Xerox buzz renewed with bank loan activity; call threats pull in several issues; Mirant dives on MAG snag

By Ronda Fears

Nashville, June 10 - It was a busy day in convertibles, from all sides Tuesday. In the primary arena, three new deals were in play, with three more pricing after the close and two already slated for Wednesday's business.

Among the new deals in play, FEI Co. was the most eventful. The $150 million 0% due 2023, sold on a call spread at par with a 33% initial conversion premium, was reoffered at 99 by lead bank Credit Suisse First Boston and opened 0.5 point lower right out of the gate.

Just before the close, CSFB quoted the new FEI at 97.5 bid, 98.25 offer but a buyside trader said he saw it earlier in the day bid at 96.75.

FEI shares closed down 75c, or 3.66%, to $19.74.

In secondary trading, several issues came under pressure from renewed call anxiety, in part related to refinancing activity related to new issues from FEI, Lamar Advertising Co. and Tekelec, as well as other redemptions already announced this week.

Mirant Corp. converts plunged on a news report that its exchange offer - for its 2.5% converts and

7.4% junk bonds - was in jeopardy of an attempt to block the transaction by holders of subsidiary Mirant Americas Generation LLC's 7.625% notes, which is the subject of a separate exchange offer.

Buzz was recirculated about a possible Xerox Corp. deal, something that has been hashed and rehashed hotly since its first quarter earnings release in April, but it appeared to be more solid than ever before.

Also, a buyside source said there was rumors that Semtech Corp. "seems to have been hoovered up [amid] rumors they will come with a refi" to take out the 4.5% convert due 2007.

"People looking at anything with a 5 handle for a refi, maybe anything with a 4 handle as the 10 year goes through 3.25%," the source said.

Semtech's 4.5s were quoted up about 1.5 points at 96.5 bid, 97.75 offer. The stock closed up 25c, or 1.65%, to $15.40.

Xerox was the show-stealer, however, in terms of speculation about who's doing what with new deals.

The business machine giant was shopping a new $1 billion bank facility and there was a potential $1 billion junk bond in the works, according to market sources, which also said Xerox was looking at a possible convertible deal and stock sale.

The buzz piqued the interest of several convertible managers, with several comments along the lines of "interesting."

"I am liking the improving [Xerox] story, but I think the preferreds are too rich for my liking," said a convertible fund manager on the West Coast.

"I would like a bond deal on that one."

Xerox's 7.5% trust preferreds dropped 1.75 points on the day to 68.25 bid, 68.75 offer. The stock closed off 17c, or 1.57%, to $10.67. The company took out most of its 0.57% discount converts, for some $560 million in cash, in March when the put came around.

Deutsche Bank Securities was identified by an informed source as the lead bookrunner on the coming junk bond deal from Xerox, which the company would use, in conjunction with proceeds from the new bank facility and possible convert and stock offerings, to repay $3.3 billion in old bank debt.

No timing was heard on the deal, although the source indicated to Prospect News that launch is seen as "day-to-day," meaning developments could be imminent.

Capital markets sources in the convertible market remained cagey about a possible deal.

Xerox has the $1 billion credit facility out to managing agents and it is expected to launch for general syndication in the near term, a source close to the deal told Prospect News. JPMorgan and Deutsche Bank, joint lead arrangers with Goldman Sachs, Citigroup, UBS and Merrill Lynch all designated as equal underwriters.

The refinancing package would come after several rounds in Xerox's bout with the Securities and Exchange Commission. Last week, the SEC forced six former and current Xerox executives to pay $22 million in fines and other penalties to settle civil fraud charges related to overstated revenue and profits.

While the latest SEC scandal involves Xerox employees, it comes after a July 2002 settlement related to financials under investigation since June 2000. In connection with that settlement, Xerox restated $6.4 billion in revenues from 1997 to 2001 - more than double the $3 billion estimated by the SEC in an April settlement.

In addition to having thought the Xerox trouble was put to bed by the April settlement, just a couple of weeks in advance of the July 2002 settlement, Xerox renegotiated its $7 billion credit revolver that was scheduled to expire on June 30, 2002. Xerox repaid $2.8 billion of the revolver in cash while extending the maturity date for the remaining $4.2 billion.

In October 2002, Xerox procurred a $5 billion financing deal with General Electric Co., secured by customer lease receivables.

Mirant suffered a severe blow from a Reuters article that some Mirant Americas Generating bondholders are preparing to sue to block the Mirant exchange offer, asserting it unjustly favors Mirant creditors over MAG's. Rating agencies last week responded to the exchange, also noting that the new bonds offered by Mirant would be secured, thereby subordinating other debt.

"The big scare here [with Mirant] is that if there's this much trouble brewing they may file bankruptcy," said a buyside trader.

"When they mentioned it last week, it was shrugged off as a negotiating tactic with the banks. Now, it could be a real possibility so everyone was shedding these bonds."

Mirant also is negotiating to refinance its $1.125 billion bank facility that matures July 15 and is asking bondholders to approve a prepackaged bankruptcy restructuring plan, although it said last week that it does not believe a filing will be necessary.

Citibank and Credit Suisse First Boston already have expressed opposition to the company's plan because of sharing first priority liens with bondholders, the company noted in an SEC filing.

Mirant's 2.5% converts plummeted 8 points on the day to 62.25 bid, 66.25 offer and the 5.75% converts fell nearly 5 points to 59 bid, 61 offer.

Mirant's junk bonds have lost some 11.5 points over the last week, one distressed trader said.

Mirant shares closed down 22c, or 8.66%, to $2.32.

New issue activity continued at a nice clip, in terms of number of deals but they were all small in size.

At bat after Tuesday's close were Lamar Advertising Co. and Guitar Center Inc.

Lamar sold $250 million of 7.5-year noncallable convertible notes at 2.875% with a 47.5% initial conversion premium, following a marketing push throughout the session.

Market watchers were anticipating that pricing terms would be tightened before final pricing but that did not come to pass, although final terms were at the tight end of yield talk and at the middle of premium guidance.

It was launched early Tuesday with talk of a 2.875% to 3.375% coupon and 45% to 50% premium. At the midpoint of guidance, sellside analysts had put the new Lamar convert from around 1% to 3.6% cheap.

Buyside traders said at the close the new Lamar convert traded at 0.75 point over issue price in the gray market. Earlier, traders said it was offered as low as 1.5 points under issue price, but trading in the gray market was described as "lackluster."

Lamar shares closed down 77c, or 2.16%, to $34.92 on heavy volume.

In pending new deal activity, convertible players were eyeing deals from Tekelec, Mesa Air Group and Guilford Pharmaceuticals Inc.

Although not related to any specific new deals, some believe there still is a good deal of cross-over participation in converts. There has been speculation from buyside sources that straight bond investors have played several of the more quirky new converts, such as Wells Fargo & Co., that have huge premiums.

"I'm seeing 'put' type names [those putable in the near future] coming in and I speculate that the new issues are having an impact on the supply of available cash," said Michael Revy, who manages a hedge fund for Froley Revy and an outright strategy for Nuveen.

He added, though: "I have read reports saying that allocation to corporate bonds hit another record, with some outflows in equities."

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