NRG trades up 3.5 points in gray market, terms tightened; Abgenix launches new deal

By Ronda Fears

Nashville, Dec. 14 - With no negative surprises by the quarter-point interest rate hike from the Federal Reserve, convertible players in fact relished in the resultant Treasury rally with some remarking that it seemed to boost risk tolerance levels.

The FOMC statement that "Inflation and longer-term inflation expectations remain well contained" was the specific cause for good cheer, one market source said.

A buyside market source said the upbeat tone of the Fed and what appeared to be a greater willingness to accept riskier credits probably contributed to the reception NRG Energy Inc. was getting for its new private placement, which was rated CCC+ by Standard & Poor's. Indicative terms on the $400 million convertible perpetual preferred were tightened, and still it was seen last at a trade of 3.5 points over issue price in the gray market just ahead of pricing.

Following the market close, Abgenix Inc. launched a more typical new deal, too, and players were expecting at least one more new deal later this week.

Abgenix seen as volatility play

Abgenix launched $150 million of seven-year convertible notes after the close Tuesday talked to yield 1.75% to 2.25% and at a 25% to 30% initial conversion premium, with proceeds earmarked in part to take out its 3.5% convertible due 2007.

The issue is scheduled to price after Wednesday's close via sole bookrunner Goldman Sachs & Co.

"This is going to be a vol [volatility] play," said a hedge fund trader. "It's far-fetched, a pretty risky way to set it up, but that's the way it's going to be played."

Fremont, Calif.-based Abgenix - a biotech firm focused on treatments for cancer, inflammation, metabolic, autoimmune, cardiovascular and infectious diseases - intends to use some proceeds from time to time to retire a portion of its outstanding 3.5% convertible notes due 2007. Otherwise, the company plans to use proceeds for research and development, capital expenditures, working capital and other corporate purposes.

Abgenix shares closed Tuesday up 8 cents, or 0.75%, to $10.68. On the convertible's launch, the stock was seen in after-hours trading down 66 cents, or 6.13%.

The 3.5% convertible was quoted t 119.5 bid, 120 offered.

NRG deal seen heavily booked

Buyside market sources said placement agents on the NRG deal took advantage of the books running heavy to tighten terms. But it did not dampen enthusiasm.

"It really had no effect because everyone was already expecting that it would get done at the most aggressive end of the price talk range," one convertible trader at a hedge fund said.

The dividend range was squeezed to 4.0% to 4.25%from 4.0% to 4.5% and the premium guidance expanded to 23.5% to 25% from 22% to 25%.

Hedge funds were not heavy players in the deal, however, at least not on hedge, sources said, because of the tight borrow on the underlying stock. There were several hedge funds participating, though, on an outright basis. Too, there was notable interest from more traditional equity funds.

The Section 4(2) status of the offering, while somewhat confusing to potential buyers at first, was not a stumbling block, sources said. The offering status was designated basically as a means of expediting the offering because a Rule 144A deal would require NRG to disclose pro forma results going back a year, or December 2003, when it emerged bankruptcy, one sellside source said. The offering is being made with registration rights, so is expected to trade similar to a Rule 144A issue within a couple of days of settlement.

NRG as a recently emerged bankruptcy story was a problem for some players, though.

"The NRG deal makes a decent amount of sense," said one hedge fund manager. "But, we're not jumping in right now, just because they haven't been out of bankruptcy that long."

NRG 1.7% rich to 2.5% cheap

On the original price talk- a 4.0% to 4.5% dividend and 22% to 25% initial conversion premium - analysts had pegged the new NRG private placement anywhere from 1.7% expensive to 2.5% cheap.

At the middle of the original talk, Merrill Lynch analysts put the new NRG convertible 0.8% cheap - or 1.2% rich at the tight end of talk to 2.8% cheap at the wide end - using a credit spread of 500 basis points over Treasuries and a 20% stock volatility.

Another sellside convert analyst put the issue 2.5% cheap, at the midpoint of original price talk, using a credit spread of 350 basis points over Treasuries and a 23% stock volatility.

At 4.25%, up 23%, one buyside analyst also pegged the new NRG issue 2.5% cheap, using a credit spread of 375 basis points over Treasuries and an 18% stock volatility.

Another buyside analyst put the convertible 1.7% rich at the most aggressive end of price talk, or 4%, up 25%, using a credit spread of 500 basis points over Treasuries and an 18.5% stock volatility.

"I think using a 350 or 375 bps spread is just ridiculous" for a CCC+ rated convertible, said the analyst, who thought the issue looked expensive. "I think it will price aggressive, though, because people are more willing to reach right now. The Fed raised rates, the bond market rallied and they see we are close to the end of the line," or year-end.

NRG watchers like stock buyback

Sources familiar with the NRG story were particularly pleased with the use of proceeds, or, more specifically, the buyback of 13 million shares of common stock.

