Prudential, Maverick receive tepid reception; GM extends losses; PRG-Schultz plunges; aQuantive lifts

By Rebecca Melvin

Princeton, N.J., Nov. 10 - The convertibles market gave a lukewarm reception Thursday to a windfall of new issues, including a $2 billion deal from Prudential Financial Inc., which represents one of the largest convertible new issues of the year.

Of the two other new issues, Maverick Tube Corp.'s $220 million 1.875% convertible bonds were weak and little heard in the market; but the $153.25 million of Credit Suisse First Boston Capital's Shared Appreciation Income Linked Securities (Sails), which are mandatorily exchangeable into Equinix Inc., gained from its issue price of 35.64, to close at 36.15 bid, 36.40 offered, according to a syndicate source.

Both Prudential and Equinix were reported in trade, but Maverick was not.

On the sellside, some wondered why the Maverick convertibles, which modeled out cheap and were oversubscribed, according to a syndicate source, weren't performing better.

"I would think that people would want to move from the old bonds into the new ones, which have takeover protection," a New York-based sellside trader said. He said that perhaps the soft market and focus stolen by the large Prudential deal were to blame for the drag on Maverick.

"Also, from the outright side, perhaps, it wasn't the right time to jump into the energy services area," he said. But he predicted that the new 1.875s would move higher given a few more days.

Maverick manufactures steel tube for, among others, the oil and gas sector, which has weakened in recent days due to lower fuel prices.

On Wednesday, buysiders said that the new Maverick convertible's terms, including an eight year call/put, discouraged interest.

But even the best reactions were muted in the convertibles market on Thursday, and a New York-based analyst commented, "It's the same old story: we're waiting for volatility and interest rates to pick up. But if the market is stale for too long, people lose interest. We'll have to wait and see. There are no new large redemptions for this quarter. We'll have to see what happens at the end of the year."

An optimist, based in Chicago, said however that the market may be poised to pick up on the heels of recent issues from well-known names like Prudential, Qwest Communications International Inc. and Chesapeake Energy Corp.

Earlier this month, Qwest priced $1.1 billion of 20-year senior convertible notes at par to yield 3.5%, and Chesapeake Energy priced two concurrent convertible offerings, including $600 million of contingent convertibles priced to yield 2.75% and $500 million of 5% cumulative convertible preferred shares.

"For some of the smaller guys when they see Prudential, which is a sophisticated, savvy issuer, they feel more confident that a convertible is viable financing," the midwestern buysider said.

Elsewhere, General Motors Corp. bonds continued to bleed, particularly the 6.25% $25 bonds, after a fresh revelation that the largest U.S. automaker overstated its 2001 net earnings by $300 million to $400 million due to errors related to booking credits from suppliers.

The restatement announced late Wednesday added fuel to a fire that was already burning brightly as concerns about GM's financial and operating health pulled its stocks and bonds sharply lower on Wednesday and again on Thursday.

The preferred shares of Ford Motor Co. also fell.

Meanwhile, PRG Schultz International Inc. saw its 4.75% convertibles plunge to trade in the low 40s, down from about 60 on Wednesday, and from a recent level of 80 bid, 82 offered, sources said.

The slide started after the small Atlanta-based recovery audit firm revealed in its third-quarter financial filing that it failed to meet certain financial covenants in the quarter and it projected it will be unable to make a $3 million interest payment to its convertible noteholders due Nov. 28.

On the upside, aQuantive Inc. saw its convertibles lift again to near double par, continuing a move upward on strong earnings reported Tuesday.

Prudential convertibles reoffered at 98.5

The new floating Prudential Financial convertibles traded slightly above their reoffered price of 98.5 and closed in that area. One source put the close at 98.4 and another said it closed at 98.75 bid, 98.875 offered.

Prudential shares closed down 62 cents, or 0.84%, at $73.50.

When market sources were asked if they played the mega deal, they said, "a little."

