Disagreement on CapitalSource; acclaim for SunPower; weak reception for Global Industries; Beazer Homes hit

By Evan Weinberger

New York, July 24 - Discussions of new issues dominated the day Tuesday as Global Industries Ltd. priced the convertibles the company announced Monday and CapitalSource Inc. prepared the road for the convertibles it planned to price Tuesday after market close.

With equity markets in freefall Tuesday, there appeared to be little stomach for new deals as Global Industries bonds moved slightly south over the course of the morning before rallying somewhat at the close.

Meanwhile, opinions were split on CapitalSource's offering, which was scheduled to price after the market close, with one analyst comparing the bonds to refuse while another analyst boldly stating that he liked the stock.

Overall, traders and analysts had mixed reviews of Tuesday's trading activity. A sellside analyst at a large investment bank said that investors reacted strongly to problems in other markets, which produced a decent amount of two-way flow, and a possible bright side to Wall Street's wild gyrations.

"A lot of people are watching the high yield market deterioration," the analyst said. "I guess on the bright side, it's good for vol on a lot of names. People are trading the deltas on their converts."

Traders and analysts at other brokerages reported somewhat less action.

Along with Global Industries, which late Monday priced its $325 million in senior convertible debentures at the cheap end of talk with a coupon of 2.75% and an initial conversion premium of 32.5%, there was one other deal announced before the markets opened Tuesday.

Like many beautiful things - Flamenco dancing, wine, the locations for Spaghetti Westerns - the deal came from Spain. UBS AG Jersey Branch priced €3.2 billion in mandatory exchangeable notes due July 31, 2012 linked to shares of Banco Bilbao Vizcaya Argentaria SA.

This is where Spain comes in. The mandatories, which have an fixed coupon talked at 3.2% to 3.3% and a variable coupon that will pass through the dividend on the underlying stock, to go along with an upper threshold talked at 118% to 121% and a lower threshold of 85%, are intended to fund Spanish billionaire Manuel Jove's acquisition of 5% of Banco Bilbao, based in Bilbao, Spain.

The mandatories are expected to price Thursday.

Also announcing a new convertible offering was International Coal Group, Inc. The Scott Depot, W.Va.-based coal mining, processing and sales concern announced that it would offer $180 million in convertible senior notes due 2012. There is also a $27 million greenshoe. No other details were immediately available on the Rule 144A transaction.

The company says it intends to use the proceeds to pay off a $25 million bridge loan, to repay about $65 million from its senior credit facility and for general corporate purposes.

CapitalSource: One issue, many opinions

With CapitalSource set to price its $300 million in senior notes due 2037 Tuesday after market close, convertibles analysts spent the day modeling out their picture of the issue. They took into account the talk: a 6.5% to 7% coupon with an initial conversion premium talked at 30% to 35%. They took into account credit spreads - analysts ranged from 150 basis points over Treasuries - and implied vols somewhere in the 20s.

And even with these similar numbers, the beauty, or ugliness, was in the eye of the beholder.

"It looks like a piece of junk to me," one sellside analyst.

"I am fond of this stock," a trader said.

The one thing that often gets lost in a model is sentiment, and that seems to be what caused the disparate views.

CapitalSource, based in Chevy Chase, Md., provides financial services to small and mid-sized companies. It provides first mortgages, although not in the threatened subprime sector. It is reportedly well run with a healthy balance sheet. But it is being tarred with the subprime brush.

"Based on the pricing here, the convert market is probably going to err on the cheap side of that. I think they're probably skittish on the whole space," another analyst said. "I think there's sort of a semi-rational contagion fear going on. Even credits like this are suffering, because [people] just don't know how many dominoes are going to fall, or where."

Just to confirm the previous analyst, a third said: "We are hearing that our clients don't like it. It's mortgage related, so people are using a wider credit than what the underwriters are stating."

CapitalSource (NYSE: CSE) couldn't escape the bad feelings on the Street Tuesday, losing $1.93, or 8.77%, on Tuesday, for a closing stock price of $20.07.

High acclaim for SunPower

SunPower Corp.'s convertible debentures scheduled to price Wednesday night are being greeted with high acclaim. The $175 million offering is talked at a 0.5% to 1% coupon and a 22.5% to 27.5% initial conversion premium.

"It's an outstanding company," one sellside analyst who modeled the debentures with a 325 bps credit spread and a 40% volatility said. The model came out to 20% cheap.

"Overall, the credit should tighten," the analyst continued. "A great company, well positioned, but in expansion mode."

This follows a trader who had also modeled the SunPower cheap immediately after the offering was announced Thursday.

Global Industries hits choppy seas

With equity markets hitting extreme turbulence in recent days and investors showing increased wariness, Global Industries may simply have run into some bad timing when it priced its $325 million in convertible senior notes Monday night after the markets closed.

The convertibles have a 2.75% coupon and a 32.5% initial conversion premium, coming in at the cheap end of talk, which had been a 2.25% to 2.75% coupon and a 32.5% to 37.5% initial conversion premium.

The convertibles closed at 99.5 versus a closing stock price of $26.27.

"I just think the length of the bond and the skittishness of the credit market today didn't help," one sellside analyst said.

While the bonds were active in morning trading, much of the activity had stopped by afternoon.

"I think when it came on the cheaps, I expected it to trade above par. I figured people would get it and flip it," another analyst, who admitted the first days' trading surprised him.

Global Industries stock (NYSE: GLBL) closed down 51 cents, or 1.9%.

Is Evergreen coming?

One deal that may or may not be pricing Tuesday night comes from Denver-based Evergreen Energy, Inc.

The coal-refining company announced Tuesday morning that it was launching convertible unsecured notes due 2012, although because it's a Rule 144A transaction there was no other information given.

But a funny - or not so funny if you work for Evergreen or own its stock - thing happened on the way to the pricing. Rumors of the deal started to swirl and Evergreen stock got caught in the funnel. The stock (NYSE: EEE) lost 30 cents, or 7.41% over the course of the day, closing at $3.75.

Although many analysts hadn't heard about the proposed issues, one who did said that it may not be just around the corner. The steep stock fall may be giving Evergreen second thoughts.

Calls to Evergreen Energy were not returned by press time.

The company shouldn't feel alone in its stock's drop. Wall Street took it on the chin Tuesday, with the Dow Jones Industrial Average dropping 226.47 points, or 1.67%, to 13,716.95. The Nasdaq joined the fun, losing 50.72 points, or 1.89%, to close at 2,639.86.

Bad earnings news, concerns over subprime mortgages and profit taking pushed the indexes out the window Tuesday, with heavy volume reported in the last hour of trading, according to one trader.

"I think the market's tired," an equities analyst said. "We probably are due for some consolidation here as people work through all the information."

Beazer Homes down on investigation

One convertible issue that was in play Tuesday was Beazer Homes USA Inc.'s 4.625% convertible senior notes due 2024.

A day after announcing that the Securities and Exchange Commission had begun a formal investigation of the Atlanta-based homebuilder, the convertibles and stocks linked to the company continued a downward spiral.

Beazer announced earlier in the year that it was the subject of informal investigations by the SEC and the Justice Department, as well as several lawsuits, over its mortgage operation. In June, the company fired its chief accounting officer Michael Rand for attempting to destroy documents. And on Friday, the SEC investigation became formal.

Beazer's convertibles closed at78.75 versus a closing stock price of$18.76. On Friday, when rumors of the formal investigation started to leak out, the bonds closed at 85 versus $19.62.

Wall Street was not kind to Beazer Homes stock (NYSE: BZH), which closed down $1.97, or 10.5%.

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