The Minneapolis-based power generation firm said proceeds would be used to redeem a portion of its 8% senior secured second-lien notes due 2013 and to enable NRG to use existing cash balances to repurchase 13 million shares of stock held by investment partnerships managed by MatlinPatterson Global Advisors LLC, at a discount.

After the stock buyback from MatlinPatterson, its stake in NRG will be reduced to a point where it will no longer have a position on the NRG board of directors, according to a market source familiar with the transactions pending from NRG.

NRG issued the $1.25 billion of 8% senior secured second-lien notes due 2013 (B2/B+) in December 2003 as it exited bankruptcy; and, in January 2004, a $503.5 million proceeds add-on to that issue was sold. While the redemption price for the 8% notes was not known, market sources pointed out that those bonds were recently seen trading at 110.

NRG also was in-market with a $950 million credit facility (Ba3/BB) with proceeds earmarked to refinance bank debt, which bank loan market sources said was expected to be a blow out. Pricing on the new credit facility, however, has not been firmly established as it is still in the syndication process.

Xcel, former NRG parent, off

Former NRG parent Xcel Energy Inc. was easier Tuesday but without regard to the goings on at NRG. Rather, a sellside trader pointed to comments about the Xcel credit as the cause for a "slight" half-point decline in its 7.5% convertible due 2007.

GimmeCredit analyst Philip Adams pointed out in a report Tuesday that 2004 "was the year that Xcel Energy (senior unsecured: Baa1/BBB-) finally put former subsidiary NRG in the rear view mirror and got on with running a mostly cleaned up, vertically integrated, multi-unit utility."

It cost Xcel $752 million to end its involvement in the merchant energy business by way of an exit fee to NRG's bankruptcy creditors. Thus, it reverted to its standard utility operations in Minnesota, Wisconsin, Colorado and Texas.

"But looking at the Xcel family's year-to-date numbers, there appears to be little surplus capital and earnings capacity to address ongoing capital expenditures," Adams said. "Business as usual will not be without challenges."

Two things to keep an eye on, the analyst said, are Xcel's dispute with the IRS over corporate-owned life insurance policies and unit Southwestern Public Service's attempts to recover fuel and purchased power costs.

Aon holders boosting hedge

The sellside trader also noted that convert arb holders in Aon Corp. are boosting their hedges, per a Merrill Lynch report on Monday that highlighted the insurance broker.

Aon's 3.5% convertible due 2012 was bumped up 1.875 points on Tuesday to 121.375 bid, 121.625 offered while the stock added 60 cents, or 2.58%, to close at $23.

Merrill analysts noted the Aon convertible, at 119.875, was trading with an implied spread of 156 basis points over the swap curve, which compared favorably to the five-year credit default swap trading at 115 basis points over Libor. Convert analysts also pointed out that Aon's straight 8.205% bond due 2027 was highlighted last week by Merrill credit strategist Mary Rooney as a Top 10 long idea in 2005 at a 315 basis point spread. But for hedge buyers of the convert, the analysts noted that the underlying stock is rated sell by Merrill Lynch, which may indicate that a heavier-than-normal hedge is appropriate.

The trader said that while Aon and other insurance broker stocks have made great strides since New York attorney general Eliot Spitzer's big rigging charges in mid-October, initially aimed at Marsh & McLennan, most onlookers think there could be considerable selling in the group well into 2005.

"These stocks have rallied back too much now, so some selling is coming," the trader said. "The convert arbs are getting prepared for that."

Aon turnaround story for 2005

That said, the sellside trader acknowledged that Aon is picked as a top turnaround story for 2005 and said there will be some buyers on that basis. Indeed, a buyside trader pointed out that TheStreet.com made its top five turnaround picks for 2005 on Tuesday, including Aon.

Additionally, he pointed out that four of the five top turnaround stories for 2005 by TheStreet.com's RealMoney are convertible names. In addition to Aon, Eastman Kodak Co., Six Flags Inc. and Wild Oats Markets Inc. were included. The other was Blockbuster.

Eastman Kodak is transiting from the traditional camera and film business to focus on digital photography. The Kodak 3.375% convertible was quoted up a half-point to 124 bid with the stock up 18 cents on the day, or 0.57%, to $31.58.

Six Flags has blamed poor performance on bad weather and the economy but is getting pressure from high-profile stockholders to "unlock some value from its real estate holdings," the buyside trader said. The Six Flags preferred was up slightly on Tuesday to 21.4, and its new 4.5% convertible bond due 2015 gained 2.5 points to 106.25 bid. Six Flags shares closed up 18 cents, or 3.86%, to $21.84.

Health food retailer Wild Oats is another story affected by economic factors, which are seen improving. The Wild Oats 3.25% due 2011 convertible is hard to come by, the trader said, but he pegged it at 85.25 bid. Wild Oats shares Tuesday closed up 19 cents, or 2.53%, to $7.70.

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