American Axle continues rally on conversion option; Greenbrier up on debut; Enzon deal seen as decent

By Kenneth Lim

Boston, May 17 - The convertible bond market was kinder to hedged investors on Wednesday than it was to outrights as the equity market slid across the board.

American Axle and Manufacturing Holdings Inc. continued to see action early in the day and inched closer to par after the company said it would settle in cash any conversions of its 2% convertible due 2024.

The new convertibles from Greenbrier Cos., Inc. had a strong debut, opening about two points above par then climbing even higher later in the day.

Enzon Pharmaceuticals Inc.'s planned $175 million of seven-year convertible senior notes were seen as fair during marketing on Wednesday, and no quotes were seen in the gray market. The deal was expected to price after the market closed.

New offerings continued to pour down the pipeline, with Velocity Asset Management Inc. selling $12 million of 10% perpetual preferreds and Nabors Industries Ltd. announcing a massive $2.5 billion offering. Gol Linhas Aereas Inteligentes SA registered a proposed $100 million deal while Retail Ventures Inc. filed plans for $125 million of mandatory notes exchangeable into DSW Inc. shares.

The convertible bond market was poorer on an outright basis in general on Wednesday on the back of a lackluster equity market, sources said. The Dow Jones Industrial Average sank 1.88%, or 214.28, to close at 11,205.61, a one-month low and the sharpest one-day drop in three years. The Nasdaq composite index fell 1.5%, or 33.33 points, to end at 2,195.8.

"Overall, it was a more volatile day, so it was good," said a sellsider. "For outright, things were down significantly, but for the arb guys, volatility picked up so that's a positive."

American Axle climbs further

American Axle's 2% convertible due 2024 surged a further five points outright on Wednesday and ended at about 99.25 as the stock declined 3.34% or 57 cents to close at $16.50.

Fueling the convertible's climb was a statement by American Axle (NYSE: AXL) that said investors were entitled to convert their notes for cash, confirming speculation that emerged on Tuesday.

The convertibles became contingently convertible two weeks ago after Standard and Poor's downgraded Detroit-based American Axle's credit rating to below investment grade. But it was only on Tuesday afternoon that the broader market began to learn about a widely overlooked notice from October 2004 in which the automotive engine maker elected, on a conversion, to "deliver cash in an amount at least equal to the Accreted Principal Amount of the Securities converted."

On Wednesday, American Axle said that following the downgrade, the securities are now convertible "in accordance with the terms of the Indenture." It did not comment further on the market expectation that holders will now receive a cash payment far in excess of the value of the shares that would previously have been received on conversion.

The 2% convertible, of which there is about $150 million outstanding, was trading at about 83 before Tuesday's climb.

American Axle representatives could not be reached for comment on Wednesday.

A sell-side convertible bond trader said the convertible continued to be active early Wednesday, and the news was good for people who managed to get the convertibles, but "it was bad news" for those who sold early in the rally not knowing why the convertibles were in such demand.

"Once that story [the company's statement] appeared it stopped moving around," the trader said.

Greenbrier gains on debut

Greenbrier' new 2.375% convertibles due 2026 had a strong start on Wednesday after they were priced late Tuesday within talk.

The convertibles were seen at 102.625 versus the closing stock price of $36.50 on Wednesday, even though Greenbrier stock (NYSE: GBX) slid 1.24% or 46 cents.

"Those were up from the start," a sell-side trader said.

Price talk for the $85 million deal was for a coupon of 2.125% to 2.625% and an initial conversion premium of 27.5% to 32.5%. The initial conversion premium was set at 30% and the initial conversion ratio at 20.8125 shares per note.

There is a greenshoe option for a further $15 million.

Bear Stearns and Bank of America were the bookrunners of the Rule 144A deal.

Greenbrier is a Lake Oswego, Ore.-based maker of railcars. It will use the proceeds of the offering for general corporate purposes.

Enzon deal seen as fair

Enzon Pharmaceuticals' planned $175 million of seven-year convertible senior notes were seen as fair to cheap during price talk on Wednesday, but traders said they did not see any quotes in the gray market. Enzon stock (Nasdaq: ENZN) closed at $7.64 on Wednesday, down 4.38% or 35 cents.

