CSG bid higher in gray, prices at the mids; General Growth strengthens; ArvinMeritor expands

By Rebecca Melvin

New York, Feb. 24 - CSG Systems International Inc. was a focus of convertible bond players Wednesday ahead of final pricing of the small tech company's planned $130 million of seven-year convertibles. After the close, the paper priced to yield 3% with an initial conversion premium of 25%, the midpoint of talk.

The seven-year convertibles were seen bid slightly higher in the gray market Wednesday, but no trades were heard. Convert arb players were said to be ambivalent about the paper given its longer term, and they weren't expected to get overly involved unless the paper came at the midpoint of talk or better.

General Growth Properties Inc.'s convertibles added another point after the Chicago-based real estate investment trust announced that it agreed in principal with Brookfield's Cornerstone Investment for recapitalization investment of $15 per share and providing par plus accrued interest to unsecured creditors.

News of a rival bidder after Simon Property Group Inc.'s proposed offer to acquire General Growth for about $10 billion last week was rebuffed spurred trading in the General Growth convertibles.

ArvinMeritor Inc.'s 4% convertibles looked to have expanded about 0.75 point Wednesday, and its sister issue, a 4.625% convertible, were little changed the day after the auto parts supplier announced an equity and straight bond deal Tuesday.

Trading volume improves

Overall convertible bond trading was a little heavier than in the early part of the week, but activity was concentrated in the usual larger, liquid issues, a New York-based sellside trader said.

"I think a lot of people are still pretty slow," the sellsider said. "Accounts continue to sit there on the sidelines."

Although the market has been pretty illiquid, pricing remains firm, however. "If you can find some buyers, there are no sellers," the sellsider said, because investors would have difficulty replacing paper that they sold.

"It's the paradox of an illiquid market, but spreads are very tight," the sellsider said.

The equities market snapped a two-day losing streak. Federal Reserve chairman Ben Bernanke gave testimony on monetary policy in a semiannual report to the House Financial Services Committee on Wednesday, in which he indicated that interest rates are expected to remain at current low levels for the foreseeable future.

Europe also eyes new deal

The European convertible market had another quiet session, although the primary market saw some action with Marine Harvest ASA's €225 million offering.

The 4.5% convertible senior notes due 2015 were bid at about 100.5 in the gray market ahead of pricing after the close on Wednesday, a London-based sellside trader said.

The deal priced with an initial conversion premium of 30% over the Feb. 24 volume weighted average stock price. Price talk was at a coupon of 3.625% to 4.625% and an initial conversion premium of 30% to 35%, according to a press release.

The notes were offered at par.

There is an over-allotment option for an additional €25 million.

ABG Sundal Collier, Credit Suisse and J.P. Morgan are the bookrunners of the Regulation S offering.

Proceeds will be used for general corporate purposes, including the refinancing of loans and to extend the company's debt maturity profile.

Marine Harvest is an Oslo, Norway-based seafood and salmon-farming company.

The offering looked "reasonably valued" for hedge investors, the trader said.

"It's not really for outrights, mostly for hedge investors," the trader said. "There's not so much upside on the stock or the credit, but the stock trades quite liquid."

Angus Allison, a convertible analyst at Barclays Capital, used a volatility assumption of 30% and highlighted that the underlying shares had a historically high realized volatility. Although the company's latest financial results seemed sound, getting an accurate sense of Marine Harvest's credit strength was tricky, the analyst said.

"There are limited comparables in the broader market from which to extract a comparable spread although, by way of illustration, we calculated an implied z-spread of c.800 bps for Pescanova's convertible at the time of its issue," the analyst wrote. "Given Marine Harvest's larger size and stronger balance sheet, we employ a base credit assumption inside this, while acknowledging the wide error bar around the input."

CSG up slightly in the gray

CSG priced $130 million of seven-year convertibles after the close of markets Wednesday at par to yield 3% with an initial conversion premium of 25%, according to a syndicate source.

The Rule 144A deal came at the midpoint of talk, which was for a yield 2.75% to 3.25% and an initial conversion premium of 22.5% to 27.5%.

In the gray market ahead of final pricing, the paper was bid a little bit higher at plus 0.125 point to plus 1.5 points.

