International Game reoffers, gains slightly on debut; Peabody, Tech Data start out flat; PNC sees no trades

By Kenneth Lim

Boston, Dec. 15 - New deals continued to fuel activity in the convertible bond markets on Friday, but the latest offerings arrived to a mixed reception on their first day of trading.

Peabody Energy Corp. opened around par but slipped slightly along with its stock over the day amid grumbles about how little was left on the table for buyers.

International Game Technology Inc. had the best debut among the deals that priced for Friday's session, but it had to be reoffered after investors mostly saw initial price talk as too aggressive.

Tech Data Corp. traded mostly around its reoffered price, failing to gain much ground on concerns about the risk and richness of the deal.

PNC Financial Services Group Inc. was missing on arrival, as analysts and traders saw the deal as essentially a commercial paper that will not be expected to actively trade.

Trading outside of the new deals was mostly lackluster.

"It's your typical Friday in December," a buyside convertible bond trader said.

But even the new deals were giving some market players cause for caution.

"The pricing of these recent convert deals are getting totally stupid," another buysider said. "Buyers of this paper are just asking for another period for convert losses as they had two years ago."

Peabody flat on debut

Peabody's new 4.75% convertible junior subordinated debenture due 2066 was mostly flat on Friday, after the deal was upsized and priced at the rich end of revised talk.

The convertible, which was offered at par, changed hands at par against a stock price of $43.75 on Friday. Peabody stock (NYSE: BTU) eased 0.93%, or 41 cents, to close at $43.84.

"They kind of started around par, but trailed off as the day wore on," a sellsider said. "People liked the company, but I don't know if they necessarily liked the structure of the bonds."

Peabody's $675 million offering priced with an initial conversion premium of 40% late Thursday. Price talk was revised to a coupon of 4.75% to 5% and an initial conversion premium of 40%, from the original guidance for a coupon between 4.5% to 5% and an initial conversion premium of 40% to 45%.

The size of the deal was originally $500 million. The over-allotment option remains at a further $75 million.

Morgan Stanley, Lehman Brothers and Citigroup were the bookrunners of the registered off-the-shelf offering.

The convertibles will have a scheduled maturity of 35 years, at which time Peabody must redeem the debentures with similar equity-credit securities. Failure to do so will be a breach of covenant but not an event of default.

Peabody, a St. Louis-based coal company, said it will use the proceeds of the deal to repay outstanding revolving and term debt, which was used to help pay for its recent acquisition of Excel Coal Ltd.

A buyside convertible bond trader felt that the offering was a bad deal for buyers.

"It was a different structure, and it was not well priced," the trader said. "I didn't like the fact that the underwriter priced it on the richer end and upsized it...Because they upsized it some guys got more of the paper than they thought they really wanted."

"It was a difficult structure," the trader added. "It was not an easy structure, and the way it was priced, there was really no juice left in it."

Nevertheless, the trader said the new convertible offered a "decent static cash flow," although there was a lot of room for the paper to be more attractive.

"They could have done one of two things," the trader said. "Either give a seven-year provisional call or no call for seven years, or if you want a call in five years, then also a put in five years. Something to give you some time."

For the trader, Peabody was a convertible to be flipped.

"I did play it," the trader said. "But I didn't stay in it."

International Game gains after reoffer

International Game Technology's new 2.6% convertible senior debenture due 2036 gained about seven-eighths of a point on its first day of trading, after the deal was reoffered.

The convertible traded at 99.5 against a stock price of $46.25, while International Game stock (NYSE: IGT) fell 1.34%, or 61 cents, to end at $45.02.

"It was up a little this morning," a sellside convertible bond trader said. "They repriced it, but I thought it still looked a little too rich."

International Game's $825 million deal arrived at the cheap end of talk, with an initial conversion premium of 35% and reoffered at 98.625.

The debentures were originally offered at par and talked at a coupon of 2.1% to 2.6% and an initial conversion premium of 35% to 40%.

There is an over-allotment option for a further $75 million.

Banc of America Securities, Merrill Lynch, Goldman Sachs, Wachovia, UBS Investment Bank, Deutsche Bank and Bear Stearns were the bookrunners of the Rule 144A offering.

International Game, a Reno, Nev.-based maker of gaming machines and systems, said it will use about $612 million of the proceeds and cash on hand to redeem its outstanding zero-coupon convertible debentures. It will also use about $225 million of the proceeds and cash on hand to concurrently buy back its common stock.

Although a number of analysts and traders thought the company had an interesting business, the deal was seen as too rich based on the initial price talk.

"I didn't like the terms; it was just too rich," a buysider said.

A sellside convertible bond analyst said that the deal was worth "just under 99."

"It was reoffered at 98.625, so it's only about half a point cheap," the analyst said. "It wasn't really interesting at all."

Tech Data starts slow

Tech Data's 2.75% convertible senior debenture due 2026 also struggled to get past its reoffered price on Friday, with the deal seen as offering just too little upside.

The convertible traded at its reoffered price of 98.25 against a stock price of $40.19 at the start of the day. Tech Data stock (Nasdaq: TECD) fell 4.75%, or $1.91, to close at $38.28.

"It was trading around the 98 to 98.5, but quieted down pretty quickly," a sellsider said.

Tech Data's $325 million of 20-year convertible senior debentures priced early Friday, with an initial conversion premium of 35%.

There is an over-allotment option for a further $25 million.

Banc of America Securities was the bookrunner for the overnight registered off-the-shelf offering.

Tech Data, a Clearwater, Fla.-based distributor of information technology products and logistics management services, said it will use the proceeds of the deal to retire short-term debt and for general purposes.

"They did price it at 98.25, but it was still a lot of stock risk there," a buyside convertible bond trader said. "I didn't like it."

A sellside convertible bond analyst noted that the convertible had a two-to-one risk-reward profile.

"Typically that's what you'd like to see, but still, we don't like it when stuff comes below par like this," the analyst said. "It's like, sure, you have a two-to-one risk-reward profile, but if you're only talking about an 18% upside, it's not much."

The analyst said the Tech Data deal only modeled just above 99, using a volatility of 23% and a credit spread of Libor plus 135 basis points.

PNC prices, stowed away

PNC's new floating-rate exchangeable senior note due 2036 was not seen trading on Friday, although few on the Street expected it to do so.

"I didn't see a single trade the entire day," a buyside convertible trader said. "The underwriters probably just bought it all back."

PNC's $1 billion offering priced with a coupon of three-month Libor minus 40 bps and an initial exchange premium of 75%. The notes were reoffered at variable prices between 99.625 and 99.75.

There is an over-allotment option for a further $150 million.

Morgan Stanley was the bookrunner of the Rule 144A offering.

PNC, a Pittsburgh-based financial services company, said it will use the proceeds of the deal for general purposes and to finance the acquisition and integration of Mercentile Bankshares Corp. PNC expects to issue $2 billion of debt securities and hybrid capital instruments to fund that acquisition.

"I don't understand why anyone would want them," a sellsider said. "It's a one-year call, it's got a 75% premium, why take the negative carry?"

A sellside convertible bond analyst said the deal modeled a little under par but did not think investors were looking to trade the new convertibles. The analyst compared the deal to one by Prudential Financial Inc. earlier in the month that had a similar structure.

"It's another one of those Prudential-type transactions, basically a one-year commercial paper surrogate," the analyst said. "These big banks with really good credits figure that they can sell options on the stock and borrow money below Libor, why not? I won't be surprised to see other AA credit companies come to market. But it's really not an interesting trade at all. It wasn't designed to be an attractive convert."

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