Citi plans $3.5 billion mandatory convertible preferreds; Titan, GenCorp on tap to price

By Rebecca Melvin

New York, Dec. 14 - Convertibles players were weighing two new deals that launched early Monday, including Citigroup Inc.'s whopping offering of $3.5 billion of mandatory convertible preferreds. And a third new deal launched after the markets' close, with the three deals making for a pretty busy new issue calendar for the early part of the week.

Citi, which is expected to price its offering Wednesday, looked "pretty attractive," given the terms, one outright buyside source said, citing the relative value of the deal compared to the financial company's equity and also the mandatory's high coupon.

The buysider admitted investor sentiment toward Citi isn't generally very positive, but that "that in itself" might be another reason why the deal could be interesting, the buysider said.

Other sources complained about the Citi deal's structure, one citing his dislike for mandatories in general, and another pointing out that the convertible prefereds are not standard mandatories but instead an "amortizing debenture."

Titan International Inc. launched a $75 million offering of seven-year convertible senior subordinated notes, which were talked to yield 5.375% to 5.875% with an initial conversion premium of 35% to 40%, according to a market source.

GenCorp Inc. plans to price up to $125 million of convertible subordinated debentures talked to yield 3.75% to 4.5% with an initial conversion premium of 20% to 25%.

Both Titan and GenCorp were seen pricing after the close of markets Tuesday.

In the convertible secondary market, trading volume was described as "muted."

As of 2:45 p.m. ET, only $324.1 million notional had traded. "Maybe we finish at $450 million. Either way it quite low compared to the 30-day moving average total of $690 million. Even equity trading volume is significantly off its average with 693 million shares changing hands," a New York-based sellside analyst said.

The 30-day moving average is 1.1 billion shares, the analyst pointed out.

Among names in trade were offshore oil services company Seacor Holdings Inc. and offshore supply vessels provider Hornbeck Offshore Services Inc.

Citi to price $3.5 billion of mandatory preferreds

Citi's planned $3.5 billion of mandatory convertibles was talked to yield 7.5% to 8% for the dividend with an initial conversion premium of 20% to 25%.

Specifically the securities are known as tangible dividend enhanced common stock, and they will price at a par of $100.

Each mandatory, or T-DECS, is a unit including a prepaid stock purchase contract and a subordinated amortizing note due Dec. 15, 2012.

They will consist of $2.8 billion of prepaid common stock purchase contracts, recorded as equity, and about $0.7 billion of subordinated notes, recorded as debt.

Citi is also offering $17 billion of common stock, plus an over-allotment option of $2.55 billion.

Shares of the New York-based financial services giant fell 25 cents, or 6%, to $3.70 on Monday.

The T-DEC's pricing was reminiscent of the bumper crop of bank preferred's that priced in the spring and summer of 2008, one sellside source pointed out.

"There's really no reference for a financial mandatory preferred at this time that I know of," he said.

An outright buysider eyed that yield admiringly and noted that if the equity offering was struck at a price of $3.50, and based on calculations of a new tangible book value at $4.03, then the T-DECs "look like the way to go."

The sheer size of the equity offering left some wondering if the market would even bear the load.

Citi will have increased the number of its shares in one year from about 5 billion to 27.9 billion.

The new offering "would be 90% of book. I'd like it to be lower than that frankly," the buysider said.

But the number of shares was the amount needed to get done under a government agreement so that Citigroup could come out from under the exceptional assistance category, the buysider said.

Proceeds of both offerings will be used to repay $20 billion of TARP trust preferred securities.

Citi has also reached an agreement with the U.S. government and regulators to terminate its loss-sharing agreement.

"That's the deal the government came up with. This is the $20 billion that put them into the category of super scrutiny," the buysider said. They are getting rid of the loss sharing agreement so the good news is that the government doesn't see the level of risk as being that high.

In connection with Citi's offering, the U.S. Treasury will sell up to $5 billion of the common stock it holds in a concurrent secondary offering. After this secondary sale of 6.5 billion shares, the Treasury will own about 22% of Citi.

The Treasury says it has plans to fully exit its equity stake in 2010.

In addition, Citi has decided to issue in January 2010 $1.7 billion of common stock equivalents to employees in lieu of cash they would have otherwise received.

Citi plans to list the T-DECS on the New York Stock Exchange.

Citi is a New York-based diversified financial services holding company.

Citi "kind of said, 'This is what we can afford to do now, and we'll talk later on,'" the buysider said.

"I've been saying be short. But it feels that this raise could put a floor under it," the buysider said.

Citi's existing preferreds better

Citi's existing convertible preferreds gained on the news. The Citi series T preferreds were up 1.25 points to 28.350. Another source said they saw the Citi convertibles rise to about 28 from 21 on the news.

Will Citi shares be able to go up after all this? One can look at Bank of America Corp., which just raised 9 billion or 10 billion new shares at $15.00 a share earlier this month. The shares were a little higher than that on Monday, settling at $15.63.

"They got that deal done, and they've peaked out on Oct. 14 at $18.60, and its gone as low as $14.58, and now it's going sideways to down," a New York buysider said.

"I think probably once they announce the new leadership. If Bob Kelly of Bank of New York was named, that could be a catalyst in the market's mind. I actually like B of A; I feel it's cheap," the buysider said.

Titan plans $75 million deal

The $75 million of seven-year convertible senior subordinated notes that Titan International was expected to sell after the close of markets Tuesday was talked to yield 5.375% to 5.875% with an initial conversion premium of 35% to 40%.

The new convertibles will be subordinate to Titan's existing 8% senior notes due 2012.

Goldman Sachs is the bookrunner for the deal, which will be non-callable until Jan. 20, 2014 and then provisionally callable if Titan's stock price is 130% of the conversion price for 20 or more trading days in a 30-day trading period.

There are no investor puts.

Proceeds will be used for general corporate purposes, including financing potential acquisitions and repayment of existing debt.

Titan International is a Quincy, Ill.-based maker of wheels, tires and assemblies for off-highway vehicles, including tractors and combines.

GenCorp plans $125 million deal

GenCorp's $125 million of convertible subordinated debentures were talked to yield 3.75% to 4.5% with an initial conversion premium of 20% to 25%.

The debentures are provisionally callable for life at a price hurdle of 150%. If they are called within the first five years, the coupon has a make-whole provision that will be equal to the present value of the first five years of coupons at a 2.5% discount rate.

The Rule 144A offering, which is being brought by bookrunner Morgan Stanley, has an over-allotment option for $18.75 million of debentures.

Holders can put the debentures in years five, 10, 15, 20 and 25, on Dec. 31, 2014, 2019, 2024, 2029, and 2034, respectively.

The debentures mature Dec. 31, 2039. Interest payments, repurchase or make-whole premiums are payable by delivering cash, shares of common stock or a combination of both.

GenCorp is a Rancho Cordova, Calif.-based defense company.

Mentioned in this article:

Citigroup Inc. NYSE: C

Hornbeck Offshore Service Inc. NYSE: HOS

GenCorp Inc. NYSE: GY

Seacor Holdings Inc. NYSE: CKH

Titan International Inc. NYSE: TWI

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