BorgWarner gains on debut; Archer-Daniels-Midland, Johnson Controls edge lower; Micron launches

By Rebecca Melvin

New York, April 7 - Trading of the newly priced BorgWarner Inc. convertibles dominated the convertibles market on Tuesday, trading up more than 8 points above par early on before settling back to the 107.5 bid, 108 offered range later in the session, according to market sources.

The new issue was as well-received as other recent new issues and bore other similarities to recently priced paper in the convertibles market: it is a relatively well-known industrial company, with a decent credit, decent coupon and not egregious premium, one sellsider observed.

Archer-Daniels-Midland Co. was another name in trade, with the bonds coming off a couple of points, according to a sellsider. The company's shares plunged after a Citi Investment Research analyst downgraded the stock to "sell," citing the Decatur, Ill.-based company's upcoming third-quarter earnings report as a probable disappointment and fundamental drags on the food producer's major businesses.

The ADM convertibles traded at 94 versus a share price of $26.00.

Johnson Controls Inc. bonds, which priced last month along with an offering of convertible preferreds, also edged lower for a second consecutive day, with a trade notched at 147.25 versus a share price of $14.75.

Activity in the primary market included Micron Technology Inc.'s launch of an offering of $200 million of 4.5-year convertible senior notes.

The issue was talked to yield 5% to 5.5% with an initial conversion premium of 17.5% to 22.5% and was expected to price after the market close Wednesday.

Overall activity in the convertible market was described as quiet, with "not a whole lot of activity as people are out with kids on vacations this week," a sellsider said.

BorgWarner's warm reception

The newly price BorgWarner 3.5% convertibles extended the recent market trend of warm welcomes from investors for new issues.

The paper rose pretty quickly to trades of 108 and up to 108.5 before settling back to the 107.5 bid, 108 offered range.

"The appetite is still there, especially for deals priced cheap to fair value," a sellsider said of investor sentiment.

A Connecticut-based buysider said, "A bunch of new issues that have priced ... all traded up multiple points and have done well for people."

In response to the question of which of the new issues has been the best, the buysider said, "It's not easy to differentiate, they were all pretty attractive."

The buysider expected that the trend will probably continue for the foreseeable future with pricing gradually getting less aggressive and more favorable to the issuer over time.

"That will take a little of the attractiveness," the buysider said.

BorgWarner was a "decent industrial name," coming with attractive terms, clearly priced to move, he said.

Standard & Poor's assigned a BBB rating to BorgWarner's $325 million issuance of convertible senior unsecured notes.

Proceeds of the paper, which matures 2012, were expected to be used to bolster cash balances and to repay short-term debt, some of which was incurred as the company repaid a $137 million note maturity in February, S&P said.

BorgWarner liquidity to improve

The agency said it expects BorgWarner's liquidity to improve as a result of the proposed note issuance. However, the company still needs to refinance or extend its undrawn $600 million revolving credit facility due in July 2009.

Initially the deal, which was launched ahead of the open Monday, was expected to be $275 million in size, but due to strong demand, it was upsized to $325 million.

The convertibles priced through the initial range of talk for the coupon, which was 3.75% to 4.25%; and at the tight end of talk for the initial conversion premium, which was 22.5% to 27.5%.

Morgan Stanley & Co. Inc., Merrill Lynch & Co., Citigroup Global Markets Inc. and Deutsche Bank Securities Inc. were joint bookrunners.

The three-year bullet bonds have no calls, puts or contingent conversion. Holders may receive cash, shares or a combination of both upon conversion.

BorgWarner has entered into convertible note hedge transactions and separate warrant transactions with one or more of the underwriters and their affiliates.

BorgWarner is an Auburn Hills, Mich.-based supplier of engineered automotive systems and components.

Micron plans to price

Micron plans to price $200 million of 4.5-year convertible senior notes after the market close Wednesday, which were talked to yield 5% to 5.5% with an initial conversion premium of 17.5% to 22.5%, according to a market source.

Concurrently, Micron plans to price an offering of 55.3 million shares of common stock, for total proceeds of about $450 million. Both offerings were launched late Tuesday.

Morgan Stanley and Goldman Sachs are joint bookrunners of the registered offering, with Deutsche Bank acting as co-manager.

The notes are non-callable for three years and are provisionally callable for 1.5 years subject to a price hurdle of 135%.

Proceeds are expected to be used to pay the cost of the capped call and for general corporate purposes, including working capital and capital expenditures and potential acquisitions and strategic transactions of business, technologies or products.

In a research note Tuesday, relating to Micron's existing convertibles, Barclays Capital analysts said the fundamentals of Micron have been under stress on account of falling DRAM and NAND prices due to excess capacity, high leverage to fund capital expenditures, and liquidity concerns due to upcoming debt repayments and capital contributions to its manufacturing joint ventures.

The Barclays analysts said that looking forward they expected that positive price action across the company's capital structure should be sustained due to consolidation in capacity and steep cuts in capital expenditure and partnerships with relatively strong entities that should provide potential liquidity backstops.

Therefore, the existing Micron 1.875% convertibles due 2014 were recommended as a swap out of the common.

Micron is a Boise, Idaho-based maker of semiconductor devices.

Mentioned in this article:

Archer-Daniels-Midland Co. NYSE: ADM

Borg Warner Inc. NYSE: BWA

Johnson Controls Inc. NYSE: JCI

Micron Technology Inc. NYSE: MU

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