Buyers' strike continues amid wide range of new deal types; Sinclair, Triarc hit home runs

By Ronda Fears

Nashville, May 14 - It was another hectic day of new deals, but buyers were on top of their game. Amid a wide range of structures and terms, at least one deal was reoffered by underwriters below par - SLM Corp.'s jumbo $2 billion cash-to-zero floater.

But Triarc Cos. Inc. advanced and upsized its deal to $150 million and it shot up more than 5 points in trading.

Sinclair Broadcast Group Inc.'s quick-sale deal also was called a home run, getting upsized to $125 million and using the premium-redemption structure rarely seen in the U.S. market - although it is a frequent feature of European offerings. Sinclair was quoted closing bid 1 point over par in the gray market by a buyside source. The previous U.S. premium-redemption convertible came to market more than a year ago on March 1, 2002 when AmerUs Group Inc. sold $150 million using the structure.

Fund managers are not overly concerned about the aggressive terms, as many hope it will address the demand overhang, so long as there is some measure of restraint among buyers.

They take heart in the fact that many deals lately have been remarketed by the underwriters at a discount, which confirms a buyers' strike insofar as they would sell the paper at par if that were possible.

"It's a good thing [forced discounting], in that the market is being disciplined enough to not buy this stuff," said Gene Pretti, senior portfolio manager at Zazove Associates.

Moreover, he said the new deal structures with the funky warrant kickers and call spreads are "very poor", vis-a-vis convertibles. For the most part, those structures have fallen by the wayside, though, he noted, as "the bankers are realizing that the market is not willing to pay for these."

There have been a few palatable new deals interspersed with those too aggressive to consider, though.

"The ones that are attractive are the restructuring issues, like IPG [Interpublic Group of Cos. Inc.], where the fact that they did the deal improved the credit," Pretti said, along with those that have more traditional structures, like Triarc and CenterPoint Energy Inc.

"Even when it's a name we like, it's just not the business we're in," Pretti said, referring to buying convertibles with a structure or terms that conflict with Zazove's strategy.

"These bonds [with the funky structures] are going to cheapen when the stocks begin to take off," he added. "Regardless of the high premiums, mathematically they just won't participate with the stock rise."

Many buyside sources have complained that several new deal structures don't fit a convertible model - Wells Fargo & Co. among the most egregious. In fact, many sources said the Wells Fargo deal was largely placed with corporate bond funds.

One buyside trader noted Wednesday that the Wells Fargo deal would likely appeal to short-term bond funds, because they would consider just a 0.5 bps yield pickup as meaningful.

"All these deals are competitively priced - the issuer doesn't really care who's on top of the league tables - and I would guess really that most of the trading is taking place away from the underwriters, so it will just be a matter of when the banks get their fill of carrying this paper and passing up on banking fees," the trader said.

"Sallie Mae was repriced twice," the trader noted.

Sallie Mae sold the $2 billion cash-to-zero floater to yield the 3-month Libor minus 5 basis points - at the cheap end of guidance - with a 75% premium. It was remarketed by the underwriters at a discount to par, finally settling at 98.25.

At par, sellside analysts put the Sallie Mae convert from 0.67% rich, using a spread of 60 bps over Libor and 20% stock volatility, to 1.83% rich, using a spread of 55 bps over Libor and 20% volatility.

One of the lead managers of the Sallie Mae deal closed it at 98.125 bid, 98.375 offered. The stock closed off 90c, or 0.08%, to $112.20.

LSI Logic Corp.'s deal on Tuesday also was repriced twice, first at 98 and then finally at 96 and still closed lower at 95 bid. The 4% notes, with a record 135% premium, were bumped to 99.875 bid, 100.875 offered on Wednesday by Morgan Stanley, sole lead manager of the deal. LSI shares closed up 3c, or 0.54%, to $5.61.

New Plan Excel Realty Trust Inc.'s deal also struggled, according to buyside sources, but it could not be confirmed that it was remarketed at a discount.

The New York-based shopping center REIT sold $100 million of 20-year convertibles to yield 3.75% coupon with a 20.89% initial conversion premium - at the cheap end of yield guidance.

Lehman Brothers put the New Plan convert, at the final terms, 1.42% cheap, using a credit spread of 125 bps over Treasuries and a 20% stock volatility, but Venue Krishna, head of U.S. convertible research at Lehman, noted that the REIT's high common dividend yield of 7.91% results in a negative 4.3% yield advantage, suggesting it will be a negative financing trade.

Deutsche Bank Securities Inc. analysts put the deal 1% rich, using a credit spread of 150 bps over Libor and a 20% stock volatility.

Lead manager Banc of America Securities closed the New Plan convert at 98.75 bid, 99.25 offered. The stock ended down 26c, or 1.26%, to $20.42.

Triarc, on the other hand, was deemed a home run.

Although the new Triarc convert was not considered overly cheap and sold at the aggressive end of yield talk, buyside sources said it was a name people liked and the stock buyback from convertible purchasers added delta to the issue and made it more appealing.

Triarc sold an upsized $150 million of convertible senior notes at par to yield 5.0% with a 43.88% initial conversion premium, and advanced the pricing to before the open from after the close Wednesday.

Lead manager Morgan Stanley closed the new Triarc at 105.25 bid, 105.75 offered. The stock ended down 64c, or 2.3%, to $27.16.

Sinclair's deal - marketed over the course of the day - apparently met with some success, too.

The issue was launched before the open with talk of a 4.875% to 5.375% cash coupon through January 2011 and 2% thereafter, accreting the full yield-to-maturity, for a premium redemption of 125.66 to 130.68. Guidance put the initial conversion premium between 97% to 103%.

It was quoted at the close at 1 point over par by a buyside trader. The stock closed down 94c, or 7.86%, to $11.02.

Merrill Lynch put the deal 4.1% cheap at the midpoint of guidance and with the stock at $11.50, using a credit spread of 600 bps over Treasuries and a 46% stock volatility.

Lehman Brothers put it at 02% cheap, at the midpoint of talk, using a credit spread of 600 bps over Treasuries and a 40% stock volatility.

Sinclair also is selling a $100 million add-on to its 8% straight bonds due 2012.

PPL Energy Supply LLC, a unit of PPL Corp., and The Hartford Financial Services Group Inc. also pitched deals into the ring.

PPL Energy is selling $300 million of convertible senior notes, which convert into parent PPL Corp. and are guaranteed by PPL, to yield 2.5 to 3.0% with a 27.5% to 32.5% initial conversion premium. The Rule 144A deal is set to price after the close Thursday.

PPL shares closed off 2c, or 0.05%, to $37.17. PPL is also selling 6.5 million common shares that would fetch another $242 million based on that price.

Hartford is selling $600 million 3.25-year mandatory, which is part of a $1.85 billion capital-raising effort, talked to yield 7.0% to 7.5% with an 18% to 22% initial conversion premium. Hartford also plans a $1 billion of stock offering and a $250 million straight bond deal.

The mandatory is scheduled to price sometime next week.

Hartford shares closed Wednesday up 1c, or 0.02%, to $45.84. The existing 6% mandatory ended unchanged at 49 on the New York Stock Exchange.

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