Qwest, Chesapeake Energy to price $2 billion-plus in convertibles; new IPC paper trades actively

By Rebecca Melvin

Princeton, N.J., Nov. 1 - Convertibles players eyed new deals that put paper into circulation Tuesday and a couple of new deals expected to total $2.1 billion that were seen pricing on Wednesday after the close, while the secondary market was pretty thinly traded, sources said.

IPC Holdings Ltd., which priced a downsized $236.25 million of mandatory convertible preferred shares, saw active trading as players positioned and adjusted allocations of the paper, which priced to yield 7.25%, with an initial conversion premium of 20%, according to a syndicate source.

The downsizing changed the dynamics of the deal, which priced at the middle of price talk, a syndicate source said. But the common shares traded well, moving up more than 6%, which helped the preferreds, he said.

A new, smaller deal from Cell Therapeutics Inc. also priced, with its shares gaining on the day. But no trades of the new 6.75% were reported to the Prospect News Convertibles Daily.

Meanwhile a downgrade of General Motors Corp. by Moody's Investors Service further into junk territory didn't spur trades in the automaker's convertibles.

"We had one trade all day," a large sellside convertibles director, based in New York, said. "A bunch of stuff hit the tape with earnings and Asian products and various shortfalls on sales, but there was no element of surprise."

New issues announced after the close however generated enthusiasm.

"It's been a while since we had an interesting day," a syndicate source said via email.

Qwest Communications International Inc. launched $1 billion of 20-year senior convertible notes that were expected to price Wednesday, and Chesapeake Energy Corp. launched two concurrent convertible offerings, plus a senior note offering, that were also expected to price on Wednesday, including $600 million of 30-year contingent convertibles and $500 million of cumulative convertible preferred shares.

In the biotech sector, the convertibles of Nabi Biopharmaceuticals plunged but outperformed its shares by about three to five points after the Boca Raton, Fla.-based biotechnology company announced that its StaphVAX vaccine failed to meet a primary endpoint in a phase III clinical trial, and the company said it was halting work on a second staph vaccine.

The trial news crushed its stock, sending it spiraling nearly 72% lower; but the convertible paper, which is a small issue, was actively traded and steeply lower, according to a trader, but "expanded on a hedge."

"It kept us pretty busy," the trader said, adding that few other biotech convertibles names were traded.

Proceeds of Nabi's 2.875% convertibles at issue on April 13 were $112 million.

Otherwise biotechnology convertibles were mostly lower with Cephalon Inc. and Protein Design Labs Inc. both lagging in the session ahead of earnings reports posted after the close; and Human Genome Science Inc. was lower after trial news.

Protein Design and Cephalon both saw their shares lose further ground in after-hours trading. But Cell Therapeutics Inc. shares gained after announcing that it issued $82 million in new convertibles and was buying back $38.38 million in old convertibles.

Qwest launches $1 billion issue

Qwest Communications' $1 billion of 20-year senior convertible notes, to be sold via Goldman Sachs & Co., was talked to yield of 3% to 3.5% for the coupon with an initial conversion premium of 30% to 35%.

In addition to the offering, there is a $150 million greenshoe. The notes are non-callable for three years, and provisionally callable at a 130% trigger, with a coupon make-whole in years four and five. Investor puts are in years five, 10 and 15.

The notes also have contingent conversion at 120%, and full dividend and change of control protection.

Proceeds are expected to be used, together with about $2 billion of existing cash and cash equivalents, to fund a tender offer for its 13% senior subordinated secured notes due 2007, its 13.5% senior subordinated secured notes due 2010 and its 14% senior subordinated secured notes due 2014, issued by its subsidiary Qwest Services Corp.

Remaining net proceeds will be used for other general corporate purposes and potential future refinancing of debt.

Qwest, based in Denver, Colo., is a telecommunications services provider.

Chesapeake launches $900 million of convertibles

Chesapeake's $600 million of contingent convertibles were talked to yield 1.875% to 2.375% with an initial conversion premium of 35% to 40%.

The $500 million of cumulative convertible preferred shares were talked to yield 4.125% to 4.625% with an initial conversion premium of 35% to 40% as well.

Bookrunners for both Rule 144A offerings are Deutsche Bank Securities, which is the stabilization agent, plus Banc of America Securities LLC, Credit Suisse First Boston, Lehman Brothers and UBS Investment Bank.

