Action muted ahead of GM deal; GM talk revised; Kaman quiet in the gray; RightNow on tap

By Rebecca Melvin

New York, Nov. 15 - Convertibles action was somewhat muted on Monday with market players already starting to focus on the pricing of General Motors Co.'s mandatory convertible preferred stock issue expected later this week, sources said.

Late in the session, word spread that the deal size for the GM series B mandatory convertible junior preferred stock issue was raised to $4 billion from $3 billion, and price talk was revised to 4.75% to 5.25% with a initial conversion premium of 20%, which tightened from initially talked pricing of 5.5% to 6% for the coupon and 15% to 20% for the premium.

The GM convertibles were seen up in the gray market by as much as 5 points.

Also on Monday, Kaman Corp. launched a $75 million offering of seven-year convertible notes that was seen about 1% to 2% cheap ahead of final pricing expected late Monday.

The Kaman deal, which wasn't getting a lot of attention due to its smaller size and market cap, wasn't seen in the gray market, market sources said.

Also in the primary market, RightNow Technologies Inc. launched an offering for $125 million of 20-year convertibles after the market close that was talked to yield 2% to 2.5% with an initial conversion premium of 23% to 27%.

Radian Group Inc.'s 3% convertibles, which priced last week, looked better in the secondary market, changing hands at 98 versus a share price of $7.95, compared to 95.875 bid, 96.125 offered versus a share price of $7.75 on Friday.

GM higher in the gray

Tightened talk on the upsized $4 billion of mandatory preferreds put the midpoint of talk at 5% with an initial conversion premium of 20%.

"[It's] looking a little frothy at the rich end. I think it needs a 5 handle on the coupon," a New York-based sellsider said.

But, in general, the deal was seen as cheap. After the price talk revision, another sellsider said it's "still not bad. My guess is it trades at plus 2."

Before the price talk was tightened, market players were in agreement that the deal looked cheap, but they wondered "whether GM stock is cheap."

A New York-based outright buysider said, "The mandatories are very cheap. Anyone who has a choice between the mandatory and the stock would be crazy to choose the stock. That's the easy part, but we'll need more than a model to value the stock."

The buysider was referring to the fact that GM will still have a high level of government involvement. While the objective is to reduce government involvement to zero, that is still several years away. This initial public offering set for this week is expected to reduce government involvement to 43% from 61%.

"We can easily calculate that the mandatory is cheap as a mandatory, as a convertible. But it's a tall order to try to evaluate the stock of 'Government Motors,' " the buysider said.

GM plans to price the mandatories after the close of markets on Wednesday. The deal has a 15% greenshoe for an additional $600 million of preferreds. The deal is registered with a concurrent IPO.

The three-year mandatories will be noncallable with full dividend and takeover protection.

A bevy of bookrunners are involved, including Morgan Stanley & Co. Inc., J.P. Morgan Securities LLC, Bank of America Merrill Lynch, Citigroup Global Markets Inc., Goldman Sachs & Co., Barclays Capital Inc., Credit Suisse Securities, Deutsche Bank Securities Inc. and RBC Capital Markets Corp.

The share price for the Detroit-based automaker may be raised to as high as $32 to $33 per share.

"GM mandatories look pretty interesting, reasonable valuation, and should do well. Obviously, the main issue is how the stock does," a New York-based sellside trader said prior to the talk being revised.

Kaman looks 1% to 2% cheap

Kaman planned to price $75 million of seven-year convertible notes after the market close on Monday, and shares of the Bloomfield, Conn.-based aerospace and industrial distribution company fell $2.14, or 7.6%, to $26.12 per share after the news.

The company, which makes and distributes helicopter parts, has a small market cap of $665.8 million, and for that reason, it wasn't getting a lot of attention from convertibles players.

"No one cares. It's getting put away by three people, so no one cares," a Connecticut-based sellside analyst said.

The Kaman deal was talked to yield 3.25% to 3.75% with an initial conversion premium of 25% to 30%.

The seven-year bullets, with no calls or puts, have standard cash takeover protection. There is contingent conversion subject to shares being 130% of the conversion price for a specified period.

Bank of America Merrill Lynch and RBS Capital Markets are joint bookrunners.

There was an underwriter credit spread put on the deal of 300 basis points over Libor, but one sellsider said he was much wider, giving him a valuation of 1% cheap.

He said his credit spread was significantly wider due to the small market cap of the company, which is between $600 million and $700 million.

"It doesn't look like a bankruptcy candidate, but the market limits it to single B somewhere," the analyst said.

"It has great coverage, little leverage and good track record," the analyst said.

Proceeds will be used to pay down borrowings under Kaman's existing revolving credit agreement and for general corporate purposes, including future acquisitions and potential pension contributions.

Kaman is also entering into convertible note hedge transactions, the cost of which will be partially offset by warrant transactions, with the remainder paid for with proceeds.

Its shares have been surging recently, rising more than 30% since early September. It reported double-digit sales growth and expanding operating margins

RightNow plans $125 million

RightNow, a Bozeman, Mont.-based software company, plans to price $125 million of 20-year convertibles after the market close on Tuesday.

The Rule 144A offering, which a $25 million greenshoe, was talked to yield 2% to 2.5% with an initial conversion premium of 23% to 27%.

Credit Suisse is bookrunner of the senior notes, with JMP Securities acting as co-lead manager.

The notes will be non-callable for five years until Nov. 20, 2015. There are investor puts in years five, 10 and 15.

Proceeds are earmarked for general corporate purposes, which may include financing potential acquisitions and strategic transactions and working capital.

Mentioned in this article

General Motors Co. NYSE: GM

Kaman Corp. Nasdaq: KAMN

Radian Group Inc. NYSE: RDN

RightNow Technologies Inc. Nasdaq: RNOW

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