CA up on restructuring, stock buyback; Calgon gains amid borrow concerns; Equity Residential plans deal

By Kenneth Lim

Boston, Aug. 15 - The convertible bond market had another slow session on Tuesday, with CA Inc. noticeably active and higher in the morning on anticipation of the company's restructuring efforts and a $2 billion stock buyback.

Meanwhile, the newly priced convertibles from Calgon Carbon Corp. were up about one point on their debut after they were priced at the cheap end of talk as investors described the deal as a risky play hampered by a tough borrow.

Equity Residential on Tuesday also launched marketing for $500 million of 20-year exchangeables expected to price Wednesday after the market closes.

Convertible investors in general stayed on the sidelines as equity indexes continued to tick up.

"It's very quiet," a sellside convertible bond trader said.

SanDisk Corp.'s 1% convertible due 2013 gained about 2 points outright. It stayed in line with the stock, which left some observers puzzled after it jumped 6.47% over the session. The convertible traded at 88.75 versus a stock price of $48.50, while SanDisk stock (Nasdaq: SNDK) closed at $48.87, up by $2.97.

"There was a lot of trading in SanDisk, the stock was up a lot, but I'm not sure why," a buyside convertible bond trader said.

CA rises in line

CA's 1.625% convertible due 2009 rose about 6 points outright on Tuesday after the company outlined plans for a $2 billion stock buyback in addition to job cuts as profit plunged in the latest quarter.

The convertible traded at 122.5 against a stock price of $23.10. CA stock (NYSE: CA) jumped 6.75% or $1.47 and finished at $23.24.

Islandia, N.Y.-based CA said in a conference call late Monday that it would use borrowings to fund half to three-quarters of a $2 billion stock buyback program. The company on Tuesday launched the first part of the repurchase with a tender offer for up to 40.8 million shares at $22.50 to $24.50 per share, or $1 billion in total.

The business software developer on Monday reported net profit of $35 million, or 6 cents per share, in its first fiscal quarter. That was 64% less than its profit of $97 million, or 16 cents per share, in the year-ago period, but better than the 3 cents per share Street estimate.

CA also announced plans to cut 1,700 jobs, or 10.5% of its workforce, that it says will result in $200 million in annualized savings by late fiscal 2008. Those cuts and other aspects of the company's restructuring efforts will require the company to incur $200 million in charges, to be taken over the next two quarters, the company said.

A sellside convertible bond trader said the company's move to partly fund the stock buyback with debt was not a major concern at the moment.

"To the extent that they're going to do some minor borrowing, it's not going to be a big concern in the grand scheme of things," the analyst said, explaining that the company's credit still has some breathing space before it has to address it maturing debt.

"Yes, they're going to have to think more about dealing with the maturities that they have coming up in 08," the analyst said. CA has a 6.5% senior note due 2008.

It is still unclear how CA will fund the second half of the buybacks, and if the company takes on more debt it could have a greater impact on its credit quality, the analyst said.

"As they put more debt on the books, if cash doesn't get built as quickly as they say it will, then there might be a problem," the analyst said.

The company's business seems to be holding up, the analyst said.

"It looks like they're growing the topline...although on the conference call management did comment that customer spending was going down a little," the analyst said.

Calgon up on light debut

Calgon's newly priced 5% convertible senior notes due 2036 rose about a point on its first day of trading after pricing at the cheap end of talk.

The convertible was seen trading between par and 101, while Calgon stock (NYSE: CCC) slipped 0.71% or 3 cents to end at $4.22.

"But they were quiet," a buyside convertible bond trader said.

Calgon on Monday priced the $65 million deal at a coupon of 5% and an initial conversion premium of 20%. The notes, which priced after the market closed, were offered at par. They were talked at a coupon of 4.5% to 5% and an initial conversion premium of 20% to 25%.

There was a greenshoe option for a further $10 million.

JP Morgan was the bookrunner of the Rule 144A offering.

Calgon, a Pittsburgh-based supplier of products and solutions for water and air purification, concurrently arranged for a new $50 million secured revolving loan. It plans to use the proceeds from the deal and the new loan to repay its outstanding debt under an existing revolving credit facility.

A sellside convertible analyst said the deal modeled about 5% cheap when factoring in the challenging borrow on the stock. Talk on the Street was that the borrow may have carried a negative rebate, which would have cost hedged investors to borrow the stock.

"It would be valued fairly attractively if not for the impact of the borrow," the analyst said.

But the deal had to be cheap to attract attention, given that Calgon is a risky name to invest in, the analyst said.

"A name like this, with minimal cashflow to speak of, a stock price that's corrected 50% since February...and a small market cap, it's a fairly speculative play to begin with, so it has to come cheap to theoretical value," the analyst said. "It just has to."

A sellside convertible bond trader said the name was "interesting" because of the borrow situation.

"The bonds modeled cheap, but this is an example when sometimes the model doesn't mean squat," the trader said. "If you can't short the stock, you can't find anyone to play it."

But the trader said the underwriters understood the risks involved and marked the deal with a large credit spread.

"I was impressed that the underwriter was at least not trying to whitewash this," the trader said.

Equity Residential launches deal

Equity Residential plans to price on Wednesday $500 million of 20-year exchangeable senior notes at a reoffer price of 992.5 per note, with talk for a coupon of 3.6% to 3.85% and an initial exchange premium of 28% to 30%.

The notes are expected to price after the market closes, and will be issued by Equity Residential's subsidiary ERP Operating LP.

There is a greenshoe option for a further $50 million.

Merrill Lynch is the bookrunner of the registered off-the-shelf offering.

Equity Residential said it will use the proceeds of the deal to pay down its outstanding revolving credit facilities. Equity Residential is a Chicago-based real estate investment trust that develops and operates apartment properties in the United States.

Equity Residential stock (NYSE: EQR) closed at $48.50 on Tuesday, up 1.38% or 66 cents before the deal was announced.

© 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.