NII gains on debut; Luminent struggles in NII's shadow; Kulicke and Soffa deal seen as aggressive

By Kenneth Lim

Boston, May 31 - NII Holdings Inc. improved slightly on its first day of trading with its deal seen as fairly valued after it priced at the cheap end.

Luminent Mortgage Capital Inc. was quiet with its small deal overshadowed by NII even after the offering was upsized.

Kulicke and Soffa Industries Inc. failed to attract any bids in the gray market with its planned $100 million offering seen as fair to expensive even at the reoffered price.

The convertible market in general had another lackluster session.

"There's not a lot moving around today," a sellside convertible trader said. "It's extremely quiet in the trenches, I can tell you that right now."

Novell Inc. improved slightly after the Waltham, Mass.-based software developer beat estimates for its second-quarter sales and demonstrated progress in its move toward the open-source Linux platforms. Novell's 7.83% convertible due 2024 gained about ½ point outright on Thursday, marked at 98.75 bid, 99 offered versus a stock price of $7.85. Novell stock (Nasdaq: NOVL) rose 6.25% or 46 cents to close at $7.82.

"Novell stock is up a lot," the trader said. "This is a great move for this name. That's pretty good...of course the converts will be higher."

Novell reported late Wednesday a second-quarter loss of $2.19 million, or a penny per share, from a net profit of $3.18 million, also a penny per share, in the year-ago period. Sales for the quarter rose to $239.2 million from $233.2 million, slightly above analysts' estimates of $235 million. Underlying the sales was a doubling of Linux sales to $29 million, a quarter of which came from an alliance with Microsoft.

NII gains on debut

NII's new 3.125% convertible senior unsecured note due 2012 gained slightly on Thursday with the deal seen as fair even after it came at the cheap end of talk.

The convertible traded at 100.25 versus a stock price of $81.60. The convertible was offered at par. NII stock (Nasdaq: NIHD) closed at $81.47, lower by 0.16% or 13 cents.

"NIHD was quoted today really early and then none at all because very often the deals that come hedged don't trade all that well," a convertible trader said.

NII Holdings Inc. priced the $1 billion deal on Wednesday after the market closed with an initial conversion premium of 45%. The deal was talked at a coupon of 2.625% to 3.125% and an initial conversion premium of 45% to 50%.

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

Deutsche Bank was 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 $250 million of its common stock and to fund general corporate purposes.

A buyside convertible analyst said that even at the cheap end the deal was just fairly priced.

"That's a really high conversion premium and even with the volatility in the name it's not attractive," the analyst said. "I think it was cheap enough that you could set it up, but they didn't leave a lot for holders. It's one of those deals that's good enough for you to get but it's nothing you'll be particularly excited about."

Luminent quiet, size matters

Luminent's new 8.125% convertible senior unsecured note due 2027 was not quoted on the Street on Thursday as observers said a high risk profile and the small size of the deal kept interest limited to a handful of investors.

"It was too small to get quoted," a sellside convertible trader said.

The upsized $90 million offering priced Wednesday after the market closed with an initial conversion premium of 22.5%.

The convertibles were offered at par. The deal was talked at a coupon of 7.875% to 8.375% and an initial conversion premium of 20% to 25%.

The size of the deal was originally $85 million with an over-allotment option for an additional $15 million. The greenshoe is now for a further $20 million.

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

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.

"I think that of those people who aren't already taking a vacation somewhere, most of them would have been preoccupied with NIHD," a convertible analyst said. "The problem for Luminent also was they may have had problems with the borrow, so not all the hedge guys would have gotten involved. It's also a pretty risky kind of convertible, so I would think it wasn't for everyone. Small deal, poor borrow, high risk, it's not surprising it was kinda quiet."

Kulicke and Soffa seen as rich

Kulicke and Soffa's planned $100 million of five-year convertible subordinated notes was quiet in the gray market on Thursday with critics panning price talk as too aggressive.

"It's at best fair value," a sellside convertible analyst said.

The deal was expected to price Thursday after the market closed. Price talk was for 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.

One analyst said the deal modeled fair value at about 97.5 at the cheap end of talk.

"It's expensive even at the reoffer price," the analyst said.

The analyst said the convertible will pay additional warrants if the stock trades above the conversion price. Even with the hefty conversion premium, the warrants improve the attractiveness of the convertible, albeit slightly.

"Once it goes through that conversion price you get additional warrants, so it only kicks in when the price goes up enough, but it increases your delta in the near term so if you're on a theoretical delta it does make it a little more attractive," the analyst said. "There are 50% premium bonds that have worked out, and getting $15 on the stock's not crazy, but just the pairing of the coupon and premium doesn't work here."

The analyst had a credit spread assumption around the 300 basis points over Libor region and a volatility in the low 30% range.

A sellsider said volatility above 30% may be too high, and a credit spread slightly wider than 300 bps over Libor may be appropriate, although a tighter credit spread could be possible depending on the price at which Kulicke and Soffa plans to retire its 0.5% convertible.

"It's not a large player like AMAT [Applied Materials Inc.], they're at the back end of the industry, so they can be fairly volatile," the sellsider said. "I think vol has also come in since then, although people may be adjusting their credit spreads because vol has come in."

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