Interpublic, Spansion, Charles River climb, Millipore struggles on debuts; Level 3 up in gray; L-3 gains

By Kenneth Lim

Boston, June 7 - The convertible bond market was abuzz with new deals on Wednesday, with issues from four companies making their debuts and another three due to price after the close.

Interpublic Group of Cos. Inc.'s upsized $750 million of three-year floating-rate senior note and warrant units raised eyebrows with its unusual structure, but the market appeared to like what it saw as the units gained about 3 points outright on Wednesday.

Spansion Inc.'s new 2.25% convertible senior subordinated debentures due 2016 did better than some observers expected, climbing about one to two points outright despite being downsized amid concerns about the long maturity and a lack of puts.

Charles River Laboratories International Inc.'s newly priced 2.25% convertible senior notes due 2013 also did well, opening above par on their debut. But Millipore Corp.'s 3.75% convertible senior unsecured notes due 2026, which also priced late Tuesday, struggled to rise above par.

Meanwhile, Level 3 Communications Inc.'s planned $150 million offering of six-year convertible senior notes climbed in the gray market on Wednesday as market sources reported strong interest in the deal.

Among the older convertibles, L-3 Communications Holdings Inc.'s 3% convertible due 2035 gained about 2.5 points outright and improved slightly on a dollar-neutral basis after the death of the company's chief executive sparked speculation of a buyout.

The convertible changed hands at 100.5 on Wednesday against the closing stock price of $76.93. L-3 stock (NYSE: LLL) gained 4.68% or $3.44.

"The high-yields and converts did better on the possible take-out," a sell-side trader said.

L-3 co-founder Frank C. Lanza died unexpectedly Tuesday evening. He was 74.

L-3 is a maker of electronic systems for the defense industry. CIBC World Markets analyst Myles Walton said British defense contractor BAE Systems could be a potential buyer. L-3's board met on Wednesday, and it remains unclear who will succeed Lanza.

Interpublic deal soars in trading

Interpublic's upsized $750 million convertible offer of three-year floating-rate senior note-and-warrant units had a strong start on the secondary market, with Street sources positive on the terms and hopeful that the unusual structure's adoption may lead to more deals.

The series A Libor plus 1.35% notes due 2009 with capped warrants were quoted at 103.75 bid, 104 offered against a stock price of $9.05 on Wednesday, while the series B Libor plus 0.35% notes due 2009 with uncapped warrants were 103.25 versus the same stock price. Interpublic stock (NYSE: IPG) closed at $9.05, up by 0.67% or 6 cents.

The units priced late Tuesday within talk.

The $250 million of series A notes bear interest at 1.35% over Libor, while the capped warrants in the series have an initial conversion premium of 10% with upside capped at a 37.5% premium.

The $462.5 million of series B notes bear interest at 0.35% over Libor, while the uncapped warrants in the series have an initial conversion premium of 32.5%.

There was also a $37.5 million junior tranche of note and warrant units sold in the deal, but syndicate sources declined to comment on the terms of the junior tranche. Market sources said the junior tranche may have been taken by the underwriters in exchange for underwriting the first 5% of any default.

Morgan Stanley, UBS Investment Group, Citigroup and JP Morgan were the bookrunners of the Rule 144A and 3(c)(7) unregistered offering.

The convertible units will be issued through Interpublic's special purpose vehicle ELF Special Financing Ltd., which will issue two series of notes of $100,000 apiece linked to Interpublic credit and attach to each note warrants exchangeable into Interpublic shares.

Interpublic also entered into hedging transactions that increase the effective exercise price of the warrants to a premium of about 60% over Interpublic's June 6 closing stock price. The aggregate purchase price of those call options will be about $29 million.

Interpublic, a New York-based advertising and marketing group, is using the deal to replace its existing three-year revolving stand-by loan. With the closing of the deal, Interpublic will have a $750 million revolving loan agreement with ELF in which Interpublic will pay ELF an annual interest of Libor plus 0.78% on outstanding loans.

The loan facility will not affect Interpublic's consolidated debt level until Interpublic draws on the loan. That gives Interpublic access to a credit facility but does not burden its balance sheet if it does not use the credit.

"This is obviously a very specific kind of structure, but it's definitely applicable to other issuers," a syndicate source said. "I wouldn't be surprised if other issuers took a look at the structure."

A buysider said the deal was essentially a loan that was "a lot less restrictive" for Interpublic.

"They needed some cash, and instead of just issuing a whole bunch of debt and having that on the balance sheet, they can do it this way and draw it down only when they need it," the buysider said. "It's off-balance sheet financing."

"I really like it because it may be the catalyst for other companies bringing similar types of paper that want to circumvent a credit line," the buysider said.

The A series with the capped warrants was similar to a mandatory convertible from the point of view of the investor - it is essentially a piece of paper with a call spread and "you retain none of the upside once you pass the threshold level," the buysider said. The B series with the uncapped warrants was "very much like a traditional convert."

The A series made better sense for outright investors because it has a higher yield, but hedging it will be tough, the buysider said. But hedge funds would be more likely to be involved in the B series because it can be hedged like a traditional convertible.

Spansion surges on debut

Spansion's downsized offering of 2.25% convertible senior subordinated debentures due 2016 surprised market pundits on the upside, climbing about one to two points outright on their first day of trading.

