New issues mixed, NRG trades up, UAG flat; Juniper drops; DRS launches $300 million of convertibles

By Rebecca Melvin and Ronda Fears

Princeton, N.J., Jan. 26 - With two new deals released for trading, two expected to price late, and a fifth deal launched, convertibles players on Thursday were relieved to have their first round of new issuance for the year, but they were mostly nonchalant about the pricing.

NRG Energy Inc. "was looking good," according to a Connecticut-based buyside trader. But United Auto Group Inc.'s upsized deal was unexciting, although outright interest was reported.

"There was very little borrow [for UAG], so I think very little really traded," a Connecticut-based sellsider said.

As for the two deals seen pricing late Thursday, AAR Corp.'s $100 million of 20-year convertibles looked "nice at the mids, but I don't think it's going to price there," according to a Massachusetts-based buyside trader.

And the $1.25 billion of convertibles from Teva Pharmaceutical Industries Ltd. were seen as OK. "There's not a whole lot in there, but on the whole it's decent," the buysider said.

Meanwhile, DRS Technologies Inc., which has had a deal on the horizon of the calendar for weeks, finally launched a $300 million issue of convertibles that were expected to price on Monday before the open, according to a syndicate source.

Elsewhere in the market, secondary trading was driven mostly by earnings and outlook statements, a convertibles analyst said. The convertibles of Juniper Networks Inc. dropped about 14 points outright, but held steady on a hedged basis, after the Sunnyvale, Calif.-based networking company issued a first-quarter forecast that was weaker than expected.

But General Motors Corp.'s dismal loss, its worst since 1992, didn't overly affect the automaker's convertibles. Of the automaker's three convertible bonds, two were only marginally lower. A third, its 6.25% convertible, lost 0.45 point, or 2.47%, to 11.74, but volume was average. GM shares closed off their session lows, ending down 80 cents, or 3.35%, at $23.05. This was already priced into the market, a market source said.

The convertibles of ViroPharma Inc. were little changed after the Exton, Pa.-based biotechnology company began a full redemption of its remaining 6% convertible subordinated notes due March 2007. The remaining outstanding principal is about $79 million.

On the March 1 redemption date, ViroPharma will pay holders 100.857% of the outstanding principal amount of the notes plus interest accrued. The company said it saves about $4 million in interest expenses by redeeming early.

Some airline names also traded Thursday, but the convertibles of ExpressJet Holdings Inc. were little changed to slightly lower as its shares sagged more than 6%.

Its shares (NYSE: XJT) were downgraded to "reduce" from "neutral" by Calyon Securities, which cited tough market conditions for regional aircraft and uncertainty after its work flying for Continental Airlines.

The ExpressJet 4.25% convertibles traded at 84.275, versus a closing stock price of $7.06, down 46 cents, or 6.12%. On Wednesday the convertible were at 85 and on Tuesday they were at 85 versus $7.80.

NRG does well

NRG's new 5.75% convertibles lifted early to 253 bid, 254 offered, before dropping with its shares later in the session. Near the close it was at about 251 bid, versus a stock price of $48.60, a syndicate source said.

NRG shares (NYSE: NRG) closed down 57 cents, or 1.2%, at $48.58.

The convertible did well, market players agreed. The decline was "a stock story," a New York-based sellside convertibles analyst said, adding, "If you were fully hedged and bought the convert, you could have flipped it and made the points. Even for an outright, it did OK."

Another sellsider said that the performance of the new paper was notable especially in that it was a mandatory, which was considered a relatively new product as recently as last year.

The $500 million of mandatory preferred convertibles priced at the rich end of talk to yield 5.75%, with an initial conversion premium of 24%.

Price talk on the issue, sold via joint bookrunners Citigroup Global Markets and Morgan Stanley, was for a coupon of 5.75% to 6.25% and an initial conversion premium of 20% to 24%.

There is a $75 million greenshoe. Concurrently with the mandatories, NRG priced $1 billion of common stock at $48.75 per share and $3.6 billion of unsecured notes. The unsecured notes were priced in two tranches, including $1.2 billion eight-year notes at par to yield 7.25% and $2.4 billion 10-year notes at par to yield 7.375%

Proceeds will be used to finance NRG's previously announced acquisition of Texas Genco LLC.