Price talk guided for a coupon of 3.5% to 4% and an initial conversion premium of 25% to 30%, and pricing was expected after the market closed.

There is a greenshoe option for a further $50 million.

Goldman Sachs is the bookrunner of the Rule 144A deal.

Enzon, a Bridgewater, N.J.-based biopharmaceutical company, will use the proceeds of the offering to buy back its existing 4.5% convertible subordinated notes due 2008, of which $394 million is still outstanding. Investment advisory firm Franklin Advisors Inc. has agreed to sell $128 million of the 4.5% convertibles back to Enzon and to buy at least $75 million of the new convertibles.

"It's an OK deal," said a sell-side convertible analyst who had a credit spread of 450 basis points over Treasuries on the notes. "It models out decently at the mids."

The analyst used a conservative volatility of 33%, saying that "recent vol on the name has been coming down."

But the analyst was positive on the company's plans to buy back its old notes, even though that might raise the company's net debt.

"Debt does go up, but they push out the maturities and they get rid of a relatively short paper," the analyst said. "I think it's positive for them."

Nabors deal could see limited interest

Nabors Industries' overnight $2.5 billion offering of 20-year exchangeables could see limited interest from outrights with its low coupon of 0.94% and initial conversion premium of 30%, a buy-side analyst said.

The exchangeables, which will be issued by a Nabors subsidiary, were being reoffered at 99 to 99.25 points during price talk, with final terms expected to be set Thursday morning before the market opens. Nabors stock (NYSE: NBR) closed at $35.25 on Wednesday, down 1.48% or 53 cents.

There is an over-allotment option for a further $375 million.

Citigroup and Lehman Brothers are the bookrunners of the Rule 144A deal.

Nabors is an oil and gas drilling contractor headquartered in Bermuda. It plans to use part of the proceeds to fund convertible note hedge and warrant transactions. The rest of the proceeds will be used for general corporate purposes.

The buysider said "from an outright perspective, it doesn't look very cheap" at first glance. Some outright investors may also not be interested in the deal because of the low coupon, the buysider added.

Surge in new offerings

New deals continued to pour into the market on Wednesday.

Velocity Asset Management Inc. said it priced an upsized $12 million of convertible perpetual preferred shares on Monday at a dividend of 10%.

The preferreds were offered at $10 apiece, and may be converted into Velocity common stock at $2.50 per common share. Velocity stock (Amex: VCYA) closed at $1.60 on Tuesday, down by 30 cents or 15.79%. The deal was originally for 10 million preferred shares, or $10 million, but the amount was increased by 2 million preferred shares.

Anderson and Strudwick was the bookrunner of the registered deal.

Velocity is a Ramsey, N.J.-based trader of distressed assets. It is using the proceeds of the offering to buy portfolios of unsecured consumer receivables, repay outstanding convertible debt and for general purposes.

Also, Gol registered a proposal for $100 million of 20-year convertible senior unsecured notes. Pricing is not expected until after the registration is approved, and price talk has not been set.

Gol stock (NYSE: GOL) closed at $33.05 on Wednesday, down 7.32% or $2.61 after the offering was announced.

Gol is also planning a concurrent primary offering of 2.5 million preferred shares and a concurrent offer of convertible debentures in Brazil.

There is a greenshoe option for a further $15 million.

Morgan Stanley is the bookrunner of the deal.

Gol is a Sao Paulo-based low cost airline carrier. It will use the proceeds of the offering to buy aircraft, equipment and materials.

Retail Ventures Inc. also filed its plans to sell $125 million of five-year mandatory premium income securities exchangeable into class A common shares of DSW Inc.

The principal on the PIES, which will rank equally with Retail Ventures' senior debt, will not be guaranteed. The exchange ratio will be determined based on the average trading price of DSW shares upon maturity.

Lehman Brothers is the bookrunner of the deal.

Retail Ventures, the Columbus, Ohio-based department store operator that spun off DSW in June 2005, will use the proceeds of the deal to repay loans and for general purposes. DSW (NYSE: DSW), a Columbus, Ohio-based footwear retailer, saw its shares close at $32.84 on Wednesday.

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