By Ronda Fears
Nashville, May 20 - Sirius Satellite Radio Inc. sold an upsized $175 million overnight deal with its stock at what market sources believe may be a record low for a new issue, just weeks after a $1.2 billion debt-for-equity restructuring that included its old convertibles.
The five-year convertible senior notes priced at par to yield 3.5% with a 22% initial conversion premium, via lead manager Morgan Stanley, and the Manhattan-based subscription radio broadcaster's said the issue would close its $100 million funding gap and put it in cashflow break-even territory.
The off-the-shelf deal priced at the tight end of yield talk for a 3.5% to 4.0% coupon. The premium was set aggressively outside guidance for a 15% to 20% initial conversion premium.
"This is a plain vanilla bond, lots of upside, but the concept of downside protection is nebulous, given the nature of the company," said a hedge fund manager based in New York.
"It's a bit like the dot.com deals of early 1999, which provided plenty of upside, but...," he added, trailing off as an indication that there was no downside protection.
"Companies that lack creditworthiness really have only one thing to offer - speculative upside potential," the manager said.
"It's classic to see such companies offer convertibles that seem certain to provide higher returns than the underlying stock, no matter what happens."
Sirius shares closed Tuesday down 17c, or 13%, to $1.13, and market sources were thinking it was the lowest price for the underlying stock of a new issue.
"It could be a record low, go figure," said a convertible trader at a hedge fund in New Jersey.
"But the [Sirius] stock was something like 45c a couple of months ago."
Previously, Nortel Network Corp.'s $714 million mandatory last June was widely thought of being the done with the lowest stock price on record, at $1.41 a share.
There also have been a couple of convertibles sold in recent years that were linked to when-issued stock, or in advance of the issuers' initial public offering of common stock.
While non-callable, the new Sirius bonds carry a provision for a put at par in the event of a "fundamental change."
At the middle of guidance and using Sirius stock at $1.20, Merrill Lynch & Co. analysts put the deal 3.5% cheap, using a credit spread of 2,600 basis points over Treasuries and a 55% stock volatility.
"Due to the Sirius's distressed status, the proposed convertible notes are effectively equivalent to an income-paying common stock of the company, though they rank higher in the capital structure," noted Merrill convertible analyst Tatyana Hube.
"Given the relatively tight borrow on the common, we anticipate that the deal will be placed predominantly with outright investors and will be priced at the middle of the price talk range."
In early March, Sirius completed a $1.2 billion debt-for-equity restructuring that included 89% of its 8.75% convertible subordinated notes due 2009 - the old CD Radio Inc. convert.
The company also said it received a $200 million investment, for common stock, from affiliates of OppenheimerFunds Inc., Apollo Management LP and The Blackstone Group LP.
Sirius said in early March that those funds, combined with existing cash on hand, will give it over $300 million in cash, sufficient to fund operations into the second quarter of 2004.
Joseph P. Clayton, chief executive of Sirius, said the company still intends to break even on a cash flow basis in 2005, when it hopes to have 2 million satellite radio subscribers. The New York-based company can break even on a net income basis if it has 3 million subscribers. At the end of 2002, it had about 30,000.
Terms of the deal are:
Issuer: Sirius Satellite Radio Inc.
| Issue: | Convertible senior notes
|
| Lead manager: | Morgan Stanley
|
| Co-manager: | UBS Warburg
|
| Amount | $175 million, upped from $125 million
|
| Greenshoe: | $26.25 million, upped from $18.75million
|
| Maturity: | May 2008
|
| Coupon: | 3.5%
|
| Price: | Par
|
| Yield: | 3.5%
|
| Conversion premium: | 22%
|
| Conversion price: | $1.38
|
| Conversion ratio: | 724.6377
|
| Call: | Non-callable
|
| Settlement: | May 27
|
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