Rite Aid founders in aftermarket; Rambus, Open Solutions spring 'flashback' deals on the market

By Ronda Fears

Nashville, Jan. 26 - As an astute veteran in the convertible market projected more than a month ago in speculating on the coming 2005, calling it the year of "Back to the Future," two more new deals emerged in the convertible market Wednesday that cemented a déjà vu atmosphere.

On the heels of the Rite Aid Corp. mandatory with a 50% premium, which sank hard in the immediate aftermarket, Rambus Inc. and Open Solutions Inc. rolled out deals with terms reminiscent of times many players thought had passed for good. The Rambus convertible was a 0% bond priced at par, a structure dubbed as a "no-no" by the market, while the Open Solutions issue was a discounted cash-to-zero issue that also featured a now taboo contingent conversion trigger.

"Are we all in a flashback, or the Twilight Zone? It's not 2000 or 2001 all over again, is it?" remarked a convertible hedge fund manager in New York.

What makes it harder to go back to the deals of yore, as such, he said, are the recent deals with more traditional terms like last month's Antigenics Inc. convert that came with a 5.25% handle, up 20% or deals in November from Charter Communications Inc. at 5.875%, up 12% and Level 3 Communications Inc. at 5.25%, up 20%.

Yet, players expected at least a warmer reception for the Open Solutions deal than Rambus' overnighter.

"The second one for OPEN doesn't look too bad if I understand the structure correctly," said another buyside source. "The first one for RMBS, though, definitely stinks. But I think the Street will be smarter this time than before and make underwriters eat badly priced deals. My prediction is that after a few major dings by the brokers, I would imagine pricing gets back in line much faster. That's my hope. Your headline should be: 'Just Say No' (to Bad Pricing)."

Secondary rattled by mergers

Several merger deals have routed convertible positions in recent months. On Wednesday, news of new deals - Beverly Enterprises Inc., plus Magnum Hunter Resources Inc. - and old deals going sour - Symantec Corp.'s takeover of Veritas Software Corp. - riled players.

Beverly's converts leveled off for the most part Wednesday, after taking the brunt of the losses on swap when the news broke Tuesday. But there was still heavy action in the stock where convertible arbitrageurs were frantically covering short positions, moving the stock up another 18 cents, or 1.53%, to $11.95. The Arkansas-based nursing home operator said it was weighing a $1.5 billion unsolicited takeover offer from a group of investors and, meanwhile, adopted a poison pill, or shareholder rights plan, to protect major shareholder interests.

Elsewhere on the tape, there was chatter circulating that Symantec was considering calling off its acquisition of Veritas. The market has had a tepid reaction to the all-stock deal, originally valued at $13.5 billion, as analysts express concern about integration of the two antivirus software firms.

"I heard it, but it seems to just be noise," said a convertible trader at a hedge fund in New Jersey.

Both stocks ended higher Wednesday but were lower in after-hours trading, which was attributed to a blurb on the chatter on theflyonthewall.com.

"God knows! The institutional market is as panic-prone as the retail markets of yore!" said a convertible fund manager in New York, when asked to speculate on any manipulation angle from the source of the rumor.

Magnum deal magnifies woes

While the Magnum Hunter Resources Inc. deal to be bought by Cimarex Energy Co. was an all-stock transaction valued at $2.1 billion, which limited the impact to the Magnum Hunter convertibles, it was another in a string of mergers that have stung hedge fund players.

"Everyone is getting a bit skittish now about M&A deals, looking for some takeover protection language to be inserted in a lot of the older issues," said one dealer.

The $2.1 billion price tag, which includes Cimarex assuming $625 million of Magnum Hunter debt such as the convertible, was nearly at 26% premium over the stock price where it closed Tuesday. So, hedged convertible players were again chasing the stock to narrow the short squeeze caused by the merger deal.

Magnum Hunter's convertible floater settled out the day losing around 5 to 7 points on swap, a buyside trader said, while it added 15 points or so, on an outright basis, because of the run-up in the underlying stock. Magnum Hunter shares gained $1.61, or 12.16%, to close Wednesday at $14.85.

Terms of the stock-swap deal call for Magnum Hunter stockholders to receive 0.415 share of Cimarex common stock for each of their common shares - implying $16.67 per share for Magnum Hunter, or a premium of about 26% over Tuesday's closing price of $13.24.

Magnum Hunter's junk bonds, the 9.6s of 2012, were seen up 1 point to 114.25 on the news.

Rambus gets offers, no bids

Rambus' overnighter - $300 million of five-year non-callable convertible notes pitched to yield 0% with a 45% to 52% initial conversion premium - was offered in the Street at 1 point over the par issue price shortly after the deal launched. Then, a buyside trader said, the offer was trimmed to 0.125 point over and still no bids emerged.

"Nice terms, huh," the trader said with a strong note of sarcasm.

"Uuugly," another buyside source remarked in reference to the Rambus terms.

Outside of the "no-no" feature and bulging premium, it is a straightforward convertible with the now-standard dividend and takeover protection features.

The Los Altos, Calif.-based memory chipmaker said it would use $75 million of proceeds to buy back stock and the remainder for general corporate purposes. Rambus shares on Wednesday closed up 20 cents, or 1.09%, at $18.51. In after-hours trading, news of the convertible offering sent the stock down by 46 cents, or 2.49%.

Open Solutions deal rolls out

Open Solutions Inc. launched $125 million in proceeds of 30-year discount cash-to-zero convertible notes after the market close Wednesday with guidance for a yield to maturity of 3.25% to 3.75% with a 30% to 35% initial conversion premium.

Merrill Lynch & Co. Inc. is sole bookrunner of the Rule 144A deal, which is slated to price after the market close Thursday. Co-manager is Wachovia Securities.

At an estimated issue price of 45.021 the issue would pay a cash coupon of 1.5757 for seven years for a 3.5% yield to maturity.

The senior subordinated notes will be non-callable for seven years, with cash-only puts in years seven, 10, 15, 20 and 25. There is a 130% contingent conversion trigger. There also is a cash settlement feature.

Dividend and takeover protection provisions are included.

There is an $18.75 million proceeds greenshoe available.

Glastonbury, Conn.-based Open Solutions, which provides software services to financial institutions, said it would use proceeds for working capital and general corporate purposes.

Open Solutions shares closed Wednesday up 39 cents, or 1.70%, at $23.30. In after-hours trading, news of the convertible offering sent the stock down by $1.30, or 5.58%.

Rite Aid sinks to 47.875 bid

Camp Hill, Pa.-based drugstore chain Rite Aid returned to tap convertible investors with a $115 million mandatory, which priced with a 7.0% dividend and 50% initial conversion premium - at the cheap end of yield talk for a 6.5% to 7.0% dividend. But it foundered right out of the chute.

"Pre-market this morning, the first bid was 49.25 and that was as good as it got," said a hedge fund trader. "It went downhill from there."

By day's end, the new Rite Aid convertible was last seen at 47.875 bid, 48.357 offered with the underlying stock down another 8 cents, or 2.24%, at $3.49.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.