Novellus gains in outright, hedged action on debut; Alaska 'bid at issue'; Lam higher bid

By Rebecca Melvin

New York, May 5 - Novellus Systems Inc.'s newly priced 2.625% convertibles jumped on their debut in secondary market dealings Thursday after the San Jose, Calif.-based semiconductor equipment maker priced an upsized issue of the 30-year paper at or toward the rich end of terms late Wednesday.

"The deal did well; with the stock moving up; it was good for everybody," a syndicate source said.

Alaska Communications Systems Group Inc.'s newly priced 6.25% convertibles due 2018 wasn't heard in trade but was bid at par Thursday after the Anchorage-based broadband, wireline and wireless provider priced an upsized $120 million of the seven-year notes at the cheap end of talk.

Another semiconductor equipment maker, Lam Research Corp., launched a new deal for $700 million of convertibles in two tranches ahead of the market open that was seen pricing after the close.

The shorter tenor for the Lam tranches meant that it was quite a different animal to the Novellus 30-year deal, a Connecticut-based sellside analyst said.

Elsewhere, in the secondary market on Thursday, airlines were said to be doing better with oil prices lower. Airline convertibles were active with their underlying shares up 7.5% for AMR Corp. and 6% for both UAL Continental Holdings and US Airways Group Inc.

AMR's 6.25% convertibles traded at 102 versus a share price of $6.30; UAL's 4.5% convertibles, or the old UAUA paper, traded at 101.25 versus an underlying share price of $25.25; and US Airways' 7.25% convertibles traded at 229 versus a share price of $9.65, a pricing source said.

With two new issues on Thursday and two new issues coming Friday, trading activity improved, according to some market sources, but others said it was still quiet and volume wasn't great on Thursday.

There were differing opinions on performance, as well. One sellsider said the market was steady despite a selloff of equities into the close, while a second sellsider said that he saw the market pretty mixed.

Still, seeing new paper after the drought in April - the worst month for new issuance since last May, Citigroup's convertibles trading desk wrote in commentary published Thursday - was encouraging for participants. April's low level followed March, which set a multi-year high for issuance.

The reason for such choppiness wasn't entirely clear, but one New York-based sellside trader commented, "Stocks roll over and suddenly there's convertible issuance. Once more, corporate America is playing the timing game. I suspect if equities continue lower there will be further new paper. With the current universe priced tighter than a drum, we could see come impact."

Outrights outperforming arb

The current flurry of new issues follows a dry spell in April when there were only four new offerings and an onslaught of maturities and other redemptions meant that the month left the market smaller by $1.8 billion, according to Citigroup's convertibles trading desk in commentary published Thursday.

"We don't envision a long-term decline in redemptions though, given calls, exchanges and upcoming maturities. In fact, in May the Gilead A tranche, or 0.5% notes, and the Nabors 0.94% bonds both mature, pulling around $2.2 billion from the market," Citigroup's convertibles desk analyst Stu Novick wrote.

But although strong outflows will continue in May and June due to a calendar heavy with scheduled maturities, the pace of maturing convertibles looks then set to slow for the rest of the year.

Novellus jumps in secondary

Novellus' newly priced 2.625% convertibles due 2041 traded up to 107 versus a share price of $35.75 in early trade. The new paper closed at 106.75 versus a share price of $35.42.

Novellus shares jumped $2.50, or nearly 8%, to $35.42 on Thursday. On Wednesday, the Novellus shares closed up $2.01, or 6.5%, to $32.92.

"They expanded on a hedged basis by 0.625 point to 0.75 point," a syndicate source said, explaining that given the paper's long maturity, they are going to move a little differently than the typical five-year and seven-year deals.

The source said the Novellus paper has a heavy delta.

Initially, the Rule 144A deal was going to be $525 million in size with a $75 million greenshoe, but it was upsized to $600 million base with a $100 million greenshoe.

Pricing came toward the rich end of 2.5% to 3% coupon talk and at the rich end of the 15% to 20% conversion premium talk.

J.P. Morgan Securities LLC and Bank of America Merrill Lynch were the joint bookrunners.

The notes have contingent conversion at a 130% price hurdle. The notes will be non-callable until May 21, 2021 and then will be provisionally callable at a price hurdle of 150%. There are no puts.

Proceeds of about $350 million will be used to repurchase shares from initial purchasers of the notes in privately negotiated transactions.

Novellus may also use a portion of the proceeds to repurchase additional shares of Novellus' common stock from time to time under Novellus' $1.04 billion share repurchase program.

The $1.04 billion share repurchase program includes $340 million remaining from Novellus' previously authorized share repurchase program and an additional $700 million of newly authorized share repurchases.

Any remaining proceeds will be used for general corporate purposes, which may include acquisitions of complementary businesses, products or technologies.

Alaska Communications upsized

Alaska Communications' planned $100 million of seven-year convertible notes was also upsized. The $120 million deal of 6.25% convertibles with an initial conversion premium of 15% wasn't heard in trade by market sources, and a syndicate source declined to comment on the deal.

One syndicate source said he heard a par bid on the Alaska convertibles.

Alaska Communications shares settled higher by 10 cents, or 1.1%, at $9.04 on Thursday.

The coupon talk is high in relation to the premium because, at its current stock price, the company has a high common dividend yield. In addition the stock borrow is difficult and it's a small cap company with fairly high leverage. All of these factors "contribute to the optics of the terms," CRT Capital LLC said in its analysis of the deal.

"We are not making a fundamental call on Alaska Communications, but for long-only investors comfortable with the credit and the equity, we do not feel the yield disadvantage on the convertible versus the common should keep such investors from being involved in the convertible," CRT said.

"Often when looking at convertibles such as these where there is a yield disadvantage versus the common stock, investors will often say that if they like the stock then they would just sooner buy the stock rather than convertible. However, we believe this is an overly simplistic view in that such comments do not capture the much lower risk profile of the convertible versus the common," CRT Capital said.

Lam Research to price

Lam Research plans to price $700 million of convertible senior notes in two tranches, including a $350 million five-year tranche talked to yield 0.5% to 1% and a $350 million seven-year tranche to yield 1.25% to 1.75%.

Both tranches were talked with an initial conversion premium of 27.5% to 32.5%, a syndicate source said early Thursday.

Price talk had not been changed by the end of the day.

Lam Research "pricing [is] aggressive but should get done since we need new issuance and it's relatively large and should be liquid," a sellside trader said.

Pricing of the Rule 144A deal was expected after the market close Thursday via JPMorgan and Goldman Sachs & Co.

Both tranches have a $50 million greenshoe.

Mentioned in this article:

AMR Corp. NYSE: AMR

Alaska Communications Systems Group Inc. Nasdaq: ALSK

Lam Research Corp. Nasdaq: LRCX

Novellus Systems Inc. Nasdaq: NVLS

UAL Continental Holdings NYSE: UAL

US Airways Group Inc. NYSE: LCC

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