Phoenix $130 million mandatory talked to yield 7.25% to 7.75%, up 18% to 22%

By Ronda Fears

Nashville, Dec. 12 - The Phoenix Cos. Inc.'s $130 million of three-year mandatory convertibles was launched with price talk of a 7.25% to 7.75% dividend and an 18% to 22% initial conversion premium.

The deal, via joint bookrunning managers Merrill Lynch & Co. and Morgan Stanley, is slated to price after the close Monday. There is a $20 million greenshoe.

In an initial glance at the deal, market reaction was good.

"[The issue] is subordinated, which is not always standard for a DEC, but it's a small deal. It could be cheaper," said a convertible trader at a hedge fund in New Jersey.

"Being short vol on an insurance company is always taking a flyer. We will take a flyer. It's probably not a keeper, but we will play very low risk, short-term, in a very bullish convert market."

Deutsche Bank Securities Inc. convertible analysts put the deal, at the midpoint of guidance, 3.4% cheap using a credit spread of 400 basis points over Libor at 60% volatility in the stock along with a 2.22% current yield on the stock.

As the holding company for Phoenix Life Insurance Co, Phoenix has an exchange-traded 30-year senior unsecured 7.45% due 2032 trading at a yield of 8.64%/8.52% for a spread over Libor of 338/326 basis points, the Deutsche analysts noted.

Thus, the analysts recommend investors discount the cash flow using basis points over Libor for the subordinated mandatory.

"The thinly traded options market in Phoenix make a volatility skew determination difficult," the Deutsche analysts pointed out, adding that "investors should also note that the stock borrow on this deal could become tight if hedge demand is high."

A month ago, Phoenix sold $120 million of three-year mandatory convertibles that convert into Hilb, Rogal & Hamilton Co. shares with a 7% dividend. The issue priced with a 22% initial conversion premium, at the aggressive end of guidance. At that time, Phoenix also sold 654,000 shares of Hilb Rogal & Hamilton at $38.10 each.

Proceeds were to be distributed to Phoenix Life Insurance Co. to use for general corporate purposes.

Phoenix did not specify the use of proceeds in announcing the latest mandatory.

In a filing with the Securities and Exchange Commission on Thursday, the company said it is considering creating a new subsidiary called Phoenix Life Holdings LLC for the purpose of issuing debt tied to a portion of the closed block business of Phoenix Life.

The company said it would transfer all ownership interest in Phoenix Life to Phoenix Life Holdings.

Phoenix also said it will incur higher interest costs on existing borrowings as a consequence of the recent downgrade to its senior unsecured debt to Baa3 from A3 by Moody's .

Phoenix said it expects to take a charge of $2 million to $3 million after taxes in fourth quarter related to ongoing expense reduction strategies.

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