Chattem takes off but few get to ride; General Mills flat on debut; overseas issuance robust in first quarter

By Kenneth Lim

Boston, April 5 - Chattem Inc.'s new convertible rose quickly on Thursday although the gains were enjoyed only by a handful of investors in the tightly placed offering.

General Mills Inc.'s overnight deal was flat to slightly higher on light volume, but the deal saw good demand and was seen as a straightforward low-risk play.

The convertible market in general had a languid session ahead of a long weekend.

"There's nothing going on today," a sellside convertible trader said. "Even those new deals aren't trading much."

Meanwhile, the cost of issuing a convertible in Europe slipped in the first quarter of the year, while Asian primary markets set a record and look poised to continue growing, said analysts at Barclays Capital.

Chattem climbs, allocation tight

Chattem's new 1.625% convertible senior note due 2014 improved off the blocks on Thursday after pricing near the rich end of talk, but the deal was seen to land only with a limited number of investors.

The convertible traded at 101.25 bid, 101.5 offered against a stock price of $58.90. The convertible was offered at par. Chattem stock (Nasdaq: CHTT) closed at $58.60, lower by 0.73% or 43 cents.

"It was placed in very closed hands, with the guys who got the existing bonds [in Chattem's November 2006 offering]," a buyside convertible trader said. "The bonds traded up, but it's not a lot of people who participated."

Chattem priced its $85 million deal on Wednesday after the market closed with an initial conversion premium of 24%. The deal was talked at a coupon of 1.625% to 1.875% and an initial conversion premium of 20% to 26%.

There is an over-allotment option for a further $15 million.

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

Chattem, a Chattanooga, Tenn.-based maker of over-the-counter health care, toiletries and dietary supplement products, said $25 million of the proceeds will be used to fund a convertible note hedge transaction and to repay outstanding debt. The convertible note hedge transaction and a separate warrant transaction increase the effective conversion price to Chattem to about $94.45, or a 60% conversion premium.

"It looked just slightly cheap where it priced," a sellside convertible analyst said. "But I understand that they didn't go out to a lot of people. It's like the other one that they did back in November. I don't expect that you're going to see much of it trading after today."

General Mills flat on debut

General Mills' new one-month Libor minus 7 basis points convertible senior note due 2037 was seen around its reoffered price on Thursday with the markets mostly coming from the underwriter.

The convertible traded at 99.72 to 99.82 while the stock (NYSE: GIS) gained 0.26%, or 15 cents, to close at $58.75 on Thursday. The convertible was reoffered at 99.72.

"I barely see it," a buysider said. "And all of it is coming from the underwriters."

The overnight $1 billion deal priced before the market opened. The initial conversion premium was set at 69.6%, or an initial conversion price of $100. The notes were reoffered at variable prices, but most of them were sold around 99.72, market sources said. The notes were talked at the same coupon and conversion premium with a reoffered price of 99.75.

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

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

General Mills, a Minneapolis-based producer of packaged consumer foods, said the proceeds of the deal will be used to partially repay its outstanding U.S. commercial paper.

A sellside convertible analyst said the deal was a straightforward low-risk play.

"It's basically like a one-year money market instrument," the analyst said. "If you got in at the reoffer price it's not like you're going to lose money. Maybe you'll just put in in a year and make a quarter point. It's got no volatility, a big premium, zero delta, it's basically just a cash substitute."

But the analyst said the market could also be interested in the paper partly because of a current lack of good credit.

"There's a fair amount of investment-grade paper that's left the market and there's some demand from the market," the analyst said. "They're not real exciting, but they're also a pretty safe place to park capital. There's really no downside to it."

Overseas issuance picks up

Convertible issuance outside of the United States had a strong quarter in the first three months of the year, said Barclays' convertibles analysts Heather Beattie, Luke Olsen and Haidje Rustau in recent reports.

The cost of convertible issuance in the Europe, Middle East and Africa regions ticked down in the first quarter of 2007 amid volatile market conditions while Asia saw a record number of convertibles, the analysts said.

The Barclays Convertible Cost Index for EMEA convertibles eased 2 bps in the first three months of the year to 3.69%. The index represents the hypothetical coupon that issuers will have to pay on a convertible; so, the lower the index the cheaper it is for a company to issue a convertible.

But "we expect the CCI to rise in Q2 07, thereby indicating less favorable issuance conditions," the analysts wrote.

Barclays noted that EMEA new issuance reached €5.7 billion in the first quarter with German issuers and real estate companies providing the most deals. The analysts expect EMEA issuance to slow heading into the second quarter on historical trends and the expected increase in the Cost Index.

"However, one or two jumbo deals could keep issuance figures on track for a yearly total of between €20 [billion to €22 billion]," the analysts wrote.

In Asia, convertible bond issuance also reached a record $3.95 billion in the first quarter, with real estate issuers and companies from India and Australia featuring prominently.

"We have continued to see a good range of issuer countries and sectors, although the absence of industrial issues was notable," the analysts wrote. "We would expect issuance levels to increase again if markets continue to firm up, as the list of potential deals remains long."

Barclays' reports and those by analysts looking at U.S. markets suggest that the primary convertible market had a robust quarter around the world. Convertible issuance in the United States also surged in the first quarter, with March proceeds the most since June 2003. Research by Lehman Brothers also found that the average cheapness of new U.S. issues fell in March, while real estate investment trusts continued to be prolific issuers.

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