NII flat in gray market; Luminent quiet as borrow, size limit interest; Kulicke and Soffa launches deal

By Kenneth Lim

Boston, May 30 - NII Holdings Inc. was flat in the gray market on Wednesday with its massive deal seen as aggressively priced.

Meanwhile, Luminent Mortgage Capital Inc. was quiet in the gray. Its deal appeared to model cheap for analysts, but interest was limited on concerns about a poor stock borrow, the small size of the deal and a wide yield disadvantage.

Kulicke and Soffa Industries Inc. announced a $100 million deal after the market closed, with pricing slated for Thursday.

The convertible market was mostly subdued, with volume thinning as summer begins.

"It seems like the convertible market is placid," a sellside convertible trader said. "There doesn't seem to be a lot of excitement. I guess it's the kick off of the summertime season. Seems like a lot of people are out. In fact, a lot of people are answering my Bloomberg messages from home. I don't know what kind of vacation that is, but that's what's happening."

NII bid flat in gray

NII's planned $1 billion of five-year convertible senior unsecured notes were seen as slightly rich ahead of pricing and remained flat in the gray market on Wednesday.

"NIHD was around par in the gray," a sellside convertible trader said.

NII's deal was talked at a coupon of 2.625% to 3.125% and an initial conversion premium of 45% to 50%. It was offered at par and expected to price after the market closed. NII stock (Nasdaq: NIHD) closed at $81.60, up by 3.51% or $2.77.

There is an over-allotment option for an additional $200 million.

Deutsche Bank is the bookrunner of the Rule 144A offering.

NII, a Reston, Va.-based provider of digital wireless communication services, said it will use the proceeds to buy back up to 4 million shares of its common stock and to fund general corporate purposes.

"It looks fairly valued, maybe even a little rich to us," said a convertible analyst who had a conservative credit spread assumption in the mid-100 basis points over Libor range and a volatility assumption in the low 30% region.

"We've assumed that this would probably come at the cheap end, especially since it has such a high premium," the analyst said. "We were surprised that a name like NIHD would try to have such a high premium. It's a high premium for a company like this. Usually you'd see a premium like that on a really small company or a biotech. In this case this is a pretty big company. It's too high to be supported with the vol."

The deal was seen as a positive for the stock, said Credit Suisse equity analyst Andrew Campbell in a note. Campbell cited the convertible deal and NII's plan to buy back up to $500 million of its own shares for the optimism.

"With NIHD completing its current investment cycle later this year, we expect the company to generate significant FCF [free cash flow] starting in '08," Campbell wrote. "We believe use of cash has been a key area of investor concern. The buyback program indicates a willingness on behalf of the company to return cash to shareholders in the absence of high return growth investment opportunities, and may also be a step towards a more efficiently-leveraged balance sheet."

Campbell maintained his outperform rating on the stock with a $90 target price.

Luminent quiet on borrow, yield concerns

Luminent's planned $85 million of 20-year convertible senior unsecured notes was mostly left alone in the gray market on Wednesday as borrow concerns, a large yield disadvantage and the small deal amount failed to attract significant interest.

"I heard nothing there," a sellside convertible trader said. "The commentary for you is it seemed like people didn't seem to be focusing on it because of the size and the space that it's coming from and with NIHD out there as well. I don't think it's fair to say they modeled cheap. On the cheap end they looked cheap, but it's a function of whether they model cheap and whether there's any borrow."

The offering was talked at a coupon of 7.875% to 8.375% and an initial conversion premium of 20% to 25%. The convertibles were offered at par and slated to price after the market closed. Luminent stock (NYSE: LUM) closed at $9.13, up by 4.58% or 40 cents.

There is an over-allotment option for a further $15 million.

Bear Stearns is the bookrunner of the Rule 144A offering.

Luminent subsidiaries Maia Mortgage Finance Statutory Trust, Mercury Mortgage Finance Statutory Trust and Saturn Portfolio Management Inc. will guarantee the notes.

Luminent, a San Francisco-based real estate investment trust that invests in mortgage-backed securities and loans, said it will use the proceeds of the deal to concurrently buy back up to $25 million of its common stock and fund general purposes.

"It's a really small deal so we didn't really look at it too closely," a sellside convertible analyst said. "It's a mortgage REIT, which means they probably have a pretty bad credit."

The analyst said the deal modeled about 1% to 1.5% cheap, but felt that the yield disadvantage compared to the common stock was too big.

"In this case the common pays like a 13% dividend," the analyst said. "This has a pretty high coupon, but the coupon at the mids...I can't see why this would be attractive to anybody. For the arb funds, probably not, because if you're an arb fund you're carrying the stock short and you're going to have to pay the 13% while you're receiving the 8% coupon, so I think it would probably go to outright investors, although there might be a couple of arb accounts that might flip it because it's cheap."

A convertible trader agreed.

"The model has this cheap - but I would rather own the common here," the trader said. "13.75% yield. This is a well-run company. Large short interest too."

But another convertible analyst said the deal could set up fine for hedge funds as well because of the low delta required for the hedge.

"You're also going to set it up on a low delta, around 18%, so you got to factor that into consideration," the second analyst said. "If you factor that in and you can short the stock, if you set it up on an 18% hedge it's actually going to throw off cash flow, and that would give you a return that should make sense. It would have to be priced properly. But if you can't get the borrow then it's moot."

The lack of stock to borrow could be a bigger obstacle for the deal, the second analyst said.

"Shortage has spiked way up recently and it's a huge percentage of the float," the second analyst said. "Short interest was around 13 million shares last month out of a 40 million float, so I doubt it will be easy to get a borrow. Even though the stock trades actively, it's like 30% of the float and they're buying back more of the stock. Since this is a happy meal [with a stock buyback] and it's coming on swaps then I would assume that if you're part of the deal then you're going to be able to get a short off of it, but if you don't then it doesn't matter."

The second analyst said any credit spread wider than 300 basis points over Treasuries would be too wide even though Luminent was in a risky business.

"It's a fairly conservative run business and their collateral is fairly solid," the second analyst said. "That kind of a credit spread [that is too high] would put it at too much of a discount to Annaly [Capital Management Inc.]."

Luminent's volatility is also expected to decline, the second analyst said.

"With the stock back up and the way they're buying it back, you'd expect volatility to come back in," the second analyst said. "And if you look back even to December the volatility was in the 20s."

Kulicke and Soffa launches deal

Kulicke and Soffa is expected to price $100 million of five-year convertible subordinated notes on Thursday after the market closes, market sources said.

The deal is talked at a reoffered priced of 98 to 98.5 with a coupon of 0.75% to 0.875% and an initial conversion premium of 50%.

There is an over-allotment option for a further $10 million.

Banc of America is the bookrunner of the Rule 144A offering.

Kulicke and Soffa, a Fort Washington, Pa.-based maker of semiconductor equipment and packaging materials, said it will buy back up to $40 million of its common stock concurrently with the offering and use the remaining proceeds to retire part of its outstanding 0.5% convertible subordinated notes due 2008.

© 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.