New deals seen as unexciting; Spansion structure seen as too long; Charles River, Millipore views mixed

By Kenneth Lim

Boston, June 6 - A flurry of new offerings kept the convertible bond market busy on Tuesday, although onlookers panned the coming deals as unexciting.

"My take on all of these is that they seem to be better for the companies than for investors," a sell-side convertible bond trader said.

Spansion Inc.'s proposed $240 million offering of 10-year convertible bonds had the coldest reception from analysts and traders, who described the deal as barely fairly priced and hampered by a long 10-year bullet structure.

Charles River Laboratories International Inc.'s $300 million of seven-year convertible bonds received mixed reactions from the market. The offering was seen as slightly cheap at the midpoint of price talk, but there were concerns about the stock's prospects.

Views on Millipore Corp.'s $550 million offering of 20-year convertibles were also a mixed bag. While the deal was seen as reasonably priced, spreads were widened on concerns that the company's coming acquisition of Serologicals Corp. would add to Millipore's debt levels.

Meanwhile, Level 3 Communications Inc.'s $150 million offering of six-year convertible senior notes are expected to price Wednesday after the market closes, sources said.

Beyond the coming deals, Trinity Industries Inc.'s newest 3.875% convertible subordinated notes due 2036 fell outright and in line with its stock on Tuesday. The notes, which were sold at par and started trading June 2, were quoted at 97.5 bid, 98 offered against a stock price of $54 on Tuesday. Shares of Dallas-based Trinity (NYSE: TRN), a diversified industrial company that makes railcars, inland barges and energy equipment, closed at $54.20, down by 2.52% or $1.40.

New deals uninteresting, market says

Market participants described the wave of new deals coming out this week as unexciting, and interest in the coming convertibles was noticeably absent in the gray market on Tuesday.

"Silence," a sell-side convertible bond trader said of the gray market.

A convertible bond analyst grumbled that "these low-coupon, long-dated pieces of paper they've been coming out with, they make sense for hedge funds, maybe, but I don't know if they're that interesting."

A California-based convertible bond trader said the coming deals may not trade well when they hit the secondary market because of their aggressive pricing. But the trader said that all the new issuance is probably good for the market as a whole in the longer term.

"What I think companies are doing here with interest rates potentially going higher is trying to get things done at lower interest rate," the trader said. "What that tells me is that the convertibles are working the way they should work for the convertible market as a whole."

"These [new deals] may not trade so well, but at some point the market as a whole may soften, which I hope will happen, and that will be good for investors," the trader added.

Spansion's no put puts off some

Spansion's proposed $240 million of 10-year senior subordinated debentures was seen as fairly valued during price talk, but investors were concerned about the paper's long structure.

The deal, which was to price Tuesday after the market closed, was talked at a coupon of 2% to 2.5% and an initial conversion premium of 17.5% to 22.5%. Spansion stock (Nasdaq: SPSN) closed at $14.94 on Tuesday, down by 10.86% or $1.82.

There is an over-allotment option for a further $35 million.

Citigroup and Credit Suisse were the bookrunners of the Rule 144A deal.

The debentures will be non-callable for life, and there are no investor puts.

Spansion, a Sunnyvale, Calif.-based maker of flash memory products, said it will use the proceeds of the offering to repay its entire outstanding 12.75% senior subordinated notes due 2016 and for capital expenditures, working capital and other general corporate purposes.

Spansion's deal modeled cheap at the midpoint of price talk using a credit spread of Libor plus 575 basis points and a volatility of 42%, a sell-side convertible analyst said.

"It's flash memory," the analyst said. "The stock has been turning higher ever since the IPO [in December] and...it's a viable company. It just depends on what your view on flash memory is."

But the analyst added: "I'm not crazy about the 10-year no puts."

The lack of a put was a sticking point for other onlookers. Another convertible bond analyst who said the deal was 1.5% rich at the mid-point of talk using a Libor plus 700 bps credit spread and a 38% volatility cited the 10-year structure as a reason for discounting the spread.

"If you look at the credit metrics, you would think the credit would be tighter," the analyst said. "That being said, the margins will continue to deteriorate in the business, and the [Spansion's existing] high-yield was trading at 525 bps over Libor, so you'd definitely have to back it from there."

"You'll find a lot of people who are negative on the flash business that they focus on," the analyst noted, adding that there might even be a borrow problem on the stock.

A convertible bond trader said the 10-year structure was a key concern.

