Bausch & Lomb quiet on bidding event, Advanced Medical Optics slides; GM slightly higher in gray

By Ronda Fears

Memphis, May 24 - General Motors Corp. tightened the coupon range on its new so-called convertible bullet, with a two-year tenor, and priced the new issue at the aggressive end of the revised range.

It also was upped to $1.305 billion from a $1.1 billion convertible amid what market sources referred to as "overwhelming" demand despite many people in the market taking off for an extended Memorial Day holiday weekend.

The new GM paper, the proceeds of which will in part be used to pay the put on an older GM convertible put back to the company in March, did not see enormous enthusiasm in the gray market, however. One trader saw the issue offered at 0.10 over par around midday and later said it made the rounds showing a 25.03 bid, 25.17 offered.

Elsewhere in the primary trenches, Spartan Stores Inc. came with an upsized $95 million offering of 20-year convertible senior notes, boosted from $75 million, and the issue moved up as much as 2 points in the immediate aftermarket.

Also, TUI AG launched €550 million of 5.25-year convertible bonds talked to yield 2.75% to 3.25%, up 25% to 30%, and the issue traded up to 102.75 in the gray market in Europe, according to a market source there. It was scheduled to price after the close of the European markets Thursday.

Otherwise, Advanced Medical Optics Inc. on Thursday tentatively put its hat in the ring to bid for Bausch & Lomb Inc. at a better price than the $65-per-share offer agreed to last week with private equity firm Warburg Pincus, although without specifying an amount.

As a result of a string of acquisitions by Advanced Medical Optics over the past couple of years, many think it will be making an all-cash bid for Bausch & Lomb, and that threw a monkey wrench into the market's view on Bausch & Lomb in a takeover scenario. Bausch & Lomb's floating-rate convertible saw very little action on the development, but Advanced Medical Optics' convertibles were sold off sharply.

Elsewhere in secondary dealings, LifePoint Hospitals Inc.'s new convertible was seen closing at 102, where it opened, after trading off to 101 in brisk trading.

GM coupon tightened

The coupon on GM's two-year convertible bullet was tightened to 1.5% to 1.75% from 1.75% to 2.25% amid what one market source described as "pretty strong" demand and another as "overwhelming demand." The initial conversion premium was left at 20%. Still, the issue priced aggressively with a 1.5% coupon and was seen slightly higher in the gray market, although with light activity.

GM shares (NYSE: GM) lost 96 cents, or 3.05%, on news of the deal to close Thursday at $30.47. GM's junk bonds also were said to have lost some ground on the convertible deal, which was somewhat of an oddity in that it is unusual to see such short maturities on convertible issues.

"Well, it's creative. Historically, convertibles have been longer term investments, including perpetual preferreds," one market source remarked when asked about the new GM offering.

"But we've been in a 10- to 15-year trend of shorter maturities, and lately seen some floating-rate notes from large financials (e.g., Prudential, US Bancorp, and Wells Fargo) with short puts/calls, and this two-year instrument is very short. I think it also has some moving parts under the hood that make it extremely tax-effective for the issuer."

GM has earmarked proceeds in part to replace $1.1 billion in convertible securities put to the company in March. GM also said the offering was being made to "bolster liquidity at a time when the capital markets present an attractive opportunity to do so." The company said any remaining proceeds might go toward its overall turnaround plan.

The Detroit-based automaker also said it has received a commitment for a supplemental revolving credit facility of roughly $4.1 billion, which it expects to be secured by its equity stake in former finance arm General Motors Acceptance Corp., or GMAC, in which it still owns 49%.

Bausch & Lomb steady

On the May 16 buyout news for Bausch & Lomb, its convertibles saw a big gain, but on the news that Advanced Medical Optics was interested in making a higher bid, the Bausch & Lomb floater basically was steady, according to several sellside shops that move the paper.

The Bausch & Lomb issue was quoted at 128.25. The underlying stock (NYSE: BOL) surged to $70.21 for a gain of $3.76, or 5.66%.

There was considerable excitement last week when Bausch & Lomb accepted Warburg Pincus' all-cash $65-per-share bid on prospects that it would get a better bid, but that died out pretty quickly, traders said. Thus, the Advanced Medical Optics news was somewhat of a surprise.