The convertibles, which priced late Tuesday and sold at par, were seen trading at 101.5 against a stock price of $14.85, and was bid as high as 102 at a stock price of $15.10. Spansion stock (Nasdaq: SPSN) closed at $14.71 on Wednesday, down by 1.54% or 23 cents.

"That was a surprise, it was very strong right off the bat," a sell-side convertible bond trader said.

Spansion's $180 million offering of 10-year convertible senior subordinated debentures, which priced with an initial conversion premium of 18%, were talked at a coupon of 2% to 2.5% and an initial conversion premium between 17.5% and 22.5%. The size of the deal was originally $240 million plus an over-allotment option of $35 million. The greenshoe was reduced to $27 million.

Citigroup and Credit Suisse were the bookrunners of the Rule 144A deal.

The debentures are non-callable for life, and there are no investor puts.

Spansion, a Sunnyvale, Calif.-based maker of flash memory products, said it will use the proceeds of the offering to repay its entire outstanding 12.75% senior subordinated notes due 2016.

Analysts and traders had expressed reservations about the convertible's lack of a put and the fact that Spansion has an existing 11.25% note that matures in January 2016.

"It [the straight debt] ranks senior and it matures first...the company has a pretty large cash burn and there's a suspicion that they may be coming back to the market when it matures," a sell-side analyst said.

But a buy-side convertible bond trader said the issue did well despite the concerns and a difficult borrow on the stock.

"That traded really well," the trader said. "It traded up even though it was a tough borrow, a very tough borrow."

Millipore lackluster on debut

Millipore's new 3.75% convertible senior unsecured notes due 2026 failed to shine on their debut, staying around par as investors looked elsewhere for fresh paper.

"Millipore was very, very weak," a sell-side convertible bond trader said. "I don't think they ever got out above par."

The convertible, which was sold at par after pricing within talk late Tuesday, was offered at 100.5 before the market opened against the previous closing stock price of $64.65. Millipore stock (NYSE: MIL) slid 0.76% or 49 cents to close at $64.16 on Wednesday.

"Millipore was fairly lackluster," a buy-side convertible bond trader said. "It traded around par on a neutral basis most of the day."

Millipore priced its $550 million offering at a coupon of 3.75% and an initial conversion premium of 40%. Price talk guided for a coupon of 3.25% to 3.75% and an initial conversion premium of 37.5% to 42.5%.

There is a greenshoe option for a further $82.5 million.

UBS Investment Bank and Goldman Sachs were the bookrunners of the Rule 144A offering.

Millipore, a Billerica, Mass.-based supplier of equipment to the biopharmaceutical sector, said it will use the proceeds of the deal to pay part of the consideration in its merger with Serologicals, which was announced in April. Any remaining proceeds will be used as working capital.

Charles River deal climbs from the start

Charles River Laboratories' fresh 2.25% convertible senior notes due 2013 were well-received right off the bat, opening about a point above par.

The convertible, which priced within talk Tuesday evening, was seen bid at 101.125 against the previous closing stock price $39.95 in the morning. Charles River stock (NYSE: CRL) closed at $39.70, down modestly by 0.63% or 25 cents.

"They were trading on swaps right away," a sell-side convertible bond trader said. "They were bidding me like 101, 101 right out the morning."

Charles River priced its $300 million deal Tuesday after the market closed, at a coupon of 2.25% and an initial conversion premium of 22.5%.

The notes, which were offered at par, were talked at a coupon of 2% to 2.5% with an initial conversion premium of 22.5% to 27.5%.

There is an over-allotment option for a further $50 million.

JP Morgan and Credit Suisse were the bookrunners of the Rule 144A offering.

Charles River, a Wilmington, Mass.-based provider of animal research models for the biotechnology sector, said it will use the proceeds to buy back $125 million of its common stock from purchasers of the notes and to pay for convertible note hedge and warrant transactions. The remaining proceeds will be used for general corporate purposes, including buying back shares from the open market.

"Charles River did well," a buy-side trader said. "They traded up right out of the box."

Level 3 gains in the gray

Level 3 Communications' proposed $150 million offering of six-year convertible senior notes was bid higher in the gray market on Wednesday with market sources reporting strong interest in the offering.

The convertible, which was to price Wednesday after the market closed, was bid at 100.125 in the gray market. Level 3 stock (Nasdaq: LVLT) closed at $4.55, down by 6.76% or 33 cents.

The deal, which was announced May 30, is talked at a coupon of 3.25% to 3.75% and an initial conversion premium of 17.5% to 22.5%.

There is a greenshoe option for a further $22.5 million.

Level 3 will concurrently offer 125 million shares in an off-the-shelf offering, with an over-allotment option of a further 18.75 million shares.

Merrill Lynch is the bookrunner of the registered convertible and stock deals.

"I heard that the common deal is going OK, the convert deal is very well subscribed for," a buysider said.

Level 3, a Broomfield, Colo.-based Internet backbone services provider, plans to use the net proceeds to redeem or repurchase is 9.125% senior notes due 2008 and 10.5% senior discount notes due 2008. The remaining proceeds will be used to buy back, pay out or refinance other existing debts.

"I anticipate that the borrow will get better because they're bringing a large equity offering to the market," the buysider said.

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