Interpublic again dominates market attention; new paper weak amid sluggish session

By Ronda Fears

Nashville, March 10 - The Interpublic Group of Cos. Inc. again was center stage in the convertibles market with a new deal and a tender for its 0% converts, which eased concerns about the put on the zeros in December.

"IPG dominated trading Friday, and today," said Jeff Seidel, head of U.S. convertible research at Credit Suisse First Boston.

In addition to Interpublic's new issue trading well over par in the gray market, its existing converts were 2 to 4.5 points higher on the day.

Otherwise, the convertible market was described as sluggish with most of the universe marked lower as stocks declined and credit spreads widened a bit.

"The S&P downgrade Friday lit a fire under somebody at IPG," said one dealer, referring to the senior debt getting cut to junk and the credit now being split-rated.

"They got busy, quick, with the tender and the new deal. Obviously, they'd already been talking to bankers about this, but they probably moved the schedule up a few weeks," she added.

The trader also noted that some urgency in the new deal could be due to the conversion feature of the 0% issue getting triggered if the rating declines below BB+, which is where S&P cut the rating to on Friday.

Interpublic said it would use proceeds to fund the tender, also announced Monday, for its 0% convertible due 2021, which is putable in December. Cash outlay is estimated at $582.5 million for the entire issue.

The new Interpublic $600 million convert, with guidance tightened twice during the day, still closed in the gray market about 5.5 points over par on the bid side. It traded as high as 7.5 points over par, sources said.

The 20-year issue was last talked to price at a yield of 4.5% to 5.0% with a 50% to 55% initial conversion premium. Originally, the premium guidance was 38% to 42%, then moved to 45% to 50% before the last 50% to 55% range was struck.

Sellside analysts put the deal, at the middle of guidance, around 5% to 8% cheap. Original talk put it as much as 9.5% cheap.

"What they did was quite cleverly constructed," said Jeremy Howard, head of U.S. convertible research at Deutsche Bank Securities, noting that as Interpublic's credit spreads narrowed, the guidance on the new issue was tightened.

"It almost feels like an auction process rather than filling an order book."

Spreads on Interpublic's five-year credit default swaps tightened sharply during the session - as much as 140 bps, or more.

While the deal still looked cheap at the latest revised terms, the tightening eventually priced some would-be buyers out.

"The new issue is priced cheaper relative to these [existing IPG converts] as you need some compensation for a five-year put on a name with loads of baggage in the equity story and about a billion in debt in front of or [due] at the same time as the new convert," said Michael Revy, who co-manages a hedge fund for Froley Revy.

"But the change in price talk just priced me out."

There's also some value in the dividend passthrough feature of the new issue, he added, and even with a 55% premium, this issue is the only way to get some equity exposure in Interpublic.

"The coupon differential on the new issue could also set up some interesting trades versus the existing debt, all at lower coupons and higher premiums, Revy said.

"The existing converts have shorter maturities and so they look less risky.

Indeed, as with Friday, traders said the existing Interpublic converts were very active.

"We had research out Friday. We were long the short-dated paper and had a sell on the 1.87s," said CSFB's Seidel.

"This new deal makes the 1.87s more viable," he added.

The IPG 0% due 2021 gained 3.25 points on the day to 82.75 bid, 83.75 asked. The IPG 1.8% due 2004 was quoted up 2 points on the day to 92 bid, 93 asked. IPG's 1.87% due 2006 was quoted up 4.5 points on the day to 79 bid, 80 asked. IPG shares closed off 44c to $8.01.

Outside of the Interpublic activity, little else was going on in convertibles. Not even recent new issues were overly active.

"There's enough cash sitting on the sidelines, that we didn't even see a lot of secondary activity because there was a good-sized new issue in the market," said the head convertible trader at a major investment bank.

"That was another plus to this deal, though, that it was a big enough size that no one is nervous about liquidity in it drying up."

UTStarcom Inc.'s deal from Friday, the 0.875%, which struggled out of the gate, dipped from par to 99.625 bid, 100.625 asked with the stock closing off 2c to $17.00.

Most other recently priced converts also were a bit weaker, traders said, including Watson Pharmaceuticals, Inco, U.S. Steel and Freeport McMoRan Copper & Gold.

Also noted moving southward were Fleming Cos. Inc., D.R. Horton and Crown Castle International.

© 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.