By Ronda Fears
Nashville, Feb. 11 - Sierra Pacific Resources, under the gun to meet the maturity of its floating-rate notes in April, sold $250 million of convertible senior notes intraday Tuesday cheap enough to move the paper up 8 points north of par in subsequent trading.
The utility holding company sold the seven-year notes at par to yield 7.25% with a 22% initial conversion premium in the Rule 144A market, via sole lead manager Merrill Lynch & Co. The coupon was in the middle of yield price talk and at the expensive end of premium guidance of 17.5% to 22.5%.
Analysts put the deal anywhere from just about at fair value to nearly 10% cheap. The first five coupon payments are collateralized with U.S. Treasury strips, but the stock was a tough borrow.
The convertible market is hungry for new paper but by most indications the deal priced very cheap.
After actively trading throughout the session, traders said the new Sierra Pacific convert ended at 108 bid, 108.5 asked. The underlying shares closed down 77c to $3.75.
"It looked very cheap. I just wish it was a better company, better credit," said a convertible fund manager based on the West Coast.
"If you look at the implied credit spread, they are giving this away."
One sellside analyst put the implied credit spread at 2,650 basis points over Treasuries.
Analysts were using 950 bps to 1,400 bps over Treasuries to model the deal. They also factored in 300 to 500 bps for the tough stock borrow.
Deutsche Bank Securities Inc. convertible analysts put the new Sierra Pacific convert 6.75% cheap at the final terms, using a spread of 1,200 bps over Libor and 60% volatility in the stock. They were not giving much consideration for the five guaranteed interest payments.
"This is a severely distressed utility holding company [and] we recommend that investors use 100% weighting toward the risky rate as it is the principal, not the interest, which is at risk to a distressed recovery," the analysts said.
Standard & Poor's issued a comment on the deal, saying it was positive for Sierra Pacific's credit quality. S&P said it expected to confirm the company's ratings and remove them from negative watch after the deal closed, but the outlook would remain negative.
While the convertible staves off a potential liquidity crisis, S&P said a favorable ruling on Nevada Power's deferred cost recovery case is essential to set the stage for Sierra Pacific's financial recovery over the next few years.
"The fact that Standard & Poor's issued a press release midday noting the company will be removed from CreditWatch with negative implications upon completion of the deal was a near-term credit positive," said Bear Stearns & Co. convertible analyst Matt Hempel.
Hempel put the new deal about 9% cheap, using a spread of 1,500 bps over Treasuries and 50% volatility in the stock, at the final terms.
"The deal came cheap, no matter how you look at it," Hempel said. "The company needed to get the deal done."
Sierra Pacific said it will use $191 million of the proceeds to redeem its floater due April 2003, and most of the remainder will be used to buy Treasuries for the first five coupon payments on the convert.
Lehman convertible analyst Jocelyn Picl put the deal about 9.2% cheap, using a spread of 1,400 bps over Treasuries and 40% volatility. She said the cheapness was warranted by Sierra Pacific's low stock price and tough borrow, as well as a challenging fundamental story.
But Picl estimated participation in the convert, given a 25% movement in the stock, at 100% to the upside versus 55% to the downside.
Sierra Pacific reported Monday a fourth quarter net loss of $39.5 million, or 39c a share, compared with net income of $5.8 million, or 6 cents a share, in fourth quarter 2001. Revenue fell to $631 million from $733 million.
For 2002, the company posted a net loss of $307.5 million, or $3.01 per share, versus a net loss of $235 million, or $2.30 a share, in 2001. Revenue dropped to $3 billion from $4.59 billion.
The company has been under pressure since the West Coast energy crisis of 2000-2001, which was exacerbated when Nevada utility regulators would not allow Nevada Power to recoup the higher energy costs.
Terms of the deal are:
Issuer: Sierra Pacific Resources
Amount: $250 million
Greenshoe: $37.5 million
Lead manager: Merrill Lynch
Maturity: Feb. 15, 2010
Coupon: 7.25%
Issue price: Par
Yield: 7.25%
Conversion premium: 22%
Conversion price: $4.563
Conversion ratio: 21.9164
Call: Non-callable for five years
| Expected ratings: | Moody's: B2
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| S&P: B-
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| Settlement date: | Feb. 14
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