CMS deal revived with wider yield talk, joining TXU after close as power issues heat up

By Ronda Fears

Nashville, July 9 - Power issues were hot Wednesday, convertible dealers said, as Calpine Corp. boosted its junk bond sale to $3 billion and AES Corp. launched a $1 billion loan refinancing package.

Still, buyside traders said the new convert offerings from CMS Energy Corp. and TXU Corp. on tap after the close were getting a tepid reaction with gray market bids at issue. Also at bat was a $500 million overnighter from MedImmune Inc.

"The new deals are priced for vol, not for yield," said a convertible trader at a hedge fund in New Jersey.

"Volatility is a crucial factor [for convert valuations], but our focus really is on income."

All the existing power issues were active and mostly higher, namely Calpine and Mirant Corp., said one dealer.

Another dealer agreed with buyside traders that power issues moving up underscored the market's reach for yield, also noting that CMS is ponying up a bit more yield in its revived deal.

CMS is still pitching $150 million of 20-year convertible notes but boosted the yield talk to 2.625% to 3.125 % versus original price talk the week of June 23 that put the coupon between 2.375% and 2.875%. The initial conversion premium is still expected between 48% and 52%.

The deal was delayed two weeks ago until CMS filed, as planned, a restated 10-K for 2001 with the Securities and Exchange Commission.

CMS also was pitching $250 million of seven-year straight senior notes, which were expected to price Thursday morning. But late in the day, after the market closed, the deal was said to have priced and upsized to $300 million. A market source said CMS priced the straight junk bonds at 99.668 to yield 8.0%.

The CMS convert was quoted by a buyside trader at the market close with a bid of issue price in the gray market. CMS shares ended down 51c, or 6.61%, to $7.21.

Lehman Brothers put the CMS convert, at the midpoint of guidance, 2.67% cheap, using a credit spread of 600 basis points over Treasuries and a 40% stock volatility.

Calpine's boost to its junk bond and bank financing - nearly doubling the $1.8 billion deal to $3 billion - piqued even more interest from convertible players hoping for some form of early retirement of the independent power producer's convertible bonds.

The deal is expected to come in two $1 billion fixed-rate tranches, with a seven-year tranche talked to yield 8¼% to 8½% and a 10-year tranche talked 25 bps behind the seven-year notes. The remaining $1 billion is expected as a combination of four-year floating-rate notes talked to yield Libor plus 575 bps and a term loan B, sizes to be determined.

Proceeds will be used to repay $950 million of the term loan B, $450 million under the working capital revolvers and outstanding public debt in open-market purchases.

Convertible holders are still expecting some buybacks or an exchange offer from Calpine. Thus, the 4% convertible notes due 2006 added another 1 point on Wednesday to 95 bid, 95.5 offered. The stock closed up 19c, or 2.48%, to $7.84.

TXU's new floater was on tap after Wednesday's close, but buyside traders said they did not see any gray market activity in it.

The $475 million of 30-year floating rate convertible notes were talked to yield three-month Libor plus 100 bps to 150 bps with a 65% to 70%% initial conversion premium.

TXU shares closed down 56c, or 2.6%, to $20.95. The TXU mandatories also tracked the stock lower, with the 8.75s losing 0.375 point to 31.625 bid, 31.875 offered and the 8.125s off 0.25 point to 33.125 bid, 33.275 offered.

Lehman put the TXU deal, at the midpoint of guidance, 1.2% cheap, using a credit spread of 240 bps over Libor and a 27% stock volatility, also factoring in the 2.3% common dividend yield.

But Lehman head of U.S. convertible research Venu Krishna noted that the high TXU common dividend yield reduces income pick-up on the convert to nearly 0% at the midpoint of price talk. He added that the low premium over investment value suggests limited downside, but TXU remains on negative watch by both Moody's and S&P.

Deutsche Bank Securities puts the TXU new deal 2.29% rich, at the mid-point of talk, using a spread of 220 bps over Libor and 28% volatility.

MedImmune was pitching a $500 million offering of 20-year convertible notes talked to yield 0.5% to 1.0% with a 75% initial conversion premium, to be sold on swap, with pricing slated before the open Thursday.

Up to $150 million of proceeds will be used to repurchase stock concurrently with the offering, with remaining proceeds going to general corporate purposes, which may include the repurchase of stock from time to time, pre-funding of debt and possible acquisitions.

MedImmune's 5.25% convertible due 2008 was quoted off 0.5 point to 105.75 bid, 106.75 offered. The $200 million issue, sold in February 2001, is callable in February 2004 at 103. The stock closed off 56c, or 1.42%, to $38.85.

The calls just keep coming for convertibles, although there already has been an extraordinary amount of early or unexpected redemptions so far this year.

"We're kind of struggling to reinvest proceeds of called issues," said Ted Southworth, a portfolio manager with Northern Trust Co.

He, too, expressed "no interest" in the new CMS deal.

Protein Design Labs Inc.'s new deal, another refi issue, priced aggressively and was seen sinking right out of the gate. The $250 million of 20-year convertible notes sold at par to yield 2.75% with a 33% initial conversion premium, versus talk for a 2.75% to 3.25% coupon and 30% to 35% premium.

The new Protein Design Labs convert was quoted by a dealer closing at 99.875 bid, 100.375 offered. The underlying stock closed down 32c, or 2.11%, to $14.82.

Buyside sources unimpressed with terms on the new deals, thus, are challenged to find value in paper already in the market.

"The market loosened up a bit at end of June, with all the new issue activity and the few stinkers," Southworth noted, but added, "I would like to see more evidence of rational expectations in earnings and valuations, especially in the Nasdaq."

Tyco International Ltd. converts have been a particular thorn in the side of holders, especially those wanting to remain at the higher end of the credit quality chain.

The Tyco 2.75% due 2018 dropped 1.75 points to 106 bid, 106.125 offered and the 3.125% due 2023 lost 2.5 points to 109 bid, 109.375 offered as the stock dropped 48c, or 2.43%, to $19.30.

"The bonds are just not performing like what we had hoped for," said a hedge fund manager in Connecticut.

"The stock had been taking off, but the bond just kept coming in, even with the premium contracting down to about 23% recently."

Perhaps because of the poor showing for high-grade converts, or maybe simply in a search to pickup yield, dealers see more activity in junkier names.

Charter Communications Inc. took off sharply Wednesday, one dealer said, on a couple of big trades but "no news, really." He said both converts climbed 7.5 points on the day, with the 4.75s at 74 bid, 76 offered and the 5.75s at 77 bid, 79 offered. Charter shares closed up 55.1c, or 15%, to $4.211.

© 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.