Chesapeake intends to use the proceeds of both, together with proceeds from an offering of senior notes, to fund part of its previously announced acquisition of Columbia Natural Resources, LLC for $2.2 billion in cash.

The $600 million contingent convertibles are expected to have a 30-day over-allotment option of $90 million. The notes are non-callable for 10 years and have puts in years 10, 15, 20 and 25.

Dividend protection and takeover protection are features of the paper, with a conversion ratio adjustment above $0.065 per quarter for the dividend protection, similar to Chesapeake's existing 4.5% convertible preferred.

Chesapeake also launched $500 million of a new series of its cumulative convertible preferred stock with a liquidation preference of $100 per share.

The deal will have a 30-day greenshoe for up to $75 million.

The perpetual shares are non-callable for five years, and the company may force conversion after year five subject to a 130% trigger. The preferred shares also have takeover protection.

Oklahoma City-based Chesapeake is an oil and natural gas producer.

GM bonds lower in light volume

The three $25 convertible bonds of General Motors were lower along with its shares after Moody's cut GM's long-term senior unsecured rating by two notches to B1, the fourth highest junk rating, from Ba2. Moody's currently rates GMAC, which wasn't changed, at Ba1, the highest junk rating.

Risks of supply disruptions from possible job actions at auto supplier Delphi Corp. and a recently announced Securities and Exchange Commission investigation of GM's pension accounting create additional uncertainty for GM, Moody's said.

"GM continues to face a significant competitive cost disadvantage because of a burdensome North American wage and benefit structure," Moody's said in a statement.

While the company has reached a tentative agreement with the United Auto Workers to reduce healthcare costs, the cash benefits are unlikely to be realized before 2008, Moody's said.

The outlook on the rating is negative, reflecting "a number of near-term challenges that could further pressure the rating," Moody's said.

Moody's rating action comes about two weeks after GM posted a $1.6 billion third-quarter loss, including special items, hurt by slumping sales of its sport utility vehicles and high costs for materials and health care.

GM has lost money for four straight quarters, including losses of more than $4.5 billion in North America this year.

GM's 5.25% convertible bonds edged down 0.05 point, or 0.30%, to 16.45 in volume that was slightly off its three-month running average. The automaker's 6.25% bonds shed 0.10 point, or 0.54%, to 18.25, and the 4.50% convertibles 0.12, or 0.51%, to 23.20 in light trade. GM shares closed down 21 cents, or 0.77%, to $27.19.

IPC moves higher in active trade

The IPC mandatory convertible preferreds followed its common shares higher throughout the day, with one level cited at 27.37 bid, 27.42 offered, versus a share price of $27.70, according to a syndicate source.

The offering was downsized to nine million shares from 11 million shares originally expected.

Concurrent with the preferred offering, the company issued 13.82 million of common stock, with a 1.05 million share greenshoe, at a share price of $26.25.

Of the common stock offering, 10.48 million shares are being offered by the underwriters and 3.34 million shares are being offered directly to American International Co. Inc., which will hold 24.2% of IPC common shares.

The mandatory convertibles priced in the middle of talk, which was 7% to 7.5% for the coupon and 18% to 22% for the initial conversion premium.

The registered shares were sold via joint bookrunners Morgan Stanley and Co. and Citigroup Corporate and Investment Banking.

The shares, which mature in three years, have dividend and takeover protection, and they are non-callable for life.

IPC, a Bermuda-based reinsurance company, plans to use proceeds to provide additional capital for reinsurance operations and for general corporate purposes.

Cell Therapeutics to buy back debt

Meanwhile no trades were reported of Cell Therapeutics' $82 million of five-year convertibles, which have an initial conversion premium of 10%. Concurrent with the offering, the company said it will retire $38.4 million of old debt through an equity exchange.

The Rule 144A convertible deal was sold by bookrunner CRT of Stamford, Conn.

The old debt, to be retired via a conversion and placement agreement with two qualified institutional buyers, will involve $18.53 million of its existing 5.75% convertible senior subordinated notes due June 15, 2008 and $19.85 million of its existing 4% convertible senior subordinated notes due July 1, 2010.

The new 6.75% notes will be convertible into shares of Cell Therapeutics at the rate of 380.37, which is equivalent to an initial conversion price of about $2.63 per share, or 10%, a syndicate source said.

Seattle, Wash.-based Cell Therapeutics develops drugs for the treatment of cancer.

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