Waste Connections gains on debut; Universal ups premium in talk; CSX, PMC-Sierra gain on upgrades

By Kenneth Lim

Boston, March 15 - The newly issued convertible bonds of Waste Connections Inc. came out higher on their debut Wednesday, but stayed below par as analysts regarded the securities as fairly priced but unexciting.

Universal Corp.'s coming $200 million offering of convertible perpetual preferred stock was seen as slightly cheap by some market observers ahead of pricing, and the talk was revised to raise the conversion premium range to between 25% and 30%, from 20% to 25% initially.

Meanwhile, analyst upgrades sent the convertibles at CSX Corp. and PMC-Sierra Inc. up sharply in line with significant jumps in the stocks.

General Motors Corp.'s three convertibles also gained on Wednesday after the Wall Street Journal reported that the Detroit auto maker had received a new bid for financing arm General Motors Acceptance Corp. from a consortium led by private-equity firm Kohlberg, Kravis and Roberts. Its offer was between $12.5 billion and $13 billion. General Motors is also considering a bid by Cerberus Capital Management, a private-equity and hedge fund firm.

General Motors' 4.5% convertible due 2032 (NYSE: GXM) rose 0.11 point, or 0.47%, to close at 23.33 on Wednesday. The 5.25% convertible 2032 (NYSE: GBM) gained 0.30 point, or 1.9%, to end at 16.11 while the 6.25% convertible due 2033 added 0.23 point, or 1.34%, to finish at 17.36. General Motors stock (NYSE: GM) closed at $21.50 on Wednesday, up 36 cents or 1.7%.

Human Genome Sciences Inc. continued to be active, regaining about two points outright after sliding on Tuesday. The biotech company's 2.25% convertible due 2011 was marked at 95.92 bid, 96.42 offered against the closing stock price of $11.30 on Wednesday, while the 2.25% convertible due 2012 was marked at 88.4 bid, 88.9 offered versus the same stock price. Human Genome stock (Nasdaq: HGSI) ended Wednesday up 41 cents, or 3.76%.

Rockville, Md.-based Human Genome said on Tuesday that 12-week drug trial data showed that its hepatitis C treatment worked as well as the current standard treatment when given fortnightly, but did not fare as well for once-a-month doses.

"On a credit basis, everybody would agree that at this stage of trials, the drug works," said a convertible strategist. "Even though it may not work that well on a four-week timeframe, it increases the probability that the drug will come to market, which is good for credit. There's still room to go on those convertibles."

Waste Connections gains on debut

Waste Connections Inc.'s new 20-year convertible bonds opened about half a point on their secondary market debut on Wednesday, and reached as high as 1.75 points up during the day.

The solid waste services company's $175 million of 20-year convertible bonds came with a coupon of 3.75% and an initial conversion premium of 35% and were reoffered at 98 points, half a point below talk.

The securities, which mature April 1, 2026, were priced Wednesday morning before the market opened.

Bookrunners Citigroup and Banc of America have also already exercised their greenshoe option of a further $25 million, raising the total size to $200 million.

A market source said the bonds opened at 98.5, while another trading source marked it at 99.75 against a stock price of $39.05 at the end of the day. Shares of Waste Connections (NYSE: WCN) gained $1.26, or 3.33%, to end at $39.05 on Wednesday.

A syndicate source said the deal had been oversubscribed and had "a good amount of fundamental investor interest."

Analysts were positive about the company's credit strength, but felt the stock's low volatility took some of the shine off the new securities.

A sell-side analyst said the new convertibles modeled fair at 97.5, based on a credit spread of Libor plus 150 basis points and 16% volatility.

"I think the credit is OK, not great, but OK," the analyst said, adding that even though his valuation may have been "aggressive" in terms of the spread there was also very low volatility.

A Connecticut-based buy-side analyst agreed with those credit spread and volatility assumptions, and said the deal was "extremely fairly priced, but the stock itself is such that it exhibits such low volatility I can't see the volatility going any lower."

"There are very few stocks that have the debt level of Waste Connections that trade at that [low] volatility levels," he said.

"It's not an interesting, exciting piece of paper," he said. But, he addedL "You stand to have a good risk-reward profile. Investors will more likely be making two points than losing two points."

Another buy-side analyst using a credit spread of Treasuries plus 175 bps and volatility of 15% thought the deal modeled about 0.7% rich, but noted that it would be 2.2% cheap if volatility rose to 18%.

