Mills off on restatement, Chapter 11 risk; volatility lifts Peabody, Medtronic; Alexandria, Baldor plan deals

By Kenneth Lim

Boston, Jan. 9 - The Mills Corp. dropped on Tuesday after the company said it will restate past results and must sell assets to pay off a $1.1 billion loan by end-March to stave off bankruptcy.

Meanwhile, the rest of the convertible market saw continued interest in volatility plays, with Peabody Energy Corp. and Medtronic Inc. gaining outright.

The primary market finally woke up from its holiday slumber, with the first two deals of the year announced on Tuesday. Alexandria Real Estate Equity Inc. plans to price $350 million of 20-year convertible senior unsecured notes Wednesday after the market closes. Baldor Electric Co.'s $150 million offering of three-year mandatorily convertible preferred stock, however, is only expected to price Jan. 25.

Mills drops on troubles

The Mills Corp.'s 6.75% convertible preferred fell about 4% outright on Tuesday, weighed by news that the company needs to restate past results following an investigation, and may have to seek bankruptcy protection if it cannot pay off a $1.1 billion loan.

The preferred, which has a $1,000 par, closed at 865 on Tuesday, down by 35.5 points. Mills stock (NYSE: MLS) fell 21.75% or $4.12 to close at $14.82.

"The stock got tattooed, wow," a buyside convertible trader said. "Only about 9,000 [preferred] shares traded today, not a lot."

Mills said Tuesday it needs to sell significant assets to repay a $1.1 billion loan that is due at the end of March, or it may be forced to seek bankruptcy protection. Mills also said an internal probe found accounting errors that will require the restatement of accounts from 2001 to the third quarter of 2005 and reduce shareholders' equity by up to $352 million. Mills' shareholders' equity was previously about $1.3 billion. Chevy Chase, Md.-based Mills, a real estate investment trust focusing on retail properties, is currently trying to sell itself.

The convertible preferreds will also now be classified as mezzanine equity by the company, which previously accounted for the preferreds as permanent equity. If Mills common stock is delisted, holders of the convertible preferreds may seek redemption of the securities, Mills said.

"This is obviously a big negative," a sellside convertible bond analyst said. "It's been building over time. This whole saga with Mills has been going on for months, and the news has been slowly getting worse, and culminating the way it has today, obviously the situation has gotten worse."

A sellside convertible bond trader said many holders of the Mills convertibles have exited since the company started to report problems with its Xanadu development and its accounting.

"There's nothing good about this for the convertibles," the trader said. "The preferreds are still holding at about 86.5, but if you ask me there's really no basis for confidence right now. You don't even know what their balance sheet really looks like at this point, and as a preferred holder you're not at the top of the pecking order, so you've got to be worried if they go into Chapter 11."

"There may have been a couple of offers out there for the company, but there's no certainty on a sale," the trader added. "Keep in mind that anyone who buys the company is inheriting a lot of issues."

Peabody, Medtronic gain on volatility

Volatility plays continued to draw attention on Tuesday as soft equity markets fueled optimism for a volatility pick-up.

"There's a lot of vega buying," a buyside trader said. "Good credit names that will hold up in a down market. Based on the activity I see, they are expecting an uptick in volatility. I don't know if that necessarily means stocks are expected to go down, but volatility usually rises when stocks are down."

Medtronic's 1.5% convertible due 2011 gained about ½ point outright, trading at 107 against a stock price of $53.90. Its 1.625% convertible due 2013 was also higher by about ½ point, at 107.45 versus the same stock price.

Medtronic stock (NYSE: MDT) added 0.28% or 15 cents on Tuesday and closed at $53.85.

Peabody, another name that has been popular among volatility seekers, also improved, trading at 95.375 against a stock price of $38, a gain of just over a point. Peabody stock (NYSE: BTU) closed at $38, up by 0.08% or 3 cents. The stock rose further in after-hours trading, to $38.25, after Banc of America initiated coverage on the stock with a buy recommendation.

Peabody, a St. Louis-based coal mining company, is the largest and most diversified coal company in the world and a "good play now, great play later," wrote Banc of America equity analyst Daniel W. Scott in a note.

Peabody's large low-sulfur coal resources are currently in demand among power producers at the moment because of the cost of sulfur emissions credits, Scott wrote. After 2009, when many coal plants will be able to handle high-sulfur coal, Peabody's Illinois Basin mines will then stand to benefit.

Peabody's Australian assets also give it a unique exposure to key markets in the Far East, Scott noted. In the long term, growing electric demand, new coal plants and falling production in Central Appalachia should boost Peabody's prospects.

Scott has a $53 price target on Peabody stock.

Issuers return with 2 deals

The first two convertible deals of 2007 were announced on Tuesday.

Alexandria's $350 million offering of 20-year convertible senior unsecured notes will arrive first, with pricing expected Wednesday after the market closes.

Price talk for Alexandria's deal is for a coupon of 3.5% to 3.75% and an initial conversion premium of 20%. There is an over-allotment option for a further $52.5 million.

UBS Investment Bank, Citigroup and Merrill Lynch are the bookrunners of the Rule 144A deal.

Alexandria is a Pasadena, Calif.-based real estate investment trust that focuses on offices and laboratories that are leased to research entities and government agencies. It will use the proceeds of the offering to reduce the outstanding balance on an unsecured credit line, which will free up the credit line for working capital and other corporate purposes that includes acquisitions and property development.

Baldor's $150 million of three-year mandatorily convertible preferred stock will price