Peabody upsizes, gains in gray; Cadence rises; International Game to reoffer; PNC, Tech Data launch deals

By Kenneth Lim

Boston, Dec. 14 - New deals continued to dominate the convertible bond market on Thursday, with Peabody Energy Corp. generating the most buzz.

Peabody's planned $500 million deal gained slightly in the gray market and was widely seen as cheap, but critics described the terms and conditions of the offering as stacked for the issuer.

Cadence Design Systems Inc. was better on its first day of trading, on the back of a strong stock.

Meanwhile, International Game Technology Inc. was bid slightly below par in the gray market, but the deal was expected to be reoffered amid views that initial price talk was too aggressive.

PNC Financial Services Group Inc. and Tech Data Corp. also launched deals worth about $1.3 billion that will start trading on Friday.

Beyond the new deals, the market was largely quiet.

"It seems like everybody's getting ready for Hanukkah," a convertible bond trader said.

Peabody up in gray

Peabody's upsized $675 million offering of 60-year junior subordinated debentures was bid up by ¼ point on Thursday, as market players tried to figure out a deal that seemed cheap yet also appeared to be stacked against the investor.

"It's all about the company," a sellside convertible bond analyst said. "They've got everything in this deal you'll ever want as an issuer."

Peabody's deal priced at the rich end of revised price talk after the market closed, at a coupon of 4.75% and an initial conversion premium of 40%. Price talk was narrowed earlier Thursday to a coupon of 4.75% to 5% and an initial conversion premium of 40%, from the original guidance of a coupon between 4.5% and 5% and an initial conversion premium of 40% to 45%.

The convertibles were offered at par. Peabody stock (NYSE: BTU) closed at $44.25, down by 3.43% or $1.57.

There is a greenshoe option for a further $75 million.

Morgan Stanley, Lehman Brothers and Citigroup were the bookrunners of the registered off-the-shelf offering.

The convertibles will have a scheduled maturity of 35 years, at which time Peabody must redeem the debentures with similar equity-credit securities. Failure to do so will be a breach of covenant, but not an event of default.

Peabody may defer coupon payments for up to 10 years. After five years of deferral or if a mandatory trigger event occurs, Peabody must fund coupons by selling warrants or preferred stock.

The debentures will be non-callable for the first five years. There will be a soft-call hurdle at 130% of the conversion price through year 25. There are no puts.

Peabody, a St. Louis, Mo.-based coal company, said it will use the proceeds of the deal to repay outstanding revolving and term debts, which were used to help pay for its recent acquisition of Excel Coal Ltd.

A sellside convertible bond trader said it was hard to see who would want a piece of paper with such terms.

"In my eyes, it's just far too long," the trader said. "You got no puts, no out, there's dividend protection, but dividend protection might not mean much. If the company increases the dividend, you keep getting better conversion prices, but the yield is skewed, and you lose all the advantage, especially with this kind of time period. With others you can sell it easily or put it back. As soon as they raise the dividends, somebody's going to be left without the chair, like when they play musical chairs and the music stops, it's going to be, 'Who's the last one who owns it?'"

The trader listed the junior ranking of the debentures and the company's ability to defer coupon payments as terms that were advantageous to the issuer, but identified the long structure of the offering as the biggest sticking point.

"If anything, it's the horizon," the trader said. "It's just too long."

The sellside analyst agreed that all those terms gave the company great protection.

"It's basically a preferred, and nobody likes preferreds," the analyst said.

The analyst said the deal modeled about 2.5% cheap at the midpoint of the new price talk, but thought that the terms could have been better. Asked if the terms was a sign of the times, the analyst disagreed.

"I thought we were going the other way," the analyst said.

Nevertheless, the deal does have some aspects going for it, such as the way the offering limits the eventual debt burden on the company, the analyst noted.

"All those things give you comfort," the analyst said.

Peabody's paper will also be the only convertible from the coal sector available to investors, the analyst said.

"If you're a fund...this will be the only coal convert out there," the analyst said. "It is exposure to coal and exposure to the behemoth in coal."

A buyside convertible bond analyst, however, thought that the deal looked attractive.

"I was focusing more on the stock," the buysider said. "I wasn't worried at all about the credit, because they have a really strong credit...It is an unusual deal, and we have a little bit of concern here about that, but it's a good-looking stock."

