New Air Lease comes at steep discount, edges higher; FiberTower drops on nixed payment

By Rebecca Melvin

New York, Nov. 16 - Air Lease Corp.'s newly priced 3.875% convertibles edged slightly higher from their steeply discounted issue price on their debut in the secondary market on Wednesday.

The new Air Lease closed out the session at 96.25 versus an underlying share price of $22.39, which was about 0.25 point better from the outright issue price and better on a dollar-neutral basis as well, a syndicate source said.

The new paper was a central focus of trade, but viewed as troubling given that it could damage the market if it becomes a trend.

Discounting is fairly common in the new issue market for convertibles, but a 4-point haircut is one that even experienced convertibles players couldn't recall having ever seen before.

Little else traded as actively, a syndicate source said.

But in other news, FiberTower Corp. announced that it won't make a $1.3 million semiannual interest payment due Nov. 15 on its 9% convertibles due 2012.

The FiberTower notes dropped about 15 points and were offered at 40 flat, or without accrued interest, according to a New York-based trader. But the convertibles had no bid, another trader said.

Old Republic International Corp. saw some action in its 3.75% convertibles, and they traded about even with the shares on a dollar-neutral basis.

Otherwise, it was "pretty slow," a New York-based sellsider said.

In the broader markets, equities were mostly weak to start with, but slumped at the end of the day after Fitch Ratings published a report that U.S. banks are at risk if the euro zone debt crisis spreads.

The Dow Jones industrial average closed down 190 points, or 1.6%, to 11,905.59. The Dow was down less than 100 points before the report. The S&P 500 stock index finished down 20.89 points at 1236.92, and the Nasdaq stock market lost 46.59 points, or 1.7%, to 2639.61.

Oil prices jumped on a drop in supply, and crude stood at more than $100 a barrel for the first time since July.

On a positive note, the Consumer Price Index came in with decent numbers. Consumer prices slipped 0.1% in October, led by a decline in gas prices, while the measure for core inflation, excluding energy and food costs, rose 0.1%.

Also output at the nation's factories, utilities and mines rose at the fastest pace in three months in October, with production of autos and auto parts rising 3.1%, according to the Federal Reserve.

But concerns related to the euro zone trumped all of this. Markets are nervous, with Italian bond yields standing at about 7% and with Spanish and French sovereign debt under pressure.

Air Lease reoffered at 96

Air Lease's new 3.875% convertibles due 2018 closed the session at 96.25 versus an underlying share price of $22.39, which was Tuesday's closing share price.

The new bonds jumped around at the open, a syndicate source said, but traded mostly in the range of 99.25 bid, 99.75 offered. There was a 97 print, the syndicate source said, and another sellsider said his firm moved a piece of the new Air Lease below the 96 issue price.

The new paper was downsized by $100 million to $200 million in size when the deal priced late Tuesday. It came at the revised terms, which were for a 3.875% coupon, a 35% initial conversion premium and a discount at 96.

Traders had suggested that it would have been looked upon more favorably if the premium was reduced to about 30%.

But really the overarching problem for the deal was the difficulty in obtaining a borrow and the expense of the borrow.

"This is a black eye for the underwriter," said a New York-based sellsider, who expressed concern that the convertible new issue market overall would become discouraged by it.

"The borrow was too tight. They totally misjudged the borrow. The outrights didn't like the break even, or the amount of time needed to recoup the premium, the sellsider said. Even at revised terms, it was long, he said.

And the hedged players didn't like the borrow.

"The company never saw this coming, I don't think," the sellsider said. "They are a good company. It's a marquee name. The guy in charge invented aircraft leasing."

Discouraged market

The deal was able to tough it out and may actually even end up OK, but sources said that it was not only a black eye for the underwriters but also for the market in general.

"We didn't need this at this point," a sellsider said, referring to the negative tone it sets and how it might be off-putting to potential issuers.

"I just hope that people don't get too discouraged by it," the sellsider said.

But a second source said that the only danger to the general market is if it becomes a recurring trend. The danger is if underwriters get afraid to pick deals at rates that issuers will accept.

Recently there have been other discounted deals, but they came at a more modest discount of 99, such as Human Genome Sciences Inc.'s 3% convertibles priced earlier this month.

Price talk on new paper from Los Angeles-based aircraft leasing company was revised during marketing Tuesday to give a significantly higher coupon. The talk was revised to 3.875% for the coupon from a previous range of 2.875% to 3.375%, and the 35% premium was narrowed from 33.5% to 38.5%.

Air Lease launched the $300 million offering after the market close Monday.

J.P. Morgan Securities LLC was said to be the lead bookrunner, with Nomura, Barclays Capital Inc. and Citigroup Global Markets Inc. Co-managers included Scotia Capital and FBR Capital Markets.

Proceeds will be used to fund the acquisition of commercial aircraft and for general corporate purposes.

Air Lease is a Los Angeles-based aircraft leasing company with business in Asia, the Pacific Rim, Latin America, the Middle East and Eastern Europe.

FiberTower collapses

FiberTower's 9% mandatory convertibles due 2012 fell about 15 points to around 40, where they were offered, with no bid, sources said.

Shares of FiberTower plunged 51 cents, or 63%, to 30 cents.

The company said that it couldn't make its $1.3 million interest payment due Nov. 15, but it has 30 days to make the payment before non-payment constitutes an event of default.

The wireless services company said it will continue to evaluate different options to manage its debt load during the cure period.

Additionally, the company said, chairman John Kelly and board member Phil Kelley resigned from the board on Monday, and director Randall Hack resigned on Tuesday.

FiberTower said it has also determined that material impairment charges related to its long-lived assets and FCC licenses will be required under generally accepted accounting principles (GAAP) as a result of events occurring in the quarter ended Sept. 30.

FiberTower said it has determined that its network equipment and construction-in-progress were impaired, as a result of continued customer early service terminations experienced in the quarter, the company's decisions to limit investment in its legacy network and its estimates of future cash flows expected to be generated by its network as compared to its carrying value. IT estimates the third-quarter impairment charges for these assets to be in the range of $150 million to $170 million.

The company said it also conducted an assessment of the fair value of its FCC licenses and found that the fair value of the licenses was less than its carrying value.

FiberTower said it estimates the impairment charges for these assets to be in the range of $158 million to $170 million in the third quarter, which would reduce the carrying value of the FCC licenses to somewhere in the range of $87 million to $129 million as of Sept. 30, according to the release.

San Francisco-based FiberTower was unable to file its third-quarter 10-Q by the Nov. 14 extended deadline because of its inability to quantify the impairment charges.

Because of this, it is in non-compliance with Nasdaq listing rules. The company has 60 days to submit a plan to regain compliance. If Nasdaq accepts that plan, FiberTower may receive a 180-day extension to regain compliance.

If the company does not regain compliance, its stock will be subject to delisting.

Mentioned in this article:

Air Lease Corp. NYSE: AL

FiberTower Corp. Nasdaq: FTWR

Old Republic International Corp. NYSE: ORI

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