Zenith $105 million convertibles talked at 5.5-6.0% yield, up 25-40%

By Ronda Fears

Nashville, March 17 - Zenith National Insurance Corp. launched $105 million of 20-year convertible notes talked to yield 5.5% to 6.0% with a 25% to 30% initial conversion premium via joint lead managers Banc of America Securities and Merrill Lynch & Co.

The Rule 144A deal is slated to price after the close Tuesday.

Bear Stearns & Co. analysts put the deal 5.8% cheap at the midpoint of guidance, using a credit spread of 600 basis points over Treasuries and 25% stock volatility, noting a "terrible" borrow on the stock that will likely mean substantial outright interest in the deal.

"This deal continues a recent string of small-cap companies coming to market (Arris, Axcan, Sierra Health) with small deals [of] around $100 million," Bear Stearns convertible analysts said in a new issue report.

"This offering models significantly cheap and will probably do well, although arbs will be challenged to set up the deal on swap with the tiny borrow."

Another sellside analyst put the deal 2.8% cheap, at the middle of price talk, using a spread of 500 bps over the five-year Treasury and 27% stock volatility. The valuation was made with Zenith shares at $19.30, and accounts for a 5.2% yield on the common.

There is a $15 million greenshoe available on the deal.

The 20-year senior notes will be non-callable for five years, with puts in years seven, 10 and 15.

There is a contingent conversion trigger at 120% and contingent payment trigger of 120%.

Woodland Hills, Calif.-based Zenith, a property and casualty insurer, said it plans to use proceeds to repay its bank lines of credit and general corporate purposes.

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