Nextel higher on Sprint talks; Kerzner slides amid 'trouble in Paradise'; NRG deal appears

By Ronda Fears

Nashville, Dec. 13 - Merger news was not lacking Monday, but nothing definite came yet from Nextel Communications and Sprint Corp. Now, the two are reportedly discussing details of a $35 billion merger that could hit the tape by mid-week; but, speculation was rampant, too, that another wireless rival like Verizon Communications Inc. might make a bid for Nextel.

Otherwise, the convertibles market was "busy, but not," as one buyside trader put it. Fund managers and traders were busy with end-of-month, end-of-quarter and end-of-year paperwork, he said, but there was not a tremendous volume of trading taking place.

Sellside sources agreed.

"As for anything going on, it's actually been pretty slow. It seems that a lot of the FON/NXTL jockeying already hit the tape last week. Same goes for TYC," said a sellside convertible analyst. "Homebuilder stocks seem to be on a good roll but there's not a whole lot of homebuilder convert paper out there these days."

Nothing ever, or yet anyway, has come of the rumors from last week that Delta Air Lines Inc. was prepping a new convertible, but the market is still expecting to stay busy until the Christmas holiday.

"I haven't heard about any deals (including DAL) although I'd be kind of surprised if we didn't see anything at all this week - especially after a nice 'up' day for the stock market," the convertible analyst said. "It's getting close to the holiday - you have to figure that there won't be anything more at all this year after next Wednesday - and there's got to be some stuff left to do in convert issuance."

There were rumblings of at least one, maybe two, deals launching after Monday's close, but as it turned out only a private placement from NRG Energy Inc. surfaced.

NRG transaction emerges

NRG launched $400 million of convertible perpetual preferreds talked with a 4.0% to 4.5% dividend and 22% to 25% initial conversion premium via equal placement agents Deutsche Bank Securities and Citigroup Global Markets Inc.

The Section 4(2) offering, designated basically as a means of expediting the offering, is being made with registration rights so is expected to trade similar to a Rule 144A issue within a couple of days of closing the books, a market source said.

After a full day of book-building, including a "due diligence" conference call at 11 a.m. ET on Tuesday, the convertible is set to price after the market closes Tuesday.

The Minneapolis-based power generation firm said proceeds would be used to redeem a portion of its 8% senior secured second-lien notes due 2013 and to enable NRG to use existing cash balances to repurchase 13 million shares of stock held by investment partnerships managed by MatlinPatterson Global Advisors LLC.

NRG issued the $1.25 billion of 8% senior secured second-lien notes due 2013 (B2/B+) in December 2003 as it exited bankruptcy; and, in January 2004, a $503.5 million proceeds add-on to that issue was sold.

After the stock buyback from MatlinPatterson, its stake in NRG will be reduced to a point where it will no longer have a position on the NRG board of directors, according to a market source familiar with the transactions pending from NRG.

NRG shares closed Monday unchanged at $32, but were seen in after-hours trading off by 4 cents, or 0.13%.

NRG plans new bank facility

NRG also was in-market with a $950 million credit facility (Ba3/BB) via joint lead arrangers Credit Suisse First Boston and Goldman Sachs, structured as a $450 million seven-year term B talked at Libor plus 250 basis points, a $350 million seven-year synthetic letter-of-credit facility talked at Libor plus 250 basis points, and a $150 million three-year revolver talked at Libor plus 275 bps with a 50 basis point commitment fee.

The new credit facility proceeds are earmarked to refinance bank debt. It was already oversubscribed by Dec. 3, almost a week before the actual commitment deadline, with more than $1.6 billion of commitments in the book. More than 80 people attended the Nov. 30 bank meeting that launched the deal into syndication in person and more than 80 people attended via telephone, market sources said, so it was expected to be a blow out.

Pricing on the new credit facility, however, has not been firmly established as it is still in the syndication process.

NRG looks for more flexibility

NRG said Monday, in announcing the new bank facility, that it was aiming to lower its cost of borrowing, procure less restrictive loan covenants and maintain liquidity.

