MetLife's new issue turns heads; GM, Calpine convertibles rise with shares; market quiets

Princeton, N.J., June 10 - Word of the largest new convertibles issue in the last 18 months hit the market on Friday, while General Motors Corp. rose. Calpine Corp. continued to grind higher amid expectations that the debt-laden energy company may be poised for improvement.

A flurry of trading marked the session early on, but trades dropped off steeply with the onset of a summer-like Friday afternoon.

"There was a flurry for the first half hour, but it's been quiet since then," a sellside trader based in New York said.

New York-based insurer MetLife Inc.'s launch of $1.8 billion of mandatory convertibles, with a greenshoe of 15%, or $270 million, impressed market players, however. Joint global coordinators of the issuer are Banc of America Securities LLC and Goldman, Sachs & Co., and joint bookrunners are Citigroup, Credit Suisse First Boston, Lehman Brothers, Merrill Lynch & Co., Morgan Stanley and UBS Investment Bank.

The deal, set for pricing on June 15, is not only large - the biggest underwritten issue since American Express Co. brought $2 billion of convertible notes in November 2003 and the biggest of any kind since Fannie Mae sold $2.5 billion of convertible preferreds in December 2004 - but it also comes at a time when new issues of any size are few and far between. Price talk for the deal was set at 6% to 6.75%, with the initial conversion premium at 20% to 25%.

GM convertibles jumped along with the automaker's share price on reports that representatives of the company's largest labor union gave their national leaders permission to negotiate healthcare benefits with the company.

Although formal contract talks aren't scheduled to begin until 2007, the markets took the conciliatory gesture as a good sign that GM will be able to make progress on cutting employee healthcare benefits, which are one of the biggest drains on the company.

Friday's rise followed a jump in the convertibles Tuesday when chief executive Rick Wagoner said at the company's annual meeting that the company plans to cut 25,000 jobs by 2008 as part of a four-step strategy to boost profitability at its North American business. He also pointed to the need to reduce healthcare costs.

"The number one issue is for GM to get a handle on its bloated cost structure," a Connecticut buyside analyst said, adding that the GM convertibles had been active in an otherwise quiet day of trading.

The stock has reclaimed a lot of ground after being beaten down in March when the company lowered its 2005 earnings estimate and again in April when Standard & Poor's lowered its credit rating to junk status.

A convertibles trader in New York said his firm had done "a lot" of GM's 6.25% convertible, which went out at 21.73, up 0.81 point, or 3.9%, on the day. The 5.25% issue rose 0.44 point, or 2.4%, to 18.58, and the 4.5s closed up 0.19 point, or nearly 1%, at 23.92.

GM stock surged $2.70, or 8.5%, to $34.51, but it was off its high of the day at $35.34, an 11% gain.

Ford's 6.5 convertible preferred was also swept higher, up 0.90 point, or 2.2%, at 42.

Calpine fires higher

Calpine convertibles surged for a second consecutive day, leaving buysiders shrugging their shoulders over lingering uncertainties surrounding the company, while sellsiders pointed to its improving debt situation.

A sellside trader suggested that the San Jose, Calif.-based company's sale of generating assets in England last week kindled optimism for an outfit that "always seems to be able to pull something out of its hat," he said.

But a buyside analyst said, "We can't understand why it's grinding higher."

On Thursday, the company disclosed that regulators have asked about a $402 million charge taken in 2004's oil and gas reserves. The company has also been asked for information regarding a large variety of other charges in 2004, which amounted to $223 million.

Of the charges, the buysider said, the $202 million impairment amounts to almost nothing in 2003. But it is almost the same amount as the write-up of an additional $199 million in reserves in 2002. "That's a $400 million swing in less than two years," the buyside analyst said.

A third issue revolves around a whistle-blower lawsuit that was brought against Calpine for the way it calculates sales taxes.

"The government found very quickly that the case had no basis," the analyst said. "The surprise there is how fast it was able to make that determination. These things generally drag on for years, not weeks, so the [whistleblower's] allegations must have been blatantly erroneous."

What turned things around for Calpine on Thursday when its convertibles early on were heading south was the company's announcement that it is doing a tender offer on $785 million of outstanding 9.625% first priority senior secured notes due 2014, further strengthening the credit picture.

Calpine's 4.75% convertibles due 2023 traded in the 59 bid, 60 offered range Friday.

Theoretical valuation puts the 4.75s up 3.7 points to 62.16 bid, 63.16 offered on a stock value of $3.09, according to a source. On Thursday, Calpine 4.75% convertibles traded as low as 50.5.

Calpine 6% convertibles due 2014 were seen up 6.75 points on Friday at 86.26 bid, 87.26 offered. The Calpine Capital Trust III securities, bearing a 5% coupon, went out at 47.25, up 1.25 points, or 2.7%, on the day. Calpine shares ended up 12.4% at $3.18.

LSI rises on revised guidance

LSI Logic Corp.'s 4% convertibles gained in early trades after the maker of chips for DVD players raised its sales expectations by $15 million to $20 million to a range of $465 million to $475 million.

The Milpitas, Calif.-based company's stock and bonds were also boosted by firmer forecasts for the semiconductor sector in general.

Intel Corp. late Thursday said strong demand for notebook computer chips was causing it to boost its second-quarter financials above expectations. Nevertheless, shares on Intel slipped 2.6% on Friday.

LSI's 4% convertibles due 2010 were up two points late Friday to a theoretical value of 95.8 bid, 96.8 offered, on a stock price of $7.83. LSI shares jumped on the New York Stock Exchange by 30 cents, or 3.9%, to $7.91.

Cypress Semiconductor Corp.'s 1.25% convertibles were off in early action, however. They were seen down by nearly a point at the end of the session to 110.5 bid, 111 offered, with its stock at $13.93.

Nortel drops on management clash

The 4.25% convertibles of Canadian telecommunications-equipment company Nortel Networks Corp. traded down after news Friday that its president and chief operating officer resigned due to differences of opinion with the chief executive, Bill Owens.

The president and chief operating officer, Gary Daichendt, left after less than three months on the job and took with him chief technology officer Gary Kunis, who joined Nortel after Daichendt's appointment.

Nortel's 4.25% convertibles due 2008 were down 0.13 point at 92.5 bid, 93 offered, versus a stock price of $2.58. Nortel stock, listed on the Toronto Stock Exchange, fell C$0.32, or 9%, to C$3.23.

XM gives up some gains

XM Satellite Radio Holdings Inc.'s 1.75% convertible senior notes were traded Friday, a sellside trader said. But the issue gave back about half of its Thursday gain. The issue due 2009 was seen down 0.21 point at 87.8 bid, 88.3 offered, on a stock price of $31.16.

On Thursday, the satellite radio broadcaster announced that it placed about 9.7 million shares of its class A common stock in a public offering. Its stock, listed on the Nasdaq Stock Market, closed down 52 cents, or 1.5%, at $31.31 on the day.

MetLife draws interest

With MetLife's well-recognized name, good credit, and size, optimism abounds regarding the insurer's planned new issue of $1.8 billion of mandatory convertibles.

"It'll sell," said a sellside analyst of the new MetLife equity units to be priced June 15.

It will appeal to more traditional equity buyers given the yield enhancements, and not so much to those buying volatility, but "no one's complaining," the sellsider said. Price talk is for a dividend of 6% to 6.75%, with an initial conversion premium of 20% to 25%.

The dividend talk is wider than the typical 50 basis points because it is such "a huge transaction," according to a capital markets source. "On the theoretical basis it could be 6%, but we decided to go with a wide range so that the deal would get done."

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