There were early high sellers at plus three, but nothing happened with those, a sellsider said.

For the most part, it was quiet, with convert arb players not expected to be overly interested.

Nevertheless, other than being longer than is typical, the seven-year bullet structure was pretty much plain vanilla, the sellsider said.

The recent norm for new issues has been for a five-year tenor.

It was reported that by early afternoon, the issue was fully subscribed, and it was expected that it would come at the midpoint.

The deal was talked to yield 2.75% to 3.25%, with an initial conversion premium of 22.5% to 27.5%.

The deal was seen slightly rich using a credit spread of 520 bps over Libor and a vol. of 30% at the midpoint of talk.

Still some source said that that credit assumption was "very generous" for a small cap, unrated tech company.

But players fully expected the deal to get done simply because of pent up demand among investors. Since Jan. 1, there have only been nine new issues, totaling $2.7 billion, according to Prospect News data.

"The lack of supply probably means this gets done easily and will trade at a premium," a selllsider said.

CSG's existing 2.5% convertibles weren't seen in trade, but they have been standing around par, according to one source.

General Growth jumps again

General Growth's 3.98% exchangeable convertibles due 2027 jumped another point to 103.25 bid, 104.25 offered, which comes in addition to last week's 4- or 5-point climb on a potential buyer for this bankrupt REIT, which has a portfolio of about 200 shopping malls.

Wednesday's trades were in response to General Growth's announcement that it has a new potential buyer - at least for a large portion of the entity - in the form of Brookfield.

"It should come as no surprise as it's been rumored for days," a New York-based sellside analyst said. But investors were cheered nevertheless because such news increases the certainty that a deal will actually get done.

The trading action and price increase "could reflect the rival bid, which means that there's that much more certainty that a deal gets done. Now there are two bidders," a New York-based sellside trader said.

The $2.625 billion proposed equity commitment from Brookfield is not subject to due diligence or any financing condition and is expected to create a floor value for the purpose of raising additional equity for the company, according to a news release.

The plan is subject to definitive documentation, approval of the bankruptcy court and higher and better offers under a bidding process to be approved by the court.

Last Tuesday the General Growth exchangeables jumped up to 102.5 bid, 103.5 from 98 on news that Simon Property Group Inc. had offered to acquire its smaller competitor for about $10 billion and make good on General Growth's convertible paper plus accrued interest.

Both Simon Property and General Growth are shopping mall REITs.

ArvinMeritor 4% paper expands

ArvinMeritor's 4% convertibles due 2027 looked to have expanded 0.75 point to 75, while the ArvinMeritor 4.625% convertibles due 2026 were called little changed at 87, according to a sellside analyst.

The paper traded Tuesday and Wednesday after the Troy, Mich.-based company said that it planned to sell 15 million shares of common stock as well as senior unsecured debt to the public, and tender for part of one of its debt issues.

The company plans to sell 15 million common shares and granted the underwriters an option on as many as 2.25 million more shares. The company will use the funds to pay down its revolving credit line and for other purposes. JPMorgan, Citi and UBS are running the books for the stock deal.

The company said it would sell senior unsecured notes, using the proceeds to buy back as much as $175 million of its 8.75% notes due 2012 and for other purposes. And ArvinMeritor is tendering for as much as $175 million of the 8.75% notes. Bank of America Merrill Lynch, JPMorgan, Citi and RBS are running the books for the debt offering and they are dealer managers for the tender offer.

Although the convertibles were little changed on Tuesday, and the 4% convertible only expanded on Wednesday, the feeling among players was one of vindication, a sellsider said, since "everybody was expecting a deal was coming." He said the deal was already "priced in" to the convertibles.

"The deals increase liquidity, and at least it beefs up confidence," the sellsider said.

Credit ratings agency Fitch Ratings said Tuesday it upgraded ArvinMeritor's main debt after the announced plans to raise money. Fitch upgraded ArvinMeritor's issuer default rating to B- from CCC.

Kenneth Lim contributed to this article

Mentioned in this article:

ArvinMeritor Inc. NYSE: ARM

CSG Systems International Inc. Nasdaq: CSGS

General Growth Properties Inc. Pink Sheets: GGWGQ

Marine Harvest ASA Oslo: MHG

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