Conseco sells new issue on a forward basis; AMR, International Game, Intel up with shares

By Rebecca Melvin

New York, Oct. 14 - Conseco Inc. priced Wednesday a $293 million Rule 144A offering of convertibles, which will be issued on a forward basis in tandem with the planned tender of its existing 3.5% convertibles due 2035.

Conseco's existing convertibles jumped while its underlying shares surged. The convertibles are essentially backstopped by hedge fund Paulson & Co., which has agreed to purchase up to $200 million of the new convertibles on behalf of several of its managed investment funds and accounts.

Paulson funds also agreed to buy about $78 million of Conseco common stock in a private offering. And Conseco also plans to price $200 million of common stock in a public offering at some point in the future.

The moves, which strengthen Conseco's financial position, cheered investors, but outright convertible investors may have missed out on the surge in this not-so-solid credit.

"Everybody's able to refinance themselves. It's great that they are going to have $200 million more of equity below them. The term loan is totally on fire," a New York-based buyside analyst said.

Elsewhere, AMR Corp.'s recently priced convertibles extended gains on the back of an upgrade to "overweight" from "equal weight" by Barclays Capital. Their move was mostly in line with higher shares.

International Game Technology saw its convertibles and shares add amid word from the Reno, Nev.-based gaming company that it expects to take a fourth-quarter charge related to asset write downs. International Game is expected to report earnings on Nov. 5.

Intel Corp. added after the Santa Clara, Calif.-based chip giant recorded a lower profit that beat estimates, on better revenue for the third quarter.

Conseco old paper jumps

Conseco's 3.5% convertibles due 2035 traded up to about 99 from 92 after word the Carmel, Ind.-based insurer announced a proposed tender offer for all $293 million of the issue outstanding.

Conseco shares surged 29%, or $1.47, to $6.46 in ultra heavy volume.

The company also announced final terms of a $293 million issue of seven-year convertibles, which will yield 7% with an initial conversion premium of 10%.

The new issue wasn't quoted in the gray market, as it priced but will not be issued until the tender offer is completed.

Paulson has agreed to buy most of the new issue as well as stock, which generated a lot of enthusiasm for Conseco securities on Wednesday.

But regarding the new convertible, one New York-based sellsider simply said, it's "just more weak credit in the space."

The convertibles are being sold on a forward basis by Morgan Stanley & Co. Inc. due to constraints related to its credit agreement.

FBR Capital Markets analyst Randy Binner said in a note published Wednesday that "the Paulson investment adds a moderate amount of new capital, beyond debt retirement and fees. The convert exchange, however, is a material positive and removes the primary roadblock to the company returning to a more normalized valuation."

"Although potential dilution from an equity raise could be significant, the fact that the company may be in a position to add equity capital to offset credit losses is a net positive, in our view," Binner, who boosted his share price target to $9 per share from $4 a share, wrote.

Binner and FBR Capital Markets analyst Kevin Barker upgraded the shares to "outperform." Nine dollars a share is 77% of the third-quarter estimate stated book value.

"I guess it's a good day to be long stocks," a buysider said.

In fact, stock markets rallied on Wednesday, with the Dow Jones Industrial Average jumping up to an over 10,000 close for the first time since October 2008. The 10,000 close represents a 53% climb from the Dow's early March bottom. But it is still well below its all-time high of 14,164.53 in October 2007.

The Conseco 7% convertibles with a seven-year maturity include a termination feature whereby the company has the right after 3.5 years, or June 30, 2013, to force conversion if its underlying shares reach a 140% trigger.

As per the forward feature, the company can't issue the new convertibles until the old ones are tendered due to credit agreement restrictions.

Accounts had to get their arms around the forward aspect of the deal since there will be no active, liquid trading market of the issue until some future point, a syndicate source said.

But the transactions get rid of an overhang that was causing serious headwinds for the company. And to have the Paulson investment is a real validation of the company's business, the syndicate source said.

The tender offer for the existing convertibles will take place soon, and the proposed stock offering will be done in the future, the syndicate source said.

AMR extends gains

The newish AMR 6.25% convertibles due 2014 traded at 106.5 versus a share price of $8.00 on Wednesday, compared to 104.5 versus a share price of $7.80 on Tuesday.

Shares of the Fort Worth-based airline closed up 46 cents, or 6%, at $8.13.

Barclays said that "while estimates and target for AMR are reduced on dilution from recent equity raises, its relative preference for AMR improves as the dilution was part of a series of transactions that have dramatically improved the company's liquidity position within the industry.

Barclays also upgraded Continental Airlines to "equal weight" from "overweight" based on its robust views on revenue potential, particularly in international markets.

But Barclays downgraded AirTran Holdings, which also recently priced a convertible, to "underweight" from "equal weight" based on its reduced estimate and target due to recent dilution and based on the belief that upside potential in the name isn't competitive with the rest of the sector.

Barclays also downgraded JetBlue Airways to "equal weight" from "overweight" due to the fact that legacy liquidity has improved substantially in recent weeks, curbing Barclays' relative preference for JetBlue, a low-cost carrier.

"Impressed as we are with the industry's ability to raise money," Barclays analysts wrote regarding the industry's recent capital raises, "we think it is high time to make money and there is a significant difference between the two. We expect investors will be keenly focused on that distinction.

"The key, as always, is capacity, and investors are likely to treat capacity ambition (no matter how creatively explained or justified) with a very harsh response. After all, the industry needs to earn about $20 billion in net profit to get back to leverage levels that existed prior to 9/11."

Intel moves up

Intel's newer 3.25% convertible due 2039 traded at 115 versus a share price of $21.10, which was up from about 110 and 111.

Intel's older 2.95% convertibles due 2035 were seen at about 95.50 on Wednesday, compared to 92.625 near the end of the session Tuesday.

Shares of the Sunnyvale, Calif.-based chip giant closed up 34 cents, or 1.7%, at $20.83.

After the close Tuesday, Intel reported profit that was down, but better than expected, and its outlook was upbeat.

Intel reported third-quarter revenue of $9.4 billion, which was down $828 million from the third quarter a year ago but up $1.4 billion from the second quarter.

The company reported operating income of $2.6 billion, which was down $519 million from the 2008 third quarter but up $1.1 billion from the second quarter using a non-GAAP comparison.

Net income of $1.9 billion, or 33 cents a share, was down $158 million, or 2 cents, from the year-earlier period but up from the second quarter.

Intel's good earnings, together with an impressive earnings report from J.P. Morgan Chase & Co., added power to Wednesday's rally in stock markets. The tech-heavy Nasdaq Stock Market ended up 32 points, or 1.5%, to 2,172.23.

Mentioned in this article:

AMR Corp. NYSE: AMR

Conseco Inc. NYSE: CNO

Intel Corp. Nasdaq: INTC

International Game Technology NYSE: IGT

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