Suntech takes off on early debut; EMC climbs on spinoff plans; Level 3 lower on results, debt sale

By Kenneth Lim

Boston, Feb. 8 - Suntech Power Holdings Co. Ltd. shined brightly on its secondary market debut on Thursday after the upsized deal arrived early and priced at the rich end of talk.

EMC Corp. rose outright and on a dollar-neutral basis after the company announced plans to spin off a unit in an initial public offering.

Meanwhile, Level 3 Communications Inc. tumbled following the company's disappointing fourth-quarter results and its plans to sell $500 million in debt.

On the accounting front, an ongoing Financial Accounting Standards Board review could change the way companies account for net-share settled convertibles and put a damper on issuance, said analysts and syndicate sources. But any impact is likely to be limited and will probably be in the short term, those market sources said.

Suntech rises early

Suntech's new 0.25% convertible senior unsecured note due 2012 rose as high as 2.5 points outright on Thursday amid strong demand for the new paper.

The convertible traded at 102 against a stock price of $36.95 near the close. It was offered at par. Suntech stock (NYSE: STP) finished the day at $36.92, down by 1.57% or 59 cents.

"They traded well," a buyside convertible trader said. "The stock didn't do as well as some people were hoping for, but it still did well."

The upsized $425 million offering priced Wednesday after the market closed, with an initial conversion premium of 30%.

The convertibles, which were expected to price Thursday after the market closed, were talked at a coupon of 0.25% to 0.75% and an initial conversion premium of 25% to 30%.

The size of the deal was originally $300 million. The over-allotment option was increased to an additional $75 million from an additional $60 million.

Goldman Sachs (Asia), UBS Investment Bank and ABN Amro Rothschild were the bookrunners of the Rule 144A offering.

Suntech, a Wuxi, China-based maker of solar cells whose American Depositary Shares trade on the New York Stock Exchange, said the proceeds of the deal will be used to expand production, to buy raw materials, to repay a loan and to fund general purposes.

The offering was cheaply priced, and investors recognized that, the buyside trader said.

"Allocations were not really that good," the trader said. "They upsized it and everybody wanted it, so the allocations really weren't that good. But there was a lot of secondary trading."

Earlier concerns about the stock borrow rates were insignificant, the trader said.

"It's [the borrow rate] slightly off top, but it's not a deal breaker," the trader said. "We were told that after the deal shakes out it should go back to top rate."

A sellside convertible analyst noted the usual risks attached to a foreign company.

"They're a foreign filer, so even though they have the ADSs, I don't think the disclosure is that good," the analyst said. "It's nothing specific to the company; it's just that with foreign filers, when the company's halfway around the world, you always have issues with different disclosure standards and access to management."

But on the whole, the analyst described Suntech as "an interesting company."

"They're pretty well-positioned, they're fairly large and expanding, and they're operating mainly in China, and that market's a growth market," said the analyst, who had the convertible modeled on a credit spread of 375 basis points over Treasuries to 400 bps over Treasuries.

"They have some kind of technology, like a lot of these solar power companies have their own technologies, and they were able to secure silicon raw material supplies, so that's really important," the analyst said. "They look like they'll be free-cashflow positive, so there's a lot to be said for it. The coupon's light...but people want paper, I guess."

EMC climbs on spinoff plans

EMC's 1.75% convertible due 2011 and its 1.75% convertible due 2013 rose about 4 points outright and improved slightly on a dollar-neutral basis as the stock rallied on news that the company will be selling part of its stake in its VMware unit in an IPO.

Both convertibles were seen trading around 108.875 against a stock price of $14.45. EMC stock (NYSE: EMC) rose 6.62%, or 90 cents, to close at $14.50 on Thursday.

"We saw a lot of EMC because, well, first Goldman Sachs upgraded them, and they said they're going to spin off a unit," a buysider said.

Hopkinton, Mass.-based EMC, an information storage company, said Wednesday that it plans to sell a 10% stake in VMware in an IPO and will retain the remaining 90%. VMware develops software that allows computers to run several operating systems at the same time.

The IPO is widely expected to be successful and reap a profit for EMC, which bought VMware in 2004 for $625 million in cash.

"We believe the transaction will be good for shareholders as it should provide increased transparency into the underlying value of EMC's portfolio as well as aid in the retention of VMware employees," wrote Lehman Brothers equity analyst Harry Blount in a report.

A sellside convertible analyst said the move appeared to be positive for EMC.

"It helps," the analyst said. "Anything that a company like this does to help highlight some of the value of its business and assets will help."

The impact on convertible holders will depend on how they view the IPO plans, the analyst said.

"I had thought, from the perspective of a convert holder, that this was one where you probably need to be bullish on it and have it reflected in your hedge to profit from it," the analyst said.

Level 3 falls on results, debt sale

Level 3's 3.5% convertible due 2012 slid about 3 points outright on Thursday after the company reported a wider quarterly loss and announced plans to sell $500 million of straight debt.

The convertible traded at 132.875 against a stock price of $6.15. Level 3 stock (Nasdaq: LVLT) closed at $6.09, down by 7.31% or 48 cents.

"They said they were doing a new deal, a couple of straights," a convertible trader said. "Those have been fairly active because of that, both the straights and the converts."

Broomfield, Colo.-based Level 3, a provider of communications services, reported a fourth-quarter loss of $237 million, or 20 cents per share, from its year-ago loss of $169 million, or 24 cents per share. Analysts were expecting a loss of about 14 cents per share. Level 3 also said it plans to sell $500 million of eight-year and 10-year senior notes. It will also cut its workforce by 1,000 jobs.

"I would say it's negative," a sellside convertible analyst said. "One of the key concerns with Level 3 has been whether they can integrate all the businesses that they've been buying, and I think we're seeing a bit of the difficulties of integration here."

But the analyst said the new bond issue may not affect the convertibles significantly.

"The convertibles are going to mature before the new notes, so if you don't think that the company's going to default anytime soon, I wouldn't be too concerned," the analyst said.

New accounting rules may hit issuance

Proposed changes to the way companies account for net-share settled convertibles may dampen the primary market, but the impact may be slight and mostly in the short term, market sources said.

The FASB's Emerging Issues Task Force plans to consider changes to the way companies account for net-share settled convertibles. One possible change could be the bifurcation of the convertibles, which would require companies to separate the debt and equity aspects of the instrument.

Bifurcation, which splits the treatment of a net-share settled convertible into debt and equity components, will require issuers to record higher interest expense than the stated coupon of the convertible bond, wrote Lehman Brothers convertible analyst Venu Krishna in a report. The higher interest expense will reduce net income, while the lower net income and increased equity will reduce returns on equity. The amount of debt recognized at issuance will be less than the size of the convertible offering, while the initial bifurcated debt amount convertible will accrete over time, causing the liability to increase over time to par.

It is still too early to know how the issue will be resolved, wrote Krishna, who expects any change to take at least a year and a half to come into effect.

But Paul Berkman, a vice president and convertible analyst at J Giordano Securities, thought that the impact on the primary market will be limited, saying investment bankers will likely create new structures that will address any concerns.

"There can be a short-term blip, but...it's a never ending tinkering on the part of investment bankers," Berkman said. "There's so many knobs to turn and adjust."

A syndicate source also felt that the issue would not hurt the primary market too much. Companies concerned about cash flow and working capital will still prefer convertibles to straight debt, and happy-meal transactions will still be accretive on the earnings front, the syndicate source said.

"Over time, the people I've spoken to and dealt with, they do convertibles not because of how their accounting will look in regards to their interest expense, but for other reasons," the syndicate source said. "So I don't think it's going to kill anything."

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