By Peter Heap
New York, April 24 - Waste Connections, Inc. became the first issuer to price a floating-rate convertible apart from investment banks selling deals for themselves.
The Folsom, Calif. solid waste services company priced $150 million of 20-year floating-rate convertible subordinated notes in an overnight Rule 144A deal after the close Wednesday via Deutsche Bank Securities Inc.
The securities priced at par with a coupon of Libor plus 50 basis points and an initial conversion premium of 32%, according to market sources.
Proceeds will be used to repay bank debt and for general corporate purposes, Waste Connections said.
The two previous floating-rate convertibles, both brought to market earlier this year, were for Merrill Lynch & Co. and Lehman Brothers, both underwriting deals for themselves.
"The only companies to do this structure to date have been financial companies doing self-issues, which is arguably the easiest way to do a deal," said a market source.
Waste Connections, by contrast, is a smaller, industrial company with a speculative-grade rating.
Explaining why a floater would make sense for the issuer, the source pointed to the "disconnect" between what investors think interest rates are going to do, as indicated by the shape of the yield curve, and what has actually been happening.
"Investors think rates are going up very fast and very soon," the source noted, but added that so far that has not happened.
That means issuers can obtain an attractive cost of funds by tapping the short end of the yield curve - and still come out ahead compared to issuing a fixed-rate convertible as interest rates rise, as long the rise is not too fast.
"The market is probably paying more than it should for floating-rate convertibles," the source added. "Because everybody thinks rates are going up and they thing they are going up right away, they are willing to pay incredible terms."
Floating-rate convertibles also bring accounting benefits, creating a better match on a pro forma basis between financing costs and revenue assumptions, the source added.
| Issuer: | Waste Connections, Inc.
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| Issue: | Floating-rate convertible subordinated notes
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| Amount: | $150 million
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| Greenshoe: | $25 million
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| Maturity: | 2022
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| Coupon: | Libor plus 50 basis points
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| Price: | Par
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| Initial conversion premium: | 32%
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| Conversion price: | $48.39
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| Call: | 2006 onwards
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| Put: | In years seven, 10 and 15
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| Contingent conversion: | 110%
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| Settlement: | April 30
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| Expected ratings: | Moody's: B2
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| S&P: B+
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