On the day of the buyout news, the Bausch & Lomb floater, which pays six-month Libor plus 50 basis points, traded at 125.75 against a stock price of $67.50, a 4-point outright gain. While it surged outright, it slipped on a dollar-neutral basis amid initial confusion about the extent of its takeover protection following a buyout.

Sellside analysts had said the equity was a better position in Bausch & Lomb as a takeover story under a going private plan. But analysts, including several at buyside shops, were awaiting further details on any bid Advanced Medical Optics makes before tweaking their views.

Advanced Medical Optics saw a big sell-off on the development as many expect it will propose an all-stock or mostly stock offer. The 3.25% issue was described as losing 2 points.

Competing bids and a longer review of the transaction would be positive for convertible holders, sellside analysts had said, but an all-stock or mostly stock deal might change the situation.

Convertible holders were initially confused about whether the make-whole provision would be triggered and with the possibility of a stock deal it is more difficult to analyze.

TUI trades to 102.75 in gray

TUI AG launched €550 million of 5.25-year convertible bonds talked to yield 2.75% to 3.25%, up 25% to 30%, and the issue traded up to 102.75 in the gray market in Europe, according to a market source there. It was scheduled to price after the close of the European markets Thursday.

Barclays Capital Markets convertible analyst Luke Olsen said the issue looks attractive, but he thinks the initial positive reaction in the market may be "slightly overstretched."

There is an over-allotment option for a further €82.5 million, with a maximum limit on the offering of €715 million.

Citigroup, Deutsche Bank and Unicredit MIB are joint bookrunners of the offering. Deutsche Bank is the stabilizing manager.

The convertible is non-callable. There are no puts.

The issue offers full dividend protection.

TUI intends to use proceeds for general corporate purposes as well as to have the possibility to refinance part of its existing debt.

TUI attractive as takeover idea

TUI is an attractive takeover potential, and, thus, the convertible could be interesting, Barclays' Olsen said, but the details of takeover protection in the prospectus are not widely known.

The analyst said the new TUI convertible will likely attract investors, owing to a fair valuation even at the worst end of the indicated range, a size that should promote liquidity and it being hedgeable, it being a familiar name, and due to TUI's restructuring and M&A activity.

"This could become an attractive takeover play in the convertibles space, provided (crucially) that the bond offers strong takeover protection," Olsen said in a report Thursday.

Allowing for 4 volatility points of "richness," the analyst said he would endorse buying up to a price of around 102.3, but noted the issue in the gray market at 102.75, "which we find slightly stretched."

But he urged potential investors to check the term sheet. Olsen said he was unaware at this stage about takeover protection, but noted TUI's existing 4% convertible due 2008 has takeover protection via a stepping-down conversion ratchet.

Barclays' valuation of 2.3% cheap for the issue uses a credit spread of 220 bps and volatility of 30%. The firm also assumed a 1.25% stock borrow level and the current zero dividend yield on the underlying common.

Yet, Olsen said he expects the issue to price at the worst end of the indicated range, so the 102.75 gray market level would be further stretched.

Spartan gains out of chute

Spartan Stores Inc. priced an upsized $95 million of 20-year convertible senior notes on Wednesday at par to yield 3.375% - at the cheaper end of price talk that put the coupon at 3% to 3.5% and an initial conversion premium between 35% and 40%.

It was upsized from $75 million and traded up to 100.75 bid, 101.5 offered against the close in the stock (Nasdaq: SPTN) of $25.78, which was a decline of 26 cents, or 1%.

There is an over-allotment option for a further $15 million, which is unchanged from original plans.

The convertibles are non-callable for five years. There are puts beginning in year seven.

The issue has a net share settlement feature.

Banc of America and Bear Stearns are the bookrunners of the Rule 144A offering.

Spartan, a Grand Rapids, Mich.-based grocery distributor, said it will use the proceeds to repay an outstanding revolving loan and fund working capital, capital expenditures and other general corporate purposes, which it said may include its acquisition of 20 Felpausch retail stores.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.