Princeton, N.J.-based NRG Energy operates power plants in the U.S. northeast, south central and western regions.

Borrow dogs United Auto

The upsized $325 million of 20-year convertibles priced by automotive retailer United Auto Group traded at 99.25 bid, 99.75 offered early in the session, according to one market source. But a syndicate source said the new issue closed at 100 bid, 100.125 offered and that during the session the paper never traded below par.

The convertible senior subordinated notes priced at the cheap end of talk to yield 3.5% with an initial conversion premium of 25%.

The deal was expected to be $250 million; and price talk was for a coupon of 3% to 3.5% and an initial conversion premium of 25% to 30%.

Merrill Lynch was bookrunner for the Rule 144A deal, and Thomas Weisel was co-manager.

The notes are non-callable for five years, with puts in years five, 10 and 15.

Good things were said about the company and its deal ahead of pricing, but tight borrow appeared to be an issue, and offered an explanation as to why the issue was taken on the road, according to one sellsider. Normally there would be no roadshow for this type of issue, he said.

United Auto is seen as one of the better managed, better quality names and looked at as an acquirer in a field that is considered ripe for consolidation.

"It is regarded as one of the best," a West Coast-based buyside analyst said. "Auto National is the biggest, other competitors include LAD, Sonic Automotive and GPI. But [United Auto Group] is the best as reflected in its margins and balance sheet, and its able to get better terms on financing," the analyst said.

The analyst said that the convertibles of Sonic Auto have a higher yield and lower premium but its credit is weaker compared to United Auto Group's single B credit.

Nevertheless, "you could see pushing for a higher yield on UAG," the analyst said.

Proceeds of Bloomfield Hills, Mich.-based United Auto Group will be used to repay long-term debt under its revolving senior credit facility, which may be re-borrowed, and to purchase, simultaneously with the offering, 500,000 shares of common stock.

"If you have to own autos it's a place to hide. Retailers aren't affected by the legacy costs of GM and Ford," the analyst said.

DRS to bring $300 million deal

DRS Technologies plans to price $300 million of 20-year convertibles on Monday ahead of the market open, according to a syndicate source. There is a greenshoe of $45 million.

Price talk on the senior subordinated convertible notes is for a coupon of 1.75% to 2.25% with an initial conversion premium of 17.5% to 22.5%, the source said.

The bonds will be non-callable for five years with puts in years five, 10 and 15.

Proceeds will be used as part of a mix of borrowings to help fund its acquisition of Engineered Support Systems Inc., a St. Louis-based diversified supplier of integrated military electronics, support equipment and technical services.

Parsippany, N.J.-based DRS Technologies is a defense company.

New, old interest for Teva paper

Teva's new paper was getting strong interest from existing players in Teva issues not to mention folks from the Ivax camp as well as emerging markets focused buyers for the straight bonds.

Teva is not a newcomer to the convertible market, and its existing convertibles were better on the news, with one big sellside shop pegging the 0.5% due 2024 at 115.25 with the stock at $41.60 and the 0.25% due 2024 at 122.25. Another sellside shop on Wednesday closed the 0.5s at 114.5 and the 0.25s at 120.125.

Teva shares (Nasdaq: TEVA) ended Thursday higher, gaining 38 cents on the day, or 0.94%, to $41.01 and were seen higher still in after-hours activity.

A buyside market source at a convertible shop on the West Coast commented, "Love the name. The current converts trade a little cheap - no takeout might be why. We like the existing issues on an outright basis a little better [than the new issues]." Later, though, after seeing the interest in the new Teva convertibles, he said, "Teva new we will be active in after all."

Another player who also is not a newcomer to the Teva trade said, "I like Teva, I like Big Pharma, I like generics, I like liquidity, and I like downside protection...enough for a relationship - not just a one-night stand, or just a flip."

Teva also inherited Ivax fans who were getting involved in the straight bonds. There also was "definite" emerging market interest in the Israel-based company's bonds.

"It would be bad if they bought an empty hole but Ivax earnings are estimated to double this year so Ivax will bring enough to make the deal accretive," said a former Ivax holder now involved in Teva, who said he was planning to buy the 10-year straight bonds. "Teva made a great deal."

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