EMC, Earthlink gain in gray; UAL cracks on LBO rumors; Bunge, Health Care REIT lead issuance surge

By Kenneth Lim

Boston, Nov. 13 - New issues continued to pour into the convertible bond market on Monday, with both the deals that were expected to price after the market closed gaining in the gray market.

EMC Corp.'s planned $3 billion offering, which will be the year's second-largest, was about ¾ point better in the gray on positive views of the company's credit.

Earthlink Inc.'s planned $225 million deal also rose in the gray, as investors described the deal as cheap despite uncertainty about the company's ability to seek new businesses.

Meanwhile, Bunge Ltd., Health Care REIT Inc., China Medical Technologies Inc., Chattem Inc. and deCODE Genetics Inc. launched more deals after the market closed. Altogether, this week could see issuers bring about $4.2 billion of new convertibles to the secondary market.

Among the older convertibles, UAL Corp. fell after reports speculating that the parent company of air carrier United Airlines could be the target of a leveraged buyout.

EMC rises in the gray

EMC's planned $3 billion dual-tranche offering of five- and seven-year convertible senior notes rose to 100.75 in the gray market on Monday, as analysts described the deal as fairly attractive.

EMC's offering, which will be the second largest this year after Amgen Inc.'s $5 billion dual-tranche deal in February, was talked at a coupon of 1.5% to 2% and an initial conversion premium of 25% to 30% for both series of notes.

The notes were offered at par. EMC stock (NYSE: EMC) closed at $12.61 on Monday, down by 0.71% or 9 cents after the deal was announced.

Each $1.5 billion tranche has an over-allotment option for a further $225 million.

Goldman Sachs, Lehman Brothers and Citigroup were the bookrunners of the Rule 144A offering.

EMC, a Hopkinton, Mass.-based information technology solutions provider, will use part of the proceeds for convertible note hedge and warrant transactions. It will also repay $2.2 billion of a senior debt used to finance its acquisition of RSA Security Inc. and concurrently buy back $850 million of its common stock.

"A deal this size ought to be priced somewhat cheap just to get it out the door," a sellside convertible bond trader said. "There's nothing terribly attractive about that, but my guess is it'll probably price OK. My guess is that people probably want to get this kind of a name on their portfolio."

A convertible bond analyst said the EMC offering modeled between 1% and 2% cheap at the midpoint of talk, noting hedging possibilities with the company's credit derivatives.

"The CDSs are trading around 35 basis points, so there might be people who set it up on that basis...It didn't look like it was anything special, but it wasn't ridiculous either," the analyst said.

The analyst also thought that there was little difference in the valuation between the five- and seven-year tranches, partly because EMC was "really good credit."

"The curve is pretty flat between five and seven years," the analyst said. "The five year looked slightly richer, but in some ways it doesn't matter that much."

Earthlink bid up in gray

Earthlink's $225 million of 20-year convertible senior notes were bid at 100.25 in the gray market on Monday ahead of its expected pricing after the close.

The deal was talked at a coupon of 3% to 3.5% and an initial conversion premium of 37.5% to 42.5%, and each note was offered at par.

UBS Investment Bank and Banc of America Securities are the bookrunners of the registered off-the-shelf offering.

Earthlink, an Atlanta-based internet service provider, said the proceeds of the deal will be used for convertible note hedge and warrant transactions and for general purposes.

"It looks OK," a sellside convertible bond analyst said, adding that the deal modeled out slightly cheap.

"I'm using a little higher volatility and wider spread than what the underwriter is using," the analyst said. "The company has a lot of cash, but a lot of issues going forward in terms of what business lines they're going to push through. So I'm slightly more negative on their credit, but slightly positive on the vol, so it works out OK."

The analyst said Earthlink is currently trying to move away from its legacy business of internet dial-up services. The company has been investing in a number of new businesses using money from its dial-up business, with the view that dial-up will probably be obsolete in the future, but it remains to be seen which of those investments will work out, the analyst said.

"For all these different business lines, there's a lot of competition and a lot of things you can point to and say there's a better technology," the analyst said. "But you could also make a case that if they don't all work, as long as a couple work they'll be fine."