The convertibles may not offer enough returns for hedge investors, but outright investors may find them more interesting with decent credit and acquisition-related equity upside, the analyst said. Nevertheless, the analyst did not find think that the deal offered a "highly compelling investment opportunity."

Universal Corp. raises premium talk

Universal, which was expected to price $200 million of convertible perpetual preferred stock on Wednesday evening, raised the range for the initial conversion premium to between 25% and 30% from 20% to 25% initially, market sources confirmed.

The talk on the dividend remained at 6.75% to 7.25%. Shares of Universal (NYSE: UVV) fell $2.85, or 7.22%, to $36.65 on Wednesday.

Deutsche Bank was running the books of the Rule 144A deal.

A New York-based sell-side analyst said the deal looked "kind of interesting" at the mid-point of initial talk. He said the convertible would have modeled about 4% cheap using a Libor plus 450 bps credit spread and a 22% volatility.

"It's interesting, and the break-even is within call protection," the analyst said. The preferreds will be non-callable for the first seven years.

Another sell-side convertible analyst said he would not be surprised if the deal "ends up coming at the cheap end" of talk, because Universal is highly leveraged and has a dividend yield of about 4.4% for the common stock, and "you have to have enough in the coupon to justify that."

Universal, a Richmond, Va.-based tobacco leaf supplier, still has long-term debt amounting to almost $800 million, and Moody's Investors Service earlier in the week cut the company's senior unsecured debt rating by one notch to Ba1, putting it in junk territory. Moody's cited concerns about the company's profit and cashflow problems as well as the lack of a firm financing plan.

The convertible analyst said that Universal's plan to use the proceeds of the new deal to reduce the debt from its revolving loan and short-term notes is positive, but "it's not a huge alteration in the capital structure."

"It's a modest positive. But when Moody's downgraded them recently because of their operating problems and what their refinancing plans were, it kind of seems like this doesn't address that in a big way," the analyst said.

"This is an OK, BB kind of credit, but it's a commodity producer, and they've had a terrible year this year and it's hard to see what next year will bring," the analyst added. "It's hard to feel too good about it."

He also said the common stock is not very liquid, and was modeling the convertibles on a credit spread of Treasuries plus 550 bps and volatility of 25% to 26%.

"It's not a great company, and it's not a very well known one either," he said. "It's a small commodity processor in weird parts of the world with a troubled product, and it's not really followed by anybody."

CSX jumps on upgrades

Bullish views by analysts at Merrill Lynch & Co. and UBS Investment Bank sent CSX climbing on Wednesday, with the railroad company's zero-coupon convertible due 2021 gaining about five points outright.

The security was marked at 107.47 bid, 107.72 offered against the closing stock price of $59.56 by a major convertible trading house. The stock was up 5.32%, or $3.01, on Wednesday.

UBS analyst Rick Paterson upgraded CSX (NYSE: CSX) to Buy 2 from Neutral 1 in a research report on Tuesday, saying that he expects the stock price to double over the next five years. He cited improving terminal dwell performance, improved safety metrics and greater conviction from management for the greater confidence.

"Our modeling also reveals an emerging free cash flow story, with material amounts of FCF generated from 2008 onwards," Paterson wrote. "With a healthy BS [balance sheet] and no interest in acquisitions, this suggests buybacks and dividend hikes in future years."

Merrill Lynch analyst Ken Hoexter also raised his stock target for CSX on Wednesday to $70 from $68, after a positive earnings surprise from railroad company Union Pacific Corp.

PMC-Sierra boosted by upgrade

Santa Clara, Calif.-based PMC-Sierra also saw its convertibles gain in line with the stock after UBS analyst Alex Gauna upgraded the stock to Buy 2 from Neutral 2.

PMC-Sierra's 2.25% convertible due 2025 was marked at 150.14 bid, 150.64 offered against the closing stock price of $12.09 on Wednesday. It was seen at 146.75 bid, 147.75 offered versus a $11.35 stock price on Tuesday. PMC-Sierra stock (Nasdaq: PMCS) closed 77 cents, or 6.8% higher on Wednesday.

The company is a designer and maker of semiconductors.

Gauna said in a research report on Wednesday that telecommunications capital expenditures are expected to increase, which suggests "conditions are ripe for PMCS to finally begin harvesting the 40% plus of revenues they have been diligently plowing into R&D for the past several years."

Gauna raised his target on the stock to $15, from $11.

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