Convertibles still weak, Blockbuster lower; but new issues heat up with $2 billion Prudential deal

By Rebecca Melvin

Princeton, N.J., Nov. 9 - The convertibles market remained weak Wednesday, finding no support from a new $150 million issue of convertible preferreds from Blockbuster Inc., which closed off its lows at 99.5 bid, 100 offered, according to a syndicate source.

A pending new issue from Maverick Tube Corp., which was expected to price after the close Wednesday, failed to generate much enthusiasm and was below par in the gray market, sources said.

But a second pending new issue, launched after the close, attracted attention with its super size, if less than stellar terms. Prudential Financial Inc. was expected to price overnight $2 billion of convertible senior notes. The offering is being sold on swap with Prudential planning to buy back $210 million of stock from convertible buyers.

Meanwhile, General Motors Corp., which has been largely ignored in convertibles trading in recent sessions, became another weight on the market, with the automaker's $25 bonds all lower in heavy volume amid speculation about what a possible strike at its No. 1 parts supplier, Delphi Corp. would mean for the company.

In addition investors mulled speculation that the government's Pension Benefit Guaranty Corp. could force GM to use proceeds from the sale of a controlling stake of its financing arm, GMAC, to fund its pension plan.

Moving in the other direction, the convertibles of Human Genome Sciences Inc. were mostly higher after the biotechnology company announced that it was calling all of its outstanding 3.75% convertibles due 2007 and all of its outstanding 5% convertibles due 2007. The redemptions will complete Human Genome Sciences' planned repurchase of all of its remaining outstanding subordinated notes due 2007.

"It's still weak, although not as bad as yesterday," a New York-based buyside trader said of the convertibles market on Wednesday.

Prudential's floating coupon and short put eyed

The floating coupon and short put were notable among the terms of Prudential Financial Inc.'s planned $2 billion of 30-year convertibles, launched after the close.

The overnight deal, to be sold via bookrunner Goldman Sachs & Co., was talked to yield 3-month Libor minus 276 basis points, with an initial conversion price of $90, representing an initial conversion premium of 21.4%. The offering has a $300 million greenshoe.

The pricing would yield an initial coupon of 2.10% for the Rule 144A deal.

One outright buyside source saw the terms as rich, but suggested that one thing in its favor of the offering was that "insurance names have been doing okay" of late.

A second buysider added: "Certainly, it is going to be difficult to lose much money with such terms!"

Both sources said that the terms of recent new deals in general haven't been very attractive, and as for the new deals buoying the weak market, the only comment was that the deals "help the sellside by creating more trading action."

The Prudential convertible senior notes are non-callable for 1.5 years, with puts in years 1.5, five, 10, 15, 20 and 25.

The offering includes a $210 million "happy meal," or on-swap piece, in which Prudential expects to repurchase up to $210 million of its stock from purchasers of the convertible notes, the company said in a press release.

Prudential Financial, based in Newark, N.J., offers insurance and other financial services.

Maverick deal drags in the gray market

Maverick plans to offer $220 million of 20-year convertibles, which were talked to yield 1.75% to 2.25%, with an initial conversion premium of 20% to 25%, according to a syndicate source.

The Rule 144A deal of convertible senior subordinated notes was expected to price Wednesday after the close.

On Tuesday the convertible was quoted at about 99.375 bid, 100.625 offered in the gray market.

Maverick's existing 4% convertible due 2033 was seen in trade at 128 bid, 128.5 offered, lower from recent levels of about 132.

Three analysts who valued the new issue put it at about 2% cheap at the midpoint of price talk.

One source using 350 basis points over Libor and 40% volatility put the deal at 2.2% cheap at the midpoint. A second analyst using Treasuries plus 400 bps and a 35% volatility said the deal modeled out at 1.9% cheap at the middle.

A third analyst using Treasuries plus 375 bps and 35% volatility, said the deal looked 2.6% cheap, with a range of 0.1% rich to 5.1% cheap at the ends of the talk.

The notes, coming to market via Morgan Stanley & Co. as bookrunner, have a greenshoe of up to $30 million.

That the notes will be non-callable for eight years and have puts in years eight, 10 and 15, was reason enough for one Chicago-based buysider to stay away from the deal, he said.

Maverick, which makes steel tubular products for energy and other industrial applications, was seen as a solid enough company with a stable outlook, one buysider said. But one that lacked volatility.

Using net share settlement, Maverick will pay conversions in cash up to a maximum of $1,000 per note and in stock for any excess amount. The notes have takeover and dividend protection.

The company intends to use proceeds to purchase its stock in the open market and in private transactions. Also the company plans to use part of net proceeds to pay the costs associated with the convertible note hedge and warrant transactions.

GM slumps amid Delphi, PBGC speculation

The $25 convertible bonds of General Motors were off amid negative news and speculation that problems at its Troy, Mich.-based parts supplier might spread to the lossmaking automaker.

"If Delphi strikes it will be a negative liquidity event for GM," a New York-based buyside trader said.

A New York-based sellside analyst said, "God forbid, if Delphi goes on strike to protest the changes, they may have to shut down plants and they're already losing money. People are afraid that they could burn through precious cash pretty quickly."

Apparently adding to the uncertainty Wednesday was nervousness about government policy sparked by hearings conducted on Capital Hill Wednesday on the high profits reported by oil companies following the recent spike in energy prices.

"We've got the PBGC, that might force GM into bankruptcy," one buysider said sarcastically, responding to a question about GM.

"I've underestimated the government. With the oil hearings today, there appears to be no limit to what it might do."

General Motor's 6.25% convertible closed down 0.43 point, or 2.43%, to 17.23. GM shares closed down $1.23, or 4.75%, at $24.63.

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