Cephalon adds despite 'tough environment'; Hertz, Saks, Regions Financial slip on first day

By Rebecca Melvin

New York, May 21 - An ill-timed sell-off in equities put a damper Thursday on the four new issues that were released for their secondary trading debuts in the convertibles market.

The sudden windfall of $1.25 billion of new paper was the main focus of market players, but three out of the four new issues ended below par, dragged down by lower stock prices.

Cephalon Inc.'s upsized $435 million of five-year convertibles was up, however, rising to as high as 105 bid, 106 offered in early trading, before edging back to the 104 mark by midafternoon, and settling at the 102 bid, 103 offered level.

Cephalon's low premium and better credit quality probably made the difference in what was called a "tough environment." In the broader market, shares slid Thursday as anxiety over the economy flared on poor jobs data and on Standard & Poor's lowered outlook for the United Kingdom.

Hertz Global Holdings Inc.'s significantly upsized $450 million of five-year convertible notes were looking good Wednesday in the gray market, but the paper broke below par on its debut Thursday as the company's shares fell 6.5%.

Regions Financial Corp., which was also looking good at plus 10 points ahead of the open Thursday, also slipped below par as its shares slumped along with other regional bank names, which were having a bad day.

Saks Inc., which priced an upsized $105 million, were plus 1 point in the gray market Wednesday, but they too ended in the 99 bid, 100 offered context.

Trading "volume was extremely light away from the deals," a New York-based sellside trader said.

Action in the primary market wasn't finished even though many were gearing down for the upcoming three-day holiday weekend. CommScope Inc. was set to price $200 million of six-year convertible bonds after the close, but it wasn't heard in the gray market during Thursday's session.

Cephalon adds, stock lower

The newly priced Cephalon 2.5% convertibles due 2014 settled at 102 bid, 103 offered versus a closing share price of $59.46, which was down $3.61, or 5.7%.

The overnight deal, which was launched after the market close Wednesday and priced ahead of Thursday's open, was increased to $435 million from a planned $350 million and came at the aggressive end of talk, which was for a yield of 2.5% to 3% and a 10% to 15% initial conversion premium.

The deal was initially expected to be a drive by, with pricing planned only a few hours after being launched.

Cephalon also priced $300 million of common stock, or 5 million shares at $60.00 a piece. Both offerings were via bookrunner Deutsche Bank.

The new paper's low premium, the fact that it's a better credit, and also that it's a familiar name in the convert space were reasons put forward as to why it was pretty resilient amid the onslaught of a down market.

Still it "looks kind of crazy to me to have the bond up and the stock down," said a Connecticut-based sellside analyst, who had the paper 3.6% cheap at the middle of price talk.

Accepted credit spreads in valuations ran around 700 basis points over, but vol may have varied. The higher the vol, the cheaper the paper looked.

The Cephalon stock is near its 52-week lows.

The Frazer, Pa., biopharmaceutical concern plans to use proceeds for general corporate purposes.

Hertz gets discount

Ahead of the open Thursday, the newly priced Hertz 5.25% convertibles due 2014 were 103.5 bid, 105 offered, but after the open, when the stock fell, the paper slipped to 99.625 bid.

Shares of the Park Ridge, N.J.-based auto and equipment rental company fell 44 cents, or 6.5%, to $6.32.

Around midsession the notes were 99.625 to 99.75.

"Everything was going well, prior to the open," a New York-based sellside trader said.

Another source said that they came in amid excess supply. "No one wants to pay full price when there is supply. They have to clean up," another sellsider said.

The issue was substantially upsized to $450 million from an initially talked $250 million.

The company, which is pretty highly leveraged, has a lot of name recognition and likely found interest among cross-over players as opposed to purely convertible players, the sellsider said.

"With the stock at $6.50, the paper was probably right around par," he said at midsesssion. With the stock at $6.70, he thought the notes would be 104.

Hertz also priced an upsized 46 million shares at $6.50 each, increased from a proposed 40 million shares.

Hertz's new convertibles are non-callable and are putable at par on a fundamental change.

The registered offering was sold via J.P. Morgan Securities Inc., Goldman, Sachs & Co., Merrill Lynch & Co. and Barclays Capital Inc.

Saks slacks

The newly priced Saks 7.5% convertibles due 2013 were also seen closing at 99 bid, 100 offered versus a share price of $4.02, which was down 41 cents, or 9.26%.

The issue, which was upsized to $105 million from $80 million, was still viewed as rather small.

"They probably could have done more but they didn't want to do more with this kind of coupon," a New York-based sellside trader said of the issuing company.

Saks also has an existing 2% convertible.

In its earnings report Tuesday, Saks said total sales declined 27% to $621 million in the quarter ended May 2, with comparable-store sales reported down 27.6%, compared to a gain of 8.4% a year earlier.

CreditSights noted in research following the earnings report: "We continue to view ownership of high-yield luxury retailers as risky under current conditions, and feel that Nordstrom is a safer vehicle to play an eventual turnaround in discretionary/luxury demand. For investors seeking high-yield exposure, we remain better buyers of Saks relative to NMG given Neiman's significant term-loan overhang."

Regions joins mandatory camp

Regions Financial's 10% mandatory convertibles due December 2010 were called plus 10 points before the open of markets, when the stock was $4.40, and after the markets opened, it was 99.5 with the stock at $3.90, according to a sellsider.

Shares of the Birmingham, Ala.-based financial services holding company ended off their lows at $4.10, which was still down 79 cents, or 16%.

Regions joins a new camp of mandatory issues that have priced recently, including Great Plains Energy Inc., which priced $287.5 million of mandatory convertibles to yield 12% on May 12 via Goldman Sachs and JPMorgan; and FPL Group, which priced $350 million of mandatories to yield 8.375% via Credit Suisse on Wednesday.

Regions' $250 million of mandatories are $1,000-per-share preferreds, and they are callable and mature in 1.5 years. They were structured for convertible players, a sellsider noted.

In a May 12 report by Bank of America-Merrill Lynch, mandatories were recommended to convertible investors as a means to increase equity exposure as risk appetite increases.

"Investors' risk appetite is moving firmly to the risk neutral area from extreme risk aversion. At a time when willingness to take risks grows, we recommend that convertible investors consider mandatory convertibles in their efforts to establish/increase equity exposure, since this product typically provides the highest equity sensitivity and offers significant yield advantage over common stocks, which should help to outperform equities in potential market corrections. In this report, we review some liquid mandatory convertibles within our universe and compare their risk/reward profiles to their underlying equities," the report said.

The report went on to say: "... mandatories are expected to outperform underlyings until stock prices appreciate another 85% from current levels, on average. The largest outperformance would be achieved if stock prices were lower. Such a risk/reward profile should be of interest at this point of time, when it is still up for debate whether the past several weeks signal a transition from a bear market to a bull market or merely a bear market rally. Specifically we consider the ADM 6.25%, LM 7%, MYL 6.5%, and XL 10.75% as the most attractive stock surrogates for current stock holders to swap into."

Mentioned in this article:

Cephalon Inc. Nasdaq: CEPH

CommScope Inc. NYSE: CTV

Hertz Global Holdings Inc. NYSE: HTZ

Regions Financial Corp. NYSE: RF

Saks Inc. NYSE: SKS

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