UAL falls on takeout talk

UAL's 4.5% convertible due 2021 fell about 2 points outright, while its 5% convertible due 2021 lost about 1 point outright as the stock rose on speculation about the company possibly being taken over.

"There was an article in the Chicago Tribune about them potentially being taken out, and they did not have any takeover protection, which is why they came in," a buyside convertible bond analyst said.

The 4.5% convertible was marked at 125.625 bid, 125.875 offered against a stock price of $36.50, while the 5% convertible was marked at 108.25 bid, 108.75 offered versus the same stock price. UAL stock (Nasdaq: UAUA) closed at $37, up by 3.85% or $1.37.

A report in the Chicago Tribune on Sunday speculated that the Elk Grove, Ill.-based parent of United Airlines, could be heading toward a leveraged buyout. The newspaper noted that UAL is headed by a management team that is open to deals and which has hired Goldman Sachs to look at strategic options. UAL also needs to find a way to strengthen its market position, the newspaper said.

UAL did not comment on the rumors.

"The UAUA bonds came in pretty spectacularly on the speculation of the LBO," a sellside convertible bond analyst said. "There's no protection and they're traded at a pretty significant premium to parity, so both bonds came in quite a bit."

A convertible bond trader quipped: "Here's your LBO rumor of the day."

More new deals coming

Another five new deals are expected to be priced soon, after the issuers announced the offerings Monday following the market close.

The largest of those five comes from Bunge, which could price its $500 million of perpetual convertible preferred stock Tuesday after the market closes. Those preferreds are talked at a dividend of 4.5% to 5% and an initial conversion premium of 35% to 40%.

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

Credit Suisse is the bookrunner of the registered off-the-shelf offering.

Bunge, a White Plains, N.Y.-based agribusiness and food retail company, said the proceeds of the offering will be used for working capital and general purposes, which may include acquisitions and repaying debt.

Health Care REIT's $300 million of 20-year convertible senior notes, talked at a coupon of 4.375% to 4.875% and an initial conversion premium of 20% to 25%, is also slated to price Tuesday evening.

There is an over-allotment option for a further $45 million.

UBS Investment Bank and Deutsche Bank are the bookrunners of the registered off-the-shelf offering.

Health Care REIT, a Toledo, Ohio-based real estate investment trust that focuses on healthcare and senior housing facilities in the United States, said the proceeds of the deal will be used to invest in more health care and senior housing properties, and to repay its unsecured debt.

On Wednesday, China Medical Technologies Inc. plans to price $100 million of five-year convertible senior subordinated notes, talked at a coupon of 3.5% to 4% and an initial conversion premium of 20% to 25%.

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

Merrill Lynch is the bookrunner of the Rule 144A offering.

China Medical, a Beijing-based maker of cancer treatment devices, said it will concurrently repurchase $30 million of its common stock using the proceeds of the deal. It will also use the proceeds for general purposes and to acquire businesses, products and technologies.

deCODE Genetics is also offering a new series of five-year convertible senior notes due 2011 at a coupon of 3.5% and an initial conversion price of $14, which will be substantially an expansion of its existing 3.5% convertible due 2011, which was issued in April 2004.

The size of the deal has not been determined. The new convertible's initial conversion price represents a 176.7% premium to the company's closing stock price on Monday. All other terms of the new convertible will be substantially the same as the older series.

deCODE, a Reykjavik-based drug maker, said the proceeds of the new offering will be used general purposes and to advance its drug and diagnostic discovery and development programs.

Chattem's $100 million of seven-year convertible senior notes is talked at a coupon of 2% to 2.25% and an initial conversion premium of 25% to 27%.

Chattem did not disclose the timing of the deal or who was running the books, but market sources said the offering may land with only a handful of select investors.

Chattem is a Chattanooga, Tenn.-based maker of over-the-counter healthcare products, supplements and toiletries. It said about $26 million of the proceeds will be used for convertible note hedge and warrant transactions, and to repay its outstanding revolving debt. It also plans to use the proceeds to help fund its planned acquisition of five Johnson & Johnson brands and Pfizer's consumer healthcare business.

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