Robert Flexon, NRG chief financial officer, said earlier this year that it improved its medium-term liquidity by refinancing $503 million of bank debt with the add-on to the 8% second priority notes, plus extended the maturity on that debt from seven years out to 10 years. Outside of about $17 million slated to come due in 2006, the company only has around $7 million of maturing debt in each of the next two years, and each year from 2007 to 2009.

Flexon said the refinancing also reduced NRG's exposure to floating interest rates - and the company also put in place interest-rate swaps that reduced interest cash costs by $20 million over the next two years and brought its floating-rate debt ratio as a percentage of overall debt into the target range of 20% to 30% of total debt.

CEO David Crane said in the company's May earnings call that while many companies in the merchant power generating industry were successful in rescheduling debt maturities, "only NRG has been successful to date in actually restructuring our debt obligations," which he feels gives it a significant advantage.

Nextel up ahead of Sprint deal

After a weekend of negations, Sprint and Nextel reportedly were closer to finalizing a $35 billion merger that would unite the No. 3 and No. 5 wireless carriers, but the particulars on such an arrangement were still not expected to be aired until around Wednesday. Also, louder speculation was heard that, meanwhile, a rival bid for Nextel might emerge from Verizon.

Nextel's 5.25% convertible due 2010 gained another quarter-point to 102.25 bid, 102.75 offered while the stock gained 23 cents, or 0.77%, to close Monday at $29.99. In after-hours trading, however, the stock was seen giving back 7 cents, or 0.23%, of that.

Nextel's junk bonds were still gaining, too, with the 5.85% notes due 2014 adding 1 point to 105.5 bid, 106 offered.

Analyst: Take profits in Sprint

GimmeCredit analyst Dave Novosel in a report Monday said he'd prefer a union of Sprint and Verizon but, meanwhile, he suggests Sprint holders take profits on the Sprint bonds.

"There are compelling reasons for a merger. The combined firm should be able to eliminate redundant costs, although Sprint has been running lean and mean," Novosel said. "That said, we would still prefer to see a bid for Sprint from Verizon because of its similar technology and superior credit strength."

Spreads on Sprint bonds were modestly wider at the end of last week on the rumor noise, he said, and, given problems that could arise and the potentially weaker credit profile, the Sprint paper is no longer attractive. "We suggest longtime investors take profits now," he said.

However, GimmeCredit analyst Kimberly Noland said in a separate report Monday that the Sprint merger with Nextel is likely to get done, and, thus, the Nextel bonds could forfeit a few points. So selling that paper now might be a good idea, as well.

"A merger with Sprint ... we think is more likely than not," Noland said. "While we believe Nextel's bonds have longer term upside from current prices (the 5.95% are trading near 5% yield), they could lose a few points if the Sprint merger is not completed."

Of note, convertible traders pegged the Verizon 0% due 2021 steady at 61 bid while the stock gained 48 cents on the day, or 1.18%, to $41.28.

Kerzner troubles in Paradise

Gaming concern Kerzner International Ltd. continued to decline, with action in the coverts taking the 2.375% issue down by as much as 3.5 points on Monday. But the issue was lifted off the lows of the session, ending down by 2 points to 118 bid.

Kerzner shares, meanwhile, lost 81 cents on the day, or 1.36%, to close at $58.60.

Last week, Kerzner said the next phase of its Atlantis Paradise Island casino and resort in the Bahamas would be scaled down to a 600-room, all-suite luxury hotel instead of a 1,500-room hotel tower.

The cost of the expansion, which also includes a previously announced 400-room condo hotel, will be more than $1 billion, the company said, and Kerzner said it expects to partner with real estate developer Turnberry Associates to develop the condo hotel.

"I am trying to evaluate the change of plan in Paradise Island. I think it will create more revenue short term - 2 to 3 years - but less later," said one sellside trader. "The reaction is positive, I think. I like KZL but it's gotten a bit pricey with the run-up in gaming stocks. A pullback was inevitable."

Another market source said the Kerzner issue was not very liquid and "too expensive for the risk," compared to lots of other convertibles that are easier to trade. "I agree that there is good potential for the future, at some point," he said. "Right now, I'd say sit back and watch the show."

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