Open Solutions adds 3.5 points; Rambus easier again; Rite Aid gains; Huntsman details surface

By Ronda Fears

Nashville, Jan.28 - Takeover risk in the convertible market was "off the charts" as merger and acquisition activity thus far in 2005 has heated up, further cooling off any buying enthusiasm on markdowns seen in recent weeks.

"I wouldn't go so far as to say everything is for sale," said a sellside desk analyst at one of the mid-sized convertible shops. "We definitely aren't seeing a lot of bids, though, even though there's been some cheapening, so to speak, depending on how you look at the market."

M&A activity is one of the biggest perpetrators in the market weakness right now, he said, along with some disappointing earnings. But, he pointed out that elevated M&A activity is "a double-edged sword: it has some people running amok looking for the next target to get hit in the secondary market, but it also is a hot area to pick up new convertible issuers."

New issues this week were showing mixed results in the aftermarket. Rite Aid Corp.'s new 7%, up 50% mandatory, initially shot down, was a tad higher, though still underwater, while the Rambus Inc. zero-coupon issue continued to sink, hitting 95.5 on Friday, after buyside sources said it was reoffered below par by bookrunner Credit Suisse First Boston.

"RAD [Rite Aid] should have been re-priced. It's a triple-CCC type name that priced worse than Assurant Inc. (A rated)," a mandatory exchangeable by Fortis NV that priced last week at 33.66 to yield 7.75%, up 22%, said a buyside market source.

"RMBS [Rambus] was reoffered [below par]. What I heard was that the story is driven more by various lawsuits than by fundamentals, so I think this is why there was not too much enthusiasm."

Open Solutions Inc.'s new deal, though, got a warm reception, soaring out of the gate after pricing aggressively outside of indicative terms. "Open seemed to have more interest," the buyside source said. "I think the software space is a bit under-represented in convert land, and it seems IT service/software could be growth area - if it is growth you wish to buy here."

Redemption rumblings recur

Yet again, or still, rumblings about heavy redemptions have resurfaced in the convertible market, pointed mainly at the hedge funds where returns have been lackluster. Some argue there is more credence to the talk now, considering the proximity to year-end figures and that many investors rethink their focus in January.

"There are loads of redemption rumors - some must be facts!" said a convertible fund manager that oversees both outright and convertible arbitrage strategies. "It is all for sale - redemptions, cash takeovers and final capitulation on all vol trades."

Traders will concede, at most, that there are no bids in the market. But none refute the numbers for convertible hedge fund returns, which are rather dismal.

Merrill Lynch's convertible hedge index was down 0.12% on a net return basis, after hedging out interest rates, last week. For 2004, the index showed a net return of 1.16% before hedging out interest rates and 2.53% afterward - disappointing, to say the least, for those players who are used to double-digit returns.

Widening credit spreads have been the biggest culprit to convertible hedge returns thus far in 2004, Merrill analysts said. But, an easing in Treasury yields has so far served as a counteractive force.

Open Solutions adds 3.5 points

Open Solutions sold $125.4 million in proceeds of 30-year discount cash-to-zero convertible senior subordinated notes at 53.356 for a yield to maturity of 2.75% with a 32.5% initial conversion premium -aggressively outside of yield talk of 3.25% to 3.75% and smack in the middle of premium guidance of 30% to 35%.

In the gray market, the issue was seen 1 point over par on the bid side and 3 points over on the offer side, before pricing wide of guidance. At the middle of price talk, sellside analysts had put the convertible around 2% cheap.

Out of the chute, the Open Solutions convertible shot up 1.5 points over issue price, buyside traders said, and kept going for the entire session.

Bookrunner Merrill Lynch & Co. closed the new Open Solutions convertible 3.25 points over issue price on the bid side, 3.75 points over on the offer. Open Solutions stock closed Friday off 14 cents, or 0.64%, at $21.76.

Huntsman on the horizon

Huntsman Corp. has had a mandatory sitting on the calendar since early January and provided more details in a Securities and Exchange Commission filing Friday. The $250 million three-year mandatory is set to price alongside the Salt Lake City chemical company's 55.681 million share initial public offering in a range of $21 to $23 a share. Timing, though, is still uncertain.

With the $1.3 billion in estimated proceeds, Huntsman is funding a major restructuring of its junk bonds.

Reception in the convertible market to the Huntsman mandatory, a fund manager in New York surmised, is expected to be similar to the well received, though controversial, with-IPO mandatory last week from German chemical concern Celanese Corp.

On strong demand, Celanese upsized its perpetual preferred to $240 million from $200 million and printed the deal with a 4.25% dividend and 25% initial conversion premium. The IPO, however, priced at $16 - well below the company's target of $19 to $21 a share.

Celanese's mandatory has continued to do well in the aftermarket, gaining a quarter-point Friday to 25 while the stock closed at $16, up 22 cents on the day.

Tower convertibles hold pat

Tower Automotive Inc. convertibles continued to remain steady Friday, traders said, although there were bonds for sale following chatter in the high-yield ranks on Thursday of a big holder trying to unload the Novi, Mich.-based auto parts maker's bonds and speculation that there were problems with the upcoming interest payment on a euro-denominated bond issue.

The 5.75% convertible bonds were offered at 24.5 with no bids, unchanged from Thursday, one trader said. Likewise, the 6.75% convertible preferreds were steady at 3.5. Neither moved on Thursday, either, although Tower Automotive's 12% notes due 2013 traded as low as 51 on Thursday after ending Wednesday in the 57-58 area.

Tower Automotive shares closed Friday down 2 cents, or 2.11%, at 93 cents.

"The noise coming off the junk bond desks is nothing new to us in converts - Tower Automotive is in trouble and all the coupons are at risk," said another convertible trader. "We aren't seeing any action in the convert paper right now, though."

WaMu, State Street drop

With fresh speculation that Washington Mutual Inc. and State Street Corp. could be takeover targets, their convertibles dropped pretty sharply on Friday.

Punk Ziegel & Co. analyst Dick Bove said in a report Friday that WaMu would be a "near perfect" acquisition target for Citigroup Inc., citing comments by Citi chief operating officer Bob Willumstad in New York earlier in the week to the effect that Citi may need to do deals in order to achieve its desired rate of growth.

As any noise about takeovers spooks convertible holders right now, a dealer pegged the WaMu 5.375% convertible trust preferred off by about a half-point to 53.5. WaMu shares on Friday lost 17 cents to close at $40.21.

Bove said in the report that while he has often written about the merit of such a partnership, it is now time for Citi to finish what it started in November 2003 when it acquired WaMu's consumer finance business. Other targets, he said, could include State Street Corp., which also has a convertible in play.

State Street's 6.75% mandatory due 2006, which priced at par of 200, fell 3 points to 200.75, while the stock dropped 49 cents, or 1.11%, to end at $43.78.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.