Cadence climbs on debut

Cadence's new 1.375% convertible senior note due 2011 and 1.5% convertible senior note due 2013 gained slightly above one point outright on Thursday, supported by a strong stock.

The five-year convertible changed hands at 101.5 against a stock price of $18, while the seven-year note traded at 101.375 versus the same stock price. The notes were offered at par. Cadence stock (Nasdaq: CDNS) rose 2.28% or 41 cents to close at $18.41.

"They did pretty well," a sellside convertible bond trader said.

Cadence priced the two $250 million tranches Wednesday after the market closes, at an initial conversion premium of 17.5%. Price talk for the five-year tranche was at a coupon of 1.375% to 1.875% and an initial conversion premium of 15% to 20%. The seven-year series was talked at a coupon of 1.5% to 2% and an initial conversion premium of 15% to 20%.

JP Morgan, Merrill Lynch and Morgan Stanley are the bookrunners of the Rule 144A offerings.

Cadence, a San Jose, Calif.-based supplier of electronic design automation solutions, plans to use $228 million of the proceeds to buy back 45% of its zero-coupon, zero-yield convertible senior notes due 2023. It will also use $120 million of the proceeds to fund convertible note hedge and warrant transactions, and $100 million to concurrently buy back 5.575 million shares of its common stock.

"It priced cheap, that's all," a buysider said. "The terms are attractive, the volatility is reasonable. It's a straightforward deal."

International Game below par in gray

International Game Technology's planned $825 million of 30-year convertible senior debentures were seen 99.875 bid, 100.375 offered in the gray market on Thursday, ahead of pricing expected after the market closed.

The convertibles were initially offered at par, but market sources said the deal would be reoffered. It was talked at a coupon of 2.1% to 2.6% and an initial conversion premium of 35% to 40%. International Game stock (NYSE: IGT) gained 0.53% or 24 cents to close at $45.76 on Thursday.

There is an over-allotment option for a further $75 million.

Banc of America, Merrill Lynch, Goldman Sachs, Wachovia, UBS Investment Bank, Deutsche Bank and Bear Stearns are the bookrunners of the Rule 144A offering.

International Game, a Reno, Nev.-based maker of gaming machines and systems, said it will use about $612 million of the proceeds and cash on hand to redeem its outstanding zero-coupon convertible debentures. It will also use about $225 million of the proceeds and cash on hand to concurrently buy back its common stock.

"It's a great company, but the premium's too high, the coupon's too low," a sellside convertible bond analyst said.

"It doesn't set up well. For outrights, it's got a low yield, and since they give all the cash back to investors, there isn't a lot of potential for the credit...It's kind of priced to perfection."

But the analyst said the company had a compelling business.

"It's definitely a growth stock," the analyst said. "Clearly there's growth out there, although if there's a mishap, which they periodically have, the stock's going to come in.

"Anyone who can convince adults to sit at a machine for hours and push a button and let the machine suck money out of their credit cards is an awesome company," the analyst said.

PNC, Tech Data plans deals

PNC planned to price on Thursday after the market closed $1 billion of 30-year exchangeable senior notes, at a coupon of three-month Libor minus 40 basis points and an initial exchange premium of 75%.

The notes were offered at par during price talk, but market sources said the deal could be reoffered. The notes were issued by PNC Funding Corp., but are guaranteed by and exchangeable into common stock of PNC Financial.

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

PNC stock (NYSE: PNC) closed at $73.46 before the deal was announced. It slipped 0.01% or 1 cent to $73.45 in after-hours trading.

PNC, a Pittsburgh, Pa.-based financial services company, said it will use the proceeds of the deal for general purposes, and to finance the acquisition and integration of Mercantile Bankshares Corp. PNC expects to issue $2 billion of debt securities and hybrid capital instruments to fund that acquisition.

Tech Data's $325 million offering of 20-year convertible senior debentures is expected to price Friday before the market opens, talked at a coupon of 2.75% and an initial conversion premium of 35%.

There is an over-allotment option for a further $25 million.

Banc of America is the bookrunner for the overnight registered off-the-shelf offering.

Tech Data stock (Nasdaq: TECD) closed at $40.19 on Thursday, but dropped 3.43% or $1.38 to $38.81 in after-hours trading following the announcement of its deal.

Tech Data, a Clearwater, Fla.-based distributor of information technology products and logistics management services, said it will use the proceeds of the deal to retire short-term debt and for general purposes.

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