Outlook 2011: Top deals for 2010 include paper from Microsoft, GM; Gilead, Apache, SanDisk

By Rebecca Melvin

New York, Dec. 31 - Despite the U.S. convertible primary market's mediocre year in terms of volume, there were significant deals that made 2010 interesting.

Microsoft Corp.'s 0% convertible due 2013, which priced in June, wasn't notable because of its pricing or structure, nor has it been the most liquid of names in the secondary market since issue - in fact, market players were chagrined by the terms of the new Microsoft deal.

But the Microsoft convertible was and continues to be significant due to the influence it exerted with would-be issuers, and it has been important to investors interested in the large issue size from a AAA rated company. It represented a new convertibles benchmark.

"There was a lot of excitement in the convertible market surrounding the Microsoft deal," a New York based sellsider said.

"There was a positive response from issuers: even if a CFO said to himself, 'I don't like convertibles,' he'd still have to at least take a look at it after the Microsoft deal," the sellsider said, explaining that Microsoft is a company that garners respect from chief financial officers and others in the business community. "It forced a lot of issuers to consider a convert seriously."

Microsoft was also important from the investors' perspective since many fund managers are required to keep a certain amount of securities in their portfolio in investment-grade rated paper, he added.

The Redmond, Wash.-based maker of computer software and hardware opportunistically priced $1.15 billion of relatively short duration, three-year convertible notes, at a 0% coupon, with an initial conversion premium of 33%. And it also entered into capped call transactions with initial purchasers of the bonds, which pushed the effective conversion premium from Microsoft's perspective to about 48%.

Proceeds were earmarked to repay commercial paper, to pay for the call spread and to buy back common shares associated with the call spread transactions.

The Rule 144A deal came at the talked price point for the coupon but toward the rich end of premium talk. The deal initially dipped below par when it broke for secondary dealings. Currently the Microsoft 0% convertibles trade around 105 to 106.5, and they carry a negative yield of 2.5% to 3%. Alternatively, the stock has gone up 11% since issue.

GM deal size notable

Coming later in the year, the General Motors Co. convertibles deal was significant due to its size.

There are two ways to define "big deals," according to one sellsider. They can be big in terms of issue size or they can be big in terms of company size, or market cap, he said.

GM qualified by either definition with its upsized $5 billion three-year mandatory preferreds, which priced Nov. 17 to yield 4.75% with an initial conversion premium of 20%. The deal, which was initially going to be $3 billion in size, came concurrently with an initial public offering of common stock at $33.00 per share.

Like Microsoft, the GM preferreds were not significant in terms of pricing or structure. On the contrary, the widely anticipated deal disappointed, selling off on a delta-neutral basis in the first couple of days after pricing.

Given that the preferreds were upsized, and the common stock deal was repriced higher and also upsized, pricing didn't hold up. The GM preferred, reminiscent of the big financial preferreds of 2008, currently trades slightly above its $50 par.

"The stock hasn't really done much; the deal was upsized and priced at the rich end," a New York-based sellside analyst said of the Detroit-based automaker's shares.

"The stock issued at $33 is now at $34, so it was a disappointment because the pricing was very aggressive on the IPO and the issue," he said.

Apache gets kudos

Apache Corp., which priced $1.27 billion of 6% mandatory convertible preferreds in July, was heralded by many to be one of the best deals of the year.

"Apache has a massive yield advantage over the common, and utilities in general are a preferred sector," a New York-based sellside analyst said.

"It's definitely much better than holding the common," he said. "And it was a homerun for hedged players if you bought it at the time of issue."

The Apache issue is trading rich since its gains and isn't so much a hedged name at present, one source said.

The Apache convertible preferreds were priced concurrently with an offering of common stock priced at $88.00 per share.

The Houston-based oil land gas exploration and production company planned to use proceeds from the two deals to fund a portion of the $5 billion deposit associated with the acquisition of properties from BP plc.

Gilead appeals to some

Another large deal that the market liked was Gilead Sciences Inc.'s $2.5 billion of convertible notes in two four-year and six-year tranches that priced in July.

The four-year paper priced at par to yield 1% with an initial conversion premium of 35%, and the $1.1 billion of six-year paper priced at par to yield 1.625% with an initial conversion premium of 36%.

The Rule 144A deal priced at the rich end of coupon talk and at or near the talked point for the premium.

Gilead Sciences is a Foster City, Calif.-based biopharmaceutical company that used proceeds for working capital and general corporate purchases, including repurchases of common stock and repayment of debt.

Other notable deals

Also in terms of deal size, Clearwire Corp.'s 8.25% exchangeable notes due 2040 with $729.25 million principal was "a pretty chunky deal," a sellsider said of the offering that priced Dec. 2.

Other notable deals were Omnicare Inc.'s $500 million 15-year convertibles priced to yield 3.75% with a 23.5% premium on Dec. 2; Stanley Black & Decker Inc.'s $550 million convertible preferred units priced to yield 4.75% with a 22.5% premium on Nov. 2; AU Optronics Corp.'s $800 million of 0% five-year convertibles priced to yield 2.875% with a premium of 27.5%; AngloGold Ashanti Ltd.'s $789.1 million of three-year mandatory convertibles priced to yield 6% with a 25% premium on Sept. 15; and, SanDisk Corp.'s $1 billion seven year convertibles priced to yield 1.5% with a 25% premium in August.

As per the structure of convertibles, mandatories showed up in many of the year's notable deals, but they weren't any more prevalent than in previous years, a New York-based sellside analyst said.

GM, Apache, AngloGold, and Stanley Black & Decker all priced big mandatory or preferred deals. But when you look back, there were the same amount or more in past years, especially in 2008 when financial preferreds accounted for about 35% of total volume in the convertible primary market.

Lots of smaller deals

There were myriad smaller deals, too. In all, 100 convertible deals got done; many of them in the range of $100 million to $300 million in size.

These included RTI International Metals Inc., a Pittsburgh-based producer of titanium mill products, which priced an upsized $200 million of 3% convertibles; and Ixia Inc., a Calabasas, Calif.-based provider of test systems for IP-based infrastructure and services, which priced an upsized $175 million of 3% convertibles. Both of these deals priced in December.

RightNow Technologies Inc., a Bozeman, Mont.-based software company, priced an upsized $150 million of 2.5% convertibles in November; and Salix Pharmaceuticals Ltd., a Raleigh, N.C.-based maker and marketer of prescription pharmaceuticals, priced an upsized $300 million of 2.75% convertibles in May.

There is a natural demand for the convertible product from companies needing to raise capital that don't feel comfortable tapping the straight bond market. Many biotechnology and technology companies fall into this category.

These small-cap names don't have stable enough cash flow to service the debt even if the interest rate and spreads are low. "They don't want 5%, 6%, or 7% of interest flowing out of their cash balance a year," a sellsider said.

© 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.