Prudential priced $2 billion 30-year convertibles at par to yield three-month Libor minus 2.76%, with an initial conversion premium of 21.4%, according to a syndicate source. The pricing yields an initial coupon of 2.10%, which was seen rich by an outright player.

The convertible senior notes are non-callable for 1.5 years, with puts in years 1.5, five, 10, 15, 20 and 25. There is dividend and takeover protection.

There is a greenshoe of $300 million.

In connection with the offering, Prudential expects to repurchase up to $210 million of its stock on swap from purchasers of the convertible notes.

A portion of proceeds initially are expected to be used to purchase an investment portfolio as well as to repurchase, in privately negotiated transactions, concurrently with the convertible offering, the $210 million in stock.

Prudential Financial, based in Newark, N.J., offers insurance and other financial services.

Maverick prices within talk

Maverick, the Chesterfield, Mo.-based steel tube maker, was unanimously hailed a "solid company," so why its $220 million of 1.875% convertibles didn't trade better was somewhat of a mystery. They carried an initial conversion premium of 21%.

The Rule 144A deal of convertible senior subordinated notes sold via bookrunner Morgan Stanley & Co. priced within talk, which was for a coupon of 1.75% to 2.25% and an initial conversion premium of 20% to 25%.

The notes will be non-callable for eight years and will have puts in years eight, 10 and 15.

Conversion is possible after Aug. 15, 2013 at a rate of 24.6406 shares per $1,000 principal amount or a price of $40.58.

Earlier conversion is possible if the notes trade below 103% of the product of the last reported sale price of stock and the conversion rate for five consecutive trading days. There is no stock price trigger.

Maverick intends to use proceeds to repurchase its stock in the open market and in private transactions or for other general corporate purposes.

About $25.7 million of proceeds will be used to pay the net cost of the convertible note hedge and warrant transactions that will effectively increase the conversion price to $52.00 per shares, or a premium of 55%, from the company's point of view.

Mandatory exchangeables trade up

The CSFB Capital 5.5% mandatory issue that is exchangeable into Equinix was seen 1.5% cheap by one sellside shop and traded up a little, sources said.

CSFB Capital LLC sold 4.3 million Shared Appreciation Income Linked Securities (Sails), or about $153.25 million, mandatorily exchangeable into shares of Equinix, Inc., pricing them to yield 5.5% with an initial conversion premium of 18%, according to a syndicate source.

Pricing was at the middle of talk that called for a dividend of 5.25% to 5.75% and at the cheap end of talk for the initial conversion premium of 18% to 22%.

Credit Suisse First Boston was the bookrunner for the three-year mandatory exchangeables. Co-managers were Citigroup Global Markets Inc. and Goldman Sachs.

Concurrently with the exchangeable offering was a public offering of 5.15 million Equinix common shares by Equinix's largest shareholder, STT Communications. The public offering will include up to an additional 739,549 shares to cover over-allotments.

Foster City, Calif.-based Equinix is a provider of network-neutral data centers and internet exchange services.

PRG-Schultz asset value plagues

The 4.75% convertibles of PRG-Schultz were "cracked," according to one market source, and another said his buyside firm wouldn't touch them until they were "completely blown up," after the company said that it wouldn't meet financial covenants and due to the fact that it's a financial company with little true asset value.

The company said in its earnings report that it has $125 million principal amount of convertible notes outstanding, which a New York-analyst said has a market value of $62 million.

Although the company currently has borrowing capacity under its credit facility, it projects that it will be unable to make the $3 million interest payment to holders that is due Nov. 28. "In addition, the company's financial performance during the third quarter did not meet several financial covenants in its credit facility," the company said in its release.

In addressing its financial problems, the company has "entered into a forbearance agreement with its bank," which means the bank won't take action relating to the financial covenant defaults and additional technical defaults any sooner than Dec. 23, but mostly likely no later than March 31.

Shares of PRG-Schultz fell 20 cents, or 33.9%, to $0.39.

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