"I have questions about the credit," the trader said. "For a 10-year piece of paper and the technology that they're trying to sell, I don't know, if the stock cracks, the bonds may follow it."

Charles River sees views split

Charles River Laboratories' proposed $300 million of seven-year convertible senior notes drew mixed reactions on Tuesday ahead of its post-market pricing, with the deal described as fairly priced but hampered by a lackluster stock story.

"It's a pretty decent credit," a sell-side convertible trader said.

The convertible talked at 2% to 2.5% and an initial conversion premium of 22.5% to 27.5%, and there is an over-allotment option for a further $50 million. Charles River stock (NYSE: CRL) closed at $39.95 on Tuesday, up by 0.23% or 9 cents.

JP Morgan and Credit Suisse are the bookrunners of the Rule 144A offering.

Charles River, a Wilmington, Mass.-based provider of animal research models for the biotechnology sector, said it will use the proceeds to buy back $125 million of its common stock from purchasers of the notes and to pay for convertible note hedge and warrant transactions. The remaining proceeds will be used for general corporate purposes, including buying back shares from the open market.

"Of the three deals [that were pricing Tuesday after the market closed], the only one that looks relatively interesting is the Charles River," a convertible analyst said. "But I'm using about 175 basis points over Libor and 25% volatility and getting it only about 0.5 point cheap at the mids. None of them look great."

Another sell-side convertible analyst also modeled Charles River's deal about 0.5 point cheap at the mid-point of price talk, describing the deal as "coming pretty tight, fair at my spread and volatility."

But the sellsider noted that a number of equity analysts were neutral on the stock, and with the convertible modeling just modestly north of fair value, the sellsider saw little in the convertible that would be exciting for outright investors.

Millipore deal gets mixed reaction

Millipore Corp.'s $550 million of 20-year convertible senior unsecured notes also received mixed reviews on Tuesday ahead of the deal's scheduled pricing in the evening.

The notes were offered at par and talked at a coupon of 3.25% to 3.75% and an initial conversion premium of 37.5% to 42.5%. Millipore stock (NYSE: MIL) closed at $64.65 on Tuesday, down by 5.55% or $3.80.

There is a greenshoe option for a further $82.5 million.

UBS Investment Bank and Goldman Sachs were the bookrunners of the Rule 144A offering.

Millipore, a Billerica, Mass.-based supplier of biopharmaceutical equipment, said it will use the proceeds of the deal to pay part of the consideration in its merger with Serologicals, which was announced in April. Any remaining proceeds will be used as working capital.

A sell-side convertible bond analyst said the deal was only fairly valued using an assumption of 200 basis points over Libor and a volatility of 26%.

"Maybe my spread is a little wider than what others are using, the bookrunners were using 150 bps over Libor, which I thought was too aggressive based on the acquisition," the analyst said. "The proceeds are for a cash acquisition, so the credit is going to have to push out a little."

But another convertible bond analyst modeled the Millipore deal cheaper than the Charles River offering, and noted that there have been some positive views on Millipore stock.

"I have money for one of these two deals, why not go for the one that's cheap and has upside on the stock," the analyst said.

But the analyst said the Street is split over whether the Serologicals merger is good for Millipore, and although Millipore expects to reduce its leverage by the end of 2007, the company's current debt level remains high.

"My concern is that, it's going to be a highly levered company today, and there's not going to be a lot of free cashflow today," the analyst said.

Level 3 to price deal on Wednesday

Level 3 plans to price its proposed $150 million offering of six-year convertible senior notes on Wednesday after the market closes, market sources said.

The deal, which was announced May 30, is talked at a coupon of 3.25% to 3.75% and an initial conversion premium of 17.5% to 22.5%. Level 3 stock (Nasdaq: LVLT) gained 4.05% or 19 cents on Tuesday to close at $4.88.

There is a greenshoe option for a further $22.5 million.

Level 3 will concurrently offer 125 million shares in an off-the-shelf offering, with an over-allotment option of a further 18.75 million shares.

Merrill Lynch is the bookrunner of the registered convertible and stock deals.

Level 3 plans to use the net proceeds to redeem or repurchase is 9.125% senior notes due 2008 and 10.5% senior discount notes due 2008. The remaining proceeds will be used to buy back, pay out or refinance other existing debts.

Level 3 is a Broomfield, Colo.-based Internet backbone services provider.

"Assuming the borrow frees up with the stock, this could be interesting," a sell-side convertible analyst said.

© 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.