GM's new $3.5 billion deal gets many excited; Xerox heads higher in active first day of trading

By Sara Rosenberg

New York, June 20 - General Motors Corp.'s newly announced convertible offering generated quite a buzz in the market on Friday based on many factors including its size, price talk and use of proceeds. Meanwhile, Xerox Corp.'s new convertible was the most noticeably active paper out of all the new deals that hit the market prior to Friday's open, with most of the trading activity occurring in the earlier hours of the day.

"GM is $3.5 billion, plus shoe brings it to over $4 billion. It's probably one of the five biggest convert deal in the U.S. yet," said an analyst. "It's a name a lot of convert guys know already. It's the whole package - a company of this size and stature with terms on the coupon side considered generous and terms on the premium considered average.

"I would say the yield is attractive. Most bond deals are coming in with much smaller coupons. A couple of deals came at over 6% but they were small," the analyst continued. "I don't think there will be too many people complaining about [the premium]. It's not a high premium but it's not a low premium either.

"Obviously there are some credit concerns. But they will use proceeds to address the pension plan issue. They're not solving the problem but at least they're acknowledging it," the analyst concluded.

On Friday, General Motors announced it will offer $3.5 billion 30-year convertible senior debentures with talk putting the yield at 6% to 6.5% with an initial conversion premium of 30% to 35%. There is a 15% greenshoe available.

One buyside source was excited to see a company entering the convertibles market to raise new capital as opposed to just using the market for a straightforward refinancing, which has been a significant trend recently.

"Refis were in essence bids for existing issues, which generally all traded up after announcement. If GM does well then convertible market could be open for more capital raising issuance - at a price!" the buy side source added.

Of June's deals, $2.54 billion in nine offerings have been to redeem existing convertibles, according to Prospect News data. A significant proportion of the remainder have been to repay bank debt or straight notes with almost all the others being for general corporate purposes.

But, not everyone was enthused by the deal.

"It's a very reasonable piece of paper," one buy side source said. "But, because the common stock has such a high dividend yield it's worthless to me. It does away with the yield advantage of the paper. We're not volatility players here. We're more cash flow oriented."

Merrill Lynch & Co., Morgan Stanley and Citigroup are bookrunners for the registered deal, which is scheduled to price Thursday after market close.

Simultaneously, GM will offer fixed-income notes, bringing the overall offering of debt securities to approximately $10 billion, doubling the company's original balance-sheet-strengthening target for 2003 and increasing near-term liquidity to more than $30 billion.

Substantially all of the proceeds will be used over time to partially fund U.S. pension funds and other retiree benefit obligations. The Detroit automotive company expects to make significant cash contributions to these funds by late 2003.

GM's stock closed at $38.59, up $0.4827 or 1.27%.

Xerox Corp.'s new convertible traded very actively on Friday morning after being priced overnight and then slowed down a bit through the remainder of the day, according to market sources. The convertible "moved as high as plus three for a while, but basically straddled plus two for most of the afternoon," a trader said.

The convertible closed at 102¼ bid, 102½ offered, according to a second trader. The stock closed at $10.35, down $0.05 or 0.48%.

On Thursday, after market close, Xerox priced an upsized $800 million of three-year mandatory convertible preferred stock at par to yield 6.25% with an initial conversion premium of 20%.

Initially, the deal was sized at $650 million but was increased due to strong demand.

The offering priced at the rich end of yield talk and the middle of premium talk. Price talk on the convert put the yield in the typical range for a mandatory, at 6.25% to 6.75% with an 18% to 22% initial conversion premium.

Joint bookrunners on the deal are Citigroup, Goldman Sachs & Co., Merrill Lynch & Co. and JPMorgan. Citigroup and Goldman will be taking orders and making allocations. Deutsche Bank Securities and UBS Investment Bank are joint lead managers.

Proceeds from the offerings will be used by the Stamford, Conn. document company to take out the existing $3.1 billion bank facility. The refinancing package also includes a new $1 billion bank facility, $1.25 billion in junk bonds and an issuance of 40 million shares of common stock at $10.25 per share.

Xerox and the other four deals that priced after Thursday's close made the week of June 16 the equal-busiest ever in convertibles. In total 16 deals came to market, matching the previous high of 16 recorded in the week of June 2. Both figures exclude investment bank synthetic offerings linked to or exchangeable for another company's stock.

However the dollar value of $3.99 billion in the week of June 16 falls short of the $4.52 billion excluding greenshoes for the week of June 2.

The most recent week also took the total for June so far past $10 billion to $10.59 billion in 48 deals, or $10.26 billion in 44 deals excluding investment bank synthetic offerings. May saw $14.92 billion of new issues, or $14.49 billion excluding investment bank synthetics.

Thursday's issuance pushed the year-to-date total past the $50 billion mark, to $51.06 billion in 187 deals including investment bank synthetics, or $48.45 billion in 137 excluding them.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.