By Ronda Fears
Nashville, Jan. 15 - State Street Corp. upsized its new deal to $300 million from $275 million, pricing it aggressively at 6.75% up 23%, amid high demand that pushed it up nearly 5 points in the aftermarket.
The deal is in a new mandatory-type structure dubbed Spaces by Goldman Sachs & Co., which developed it. Goldman ran the books but Deutsche Bank Securities was a joint lead manager.
The structure was not a major concern for buyers but it was for the sellside community and potential issuers.
"This opens up a new realm of possibilities where banks really had not been candidates for issuing mandatories before," said a source at one of the lead managers.
That is because the issue is structured so that the Federal Reserve Bank will treat it as Tier I Capital, chiefly due to the high equity content.
The deal sold at par of 200 to yield 6.75% with a 23% initial conversion premium. That was at the rich end of yield talk for 6.75% to 7.25% and wider than the premium price talk of 18% to 22%. Analysts said it was about 5% cheap to fair value.
Each Spaces unit consists of a Paces unit - made up of a fixed-share purchase contract and Treasury securities - and a variable-share repurchase contract. The Spaces pay 6.75% on the units quarterly, consisting of an annual 2.75% coupon on the Paces and a 4% contract payment on the variable-share contract.
State Street will not receive any significant proceeds from the Spaces at closing, but will receive the proceeds upon settlement of the fixed share purchase contract on Nov. 15, 2005. The variable-share repurchase contract will be settled on Feb. 15, 2006.
Structure was not a major concern to most of the buyside community, however, which continued to bid up the deal after it freed to trade Wednesday.
The issue closed at 204.875 bid, 205.375 asked. State Street shares were lower for much of the session, but closed unchanged at $40.10.
Wachovia Securities, Inc. convertible analyst Kimberlee Brody put the deal 5.2% cheap using a credit spread of 50 basis points over Treasuries and 40% volatility in the stock, with the stock at $39.60 for a current yield on the stock of 1.31%
State Street also sold $300 million of five-year floaters to yield 50 basis points over Libor, plus fetched $246 million for 6.22 million shares of common stock.
Proceeds from the offerings, totaling about $846 million, will be used to partially fund the $1.5 billion acquisition of Deutsche Bank AG's global securities services, which may close before Jan. 31 or at least in first quarter.
State Street expects the acquisition to be dilutive to earnings by about 17-22c per share in 2003 but accretive in 2004 by about 1-3c.
Last week, State Street reported fourth quarter net income of $477 million, or $1.46 per diluted share, up from $171 million, or 52c a share, a year earlier. Revenue totaled $1.45 billion, up 46% from $998 million.
For 2002, State Street posted net income of $1 billion, or $3.10 per diluted share, up from $628 million, or $1.90 a share, in 2001. Revenue gained 15% to $4.4 billion from $3.8 billion.
Terms of the new deal are:
| Issuer: | State Street Corp.
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| Amount: | $300 million, up from $275 million
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| Greenshoe: | $45 million, up from $41.25 million
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| Lead managers: | Goldman Sachs (books) and Deutsche Bank Securities
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| Maturity date: | Feb. 15, 2006
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| Coupon: | 6.75%
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| Issue price: | Par, 200
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| Conversion premium: | 23%
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| Conversion price: | $39.60/$48.708
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| Conversion ratio: | 4.106/5.051
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| Call: | Non-callable
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| Settlement date: | Jan. 21
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