XL Capital, XM seen higher on day one; PSS World quiet with deal seen rich; Chesapeake slips with oil

By Kenneth Lim

Boston, July 29 - XL Capital Ltd. gained quickly on Tuesday as its new mandatory convertibles made their debut on the secondary market.

XM Satellite Radio Holdings Inc.'s new exchangeables into Sirius Satellite Radio Inc. common stock were also seen doing better, although trading was mostly through the desks of the deal's underwriters.

PSS World Medical Inc.'s planned $200 million offering was quiet in the gray market as analysts generally saw price talk as too rich.

The rest of the market saw light trading volumes, with energy names slipping further as oil prices fell to their lowest level in almost two months.

Chesapeake Energy Corp.'s 2.25% convertible due 2038 declined by about 3 points outright to change hands at 92 against a stock price of $46.75. Chesapeake common stock (NYSE: CHK) eased 3.58% or $1.75 to close at $47.18.

Chesapeake is an Oklahoma City-based natural gas production company.

"I feel like liquidity is not anything to write home about in convertibles right now," a sellside convertible trader said. "Just a lot of sitting on hands. I think it's just the way stocks are trading, the way stocks are moving up and down."

XL Capital gains on debut

XL Capital's new 10.75% three-year mandatory convertible was seen up by about 2 points outright on Tuesday as observers described the deal as cheap.

The convertible, which was offered at par of $25, was seen at 26.875 bid, 27.125 offered versus a stock price of $17.40 in the afternoon. XL Capital common stock (NYSE: XL) closed at $17.95, lower by 2.29% or $0.42.

"They priced it off of $16, and it's trading up now like 2.5 point versus $18," a convertible analyst said.

The $500 million offering priced before the market opened with an initial conversion premium of 18%. There is an over-allotment option of 15%, or $75 million.

Goldman Sachs & Co. and UBS Investment Bank were joint bookrunners for the registered offering.

Concurrently XL Capital priced $2 billion of common stock at $16 per share.

XL Capital, a Bermuda-based insurance and reinsurance company, plans to use proceeds from the offering, together with the $500 million of net proceeds from the put option exercise in connection with its Mangrove Bay contingent capital transaction, to pay $1.775 billion to Security Capital Assurance as part of the SCA notes redemption.

Any remaining proceeds are earmarked for general corporate purposes, including capital funding of certain subsidiaries.

The deal was priced cheap, a sellside convertible analyst said.

"I had it something like 4% cheap," the analyst said. "But I think it had to come cheap. This is a deal with a lot of baggage, although the plan is to eventually get rid of all that baggage with SCA."

The analyst said it remains uncertain whether XL Capital will emerge on a firmer credit footing when the SCA deal is completed.

"Well, the whole deal was basically to help save SCA," the analyst said. "XL's not really going to be the main beneficiary, except maybe in the sense that it's going to be separated from SCA. But I know there's still a lot of people wondering what's going to happen with XL after this."

The deal likely went to a limited number of investors, the analyst said.

"I think you probably saw more interest from people who were already investors," the analyst said. "It's not a name people are dying to get into."

XM seen better

XM Satellite Radio's new exchangeables into Sirius Satellite Radio common stock were reportedly trading better on Tuesday, although the action did not extend beyond the underwriters of the deal.

"I didn't see it, but guys were telling me that it probably did better because it came really, really cheap," a sellsider said. "You're not going to see it outside of the underwriters because of the borrow facility. The only way you can get that borrow is to go through them."

The new 7% exchangeable due 2014 priced cheaper than price talk. The $550 million deal arrived with an initial exchange premium of 25% after being talked at a coupon of 6% to 6.5% and an initial exchange premium of 20% to 30%. Sirius (Nasdaq: SIRI), which priced a concurrent offering of stock at $1.50 apiece as part of a borrow facility, saw its common stock close at $1.58 on Tuesday.

Washington-based XM, a satellite radio provider, on Tuesday completed a merger with New York-based Sirius, also a satellite radio provider. The combined company will be renamed Sirius XM Radio Inc. and will trade under Sirius's symbol on Nasdaq.

XM said the proceeds of the exchangeable deal will be used to refinance certain of its debt in connection with the merger.

The deal was cheap, but that was partly because the company was sitting on a large amount of debt, a convertible analyst said.

"It's highly levered," the analyst said. "Not a lot of interest for that here."

PSS seen as rich

PSS World Medical's planned $200 million offering of six-year convertible senior notes was quiet in the gray market on Tuesday with the deal mostly seen as rich.

Price talk was at a coupon of 2.625% to 3.125% with an initial conversion premium of 27.5% to 32.5%. Pricing was expected after the market close on Tuesday.

The Rule 144A offering, being sold via Goldman Sachs & Co., has a greenshoe of $30 million.

Proceeds are expected to be used to repurchase about $35 million of common stock and $150 million of the 2.25% convertible senior notes due March 15, 2024; to enter into call options overlay transactions; and for general corporate purposes.

In conjunction with this offering, PSS plans to enter into convertible note hedge transactions with the initial purchaser or its affiliates. And the company plans to enter into a separate transaction to sell warrants to purchase its common stock.

PSS is a Jacksonville, Fla.-based specialty marketer and distributor of medical products.

"It didn't look that attractive at all," said a convertible analyst who was using assumptions of about 400 basis points over Libor and a volatility in the high 20% region. "That's probably toward the tight end of credit in this market. I think ... at 23% to 24% volatility it might be interesting, but if it's more like 22% it will be a definite buy."

Even an analyst who thought the deal looked slightly cheap using the same spread but a higher volatility thought that the deal may not be cheap enough.

"I would say that a year ago 2% cheap was really good," the analyst said. "Now, because deals are harder to price, things are definitely beginning to come cheaper. In this case, 2% cheap would have been a nice looking deal last year, maybe not so much now."

A third analyst thought that the deal looked rich at the midpoint of talk, but added that the market is generally more cautious on volatility these days.

"People are really haircutting volatility these days because it's such a terrible market," the analyst said.

But the deal could still appeal to outright investors, the analyst said.

"I think it's interesting for outrights also because there's a case to be made for the stock to go up," the analyst said. "There's a lot of risk from regulators, but some of that has been mitigated...Most of the analysts have buy on the stock."

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