Morning Commentary: Granite offering looks cheap at the mids; Winnebago also cheap

By Rebecca Melvin

New York, Oct. 29 – Granite Construction Inc. announced early Tuesday a $200 million offering of five-year convertible bonds that were viewed as coming to the market pretty cheaply if they price at the midpoint of talk.

The Granite deal, which was announced ahead of the market open and is pricing after the close, was being talked at a 2.25% to 2.75% yield and a 32.5% to 37.5% initial conversion premium.

Using a credit spread of 450 basis points over Libor and a 30% vol., the deal was seen to be worth 103.65 at the midpoint of talk, a New York-based trader said.

By way of comparison, the Winnebago Industries Inc. $270 million convertible bond deal announced on Monday was seen worth 103.13 at the midpoint of talk, using a credit spread of 550 bps over Libor and 40% vol., the trader said.

The Winnebago 5.4-year notes were being talked to yield 1.5% to 2% with an initial conversion premium of 27.5% to 32.5%.

The Granite deal is non-callable for three years, then provisionally callable at a 130% price hurdle. It is coming with a call spread for which the warrant strike will be at least 100%.

The proceeds of the Granite deal are being used to purchase the call spread, repurchase $30 million of common shares and repay an outstanding revolving credit agreement.

The Watsonville, Calif.-based company is a heavy civil construction and transportation contractor, serving both public and private sector clients. Its projects are mainly related to infrastructure, including the construction of roads, bridges, dams, tunnels, mass transit facilities and airports.

A third deal slated to price after the market close on Tuesday is DTE Energy Co.’s $1.15 billion registered underwritten public offering of mandatorily convertible equity units.

DTE is also pricing an offering of $300 million of common stock. The mandatory equity units include a greenshoe of $150 million.

The mandatory deal was being talked to yield 6% to 6.5% with an initial conversion premium of 20% to 25%.

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