentioned in this article:

Comtech Telecommunications Corp. Nasdaq: CMTL

D.R. Horton Inc. NYSE: DHI

International Game Technology Inc. NYSE: IGT

US Airways Group Inc. NYSE: LCC

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