Kansas City Southern gains on debut; U.S. Bancorp steady after re-offer; St. Jude Medical prices

By Rebecca Melvin

Princeton, N.J., Dec. 6 - Convertibles players were busy weighing or trading five new deals on Tuesday, two that came overnight and started trading early, two that were expected to price after the session closed, and one seen pricing on Wednesday.

After the close, another new deal hit the tape, this one from SafeNet Inc., which launched $200 million of five-year convertible subordinated notes under Rule 144A.

Of the two overnight deals, Kansas City Southern, which could have been considered something of an underdog, had the stronger debut, market sources said.

The deal, which priced beyond the rich end of talk for the coupon, ended up looking cheap and closed up at 101.875 bid, 102.125 offered, according to a syndicate source.

"It got bailed out because of how the stock traded," said a Chicago-based buysider, whose firm didn't play the deal because of the stock risk.

"If we had known the stock was going to hold, we might have played," he said. Shares of Kansas City Southern moved up 28 cents from their open at $23.42 to close at $23.70. But they were lower by 98 cents, or 3.97%, compared to Monday's close. That difference boosted the initial conversion premium of the overnight deal to 29% from about 21.5%.

The second overnight deal from U.S. Bancorp - which at a size of $2 billion of convertible senior debentures was much larger than Kansas City Southern's $210 million of preferreds - was actively traded, but reoffered at 98.8125. It remained in a tight range around that number through the session, and closed a few pennies higher at 98.82 bid, 98.85 offered, a syndicate source said.

The new U.S. Bancorp floating-rate convertible was nearly identical to the financial company's $2.5 billion issue of floating-rate convertibles offered in August. That deal was re-offered at 98.75.

"The new one appears to have been priced at or near the implied volatility of the existing one," a New York-based sellside analyst said. The existing one had an implied volatility of 12% coming into the market yesterday, he said. That compares to 15% volatility at pricing in August.

Of the two new deals seen pricing late Tuesday St. Jude Medical Inc. priced $600 million of 30-year convertibles to yield 2.8%, with an initial conversion premium of 25%. The deal priced near the cheap end of talk for the coupon. The other deal was Aspen Insurance Holding Ltd.'s $200 million of convertible preferreds.

XL Capital Ltd.'s $650 million of mandatory convertibles are due to price Wednesday.

The international primary market for convertibles was also hot with new deals from the likes of Hongkong Land CB (2005) Ltd., a wholly owned subsidiary of Hongkong Land Holdings Ltd Hongkong, and India's Spicejet Ltd.

The number of new deals caused one U.K.-based sellside analyst to feel "absolutely snowed under."

Among convertibles trading in the secondary market were business-services software company Fair Isaac Corp., which saw its 1.5% convertible bump back up by more than a point to 115 as its shares gained 2.3%.

The Minneapolis-based company's stocks and bonds dropped last week on a Stephens Inc. downgrade of the company's shares to "equal weight" from "overweight."

And AMR Corp., the parent of American Airlines, saw its 4.25% convertibles trade better by about 0.125 point amid two-way interest.

But Cephalon Inc. saw its 2% convertible edge lower, mostly in line with its shares, after news that the Frazer, Pa.-based biotechnology company would acquire all of the outstanding share capital of Zeneus Holdings for approximately $360 million in cash.

The transaction will accelerate Cephalon's entry into the European oncology market with several commercialized products.

A sellside trader said the news didn't carry much significance for the company's credit as it was a small acquisition that wouldn't be accretive to earnings until 2007.

Cephalon 2% convertibles traded at 119.5 versus a share price of $50.50, compared to a level of about 120 on Monday, according to a New York-based sellside desk analyst.

St. Jude prices near cheap end

St. Jude Medical Inc. priced late Tuesday $600 million of 30-year convertibles at par to yield 2.8%, with an initial conversion premium of 25%, according to a syndicate source.

The convertible senior debentures priced toward the cheap end of the coupon, which was talked at 2.375% to 2.875%.

Ahead of final pricing, several buysiders took a dim view of the deal due to its low delta and short, one-year call/put.

"I didn't see a whole lot of upside," a Chicago-based buysider said.

Using the midpoint of talk, or 2.625% for the coupon, with an initial conversion premium of 25%, one New York-based analyst valued the deal at 100.6, using a volatility of 21% and a credit spread of Libor plus 75 basis points.

Sold via bookrunner Banc of America Securities, the St. Jude Medical debentures are non-callable for one year, and have puts in years one, three, five, 10, 15, 20 and 25. There is dividend and takeover protection. And there is a greenshoe for an additional $60 million.

The St. Paul, Minn.-based medical device maker intends to use proceeds to repay commercial paper issued to fund its previously announced acquisition of Advanced Neuromodulation Systems Inc.

U.S. Bancorp convertibles re-offered at 98.8125

The $2 billion U.S. Bancorp 30-year floating-rate convertible senior notes priced four months after the company did a nearly identical deal via bookrunner Lehman Brothers.

The new notes priced at par with a coupon of 3-month Libor minus 146 basis points and an initial conversion premium of 20%. Joint bookrunners Citigroup and Deutsche Bank chose to re-offer the notes at 98.8125, according to a syndicate source.

One buysider said that he didn't quite see the point of the deal, which his firm "passed" on due to its low delta and effective short date.

With its one year call and put, the notes are essentially one-year paper, and "substantially the same" as the $2.5 billion of 30-year convertible floaters that U.S. Bancorp priced at par in August to yield the three-month Libor minus 168 basis points, with a 20% initial conversion premium.

The new notes are non-callable for one year and have puts at year one, 1.25, 1.5, 1.75, 2.5, 10, 15, 20 and 25, all at par, similar to the older issue.

Likewise the new notes have dividend protection but no takeover protection. The new Rule 144A deal, launched after the close Monday, has a 13-day option for an additional $500 million of notes.

In August, bookrunner Lehman Brothers chose to re-offer the convertible debentures at 98.75. That deal had a greenshoe of $375 million

Minneapolis-based U.S. Bancorp is the sixth largest U.S. financial holding company.

KC Southern adds two points

The new Kansas City 5.125% cumulative perpetual preferred stock was seen as 2.2% cheap at the final pricing using a volatility of 29% and a credit spread of Libor plus 600 basis points, according to one New York-based sellside analyst.

A second New York-based sellside analyst put the deal at 2.8% cheap at final pricing using 30% volatility and Treasuries plus 700 basis points, as well as the $23.42 stock price opening level on Tuesday, since the deal came overnight.

The issue priced beyond the rich end of the talk for the coupon which was for 5.25% to 5.75%, and had a fixed initial conversion premium of $30 a share, which made the premium 29% using Tuesday's open.

"It priced better than I though it would," one analyst said, citing downsides such as its perpetual nature and the company's "shaky" credit and potential as a takeover candidate.

But a New York-based convertible fund manager, who played in the deal, said the Kansas City, Mo.-based transportation company has a dynamic management, is a growth railroad and a NAFTA play.

The company priced $210 million of the preferred stock via bookrunner Morgan Stanley. There is no overallotment option.

The preferreds are non-callable for five years with an issuer option to force conversion subject to a 130% hurdle. There are no puts.

Substantially all of the proceeds will be used to purchase nine million shares of its common stock formerly owned by Grupo TMM, SA, its largest shareholder, at a price per share equal to the net proceeds per share (before expenses) that Grupo TMM receives for nine million shares of Kansas common stock offered concurrently by Grupo TMM.

Kansas City Southern's primary U.S. holdings include The Kansas City Southern Railway Co. and Texas Mexican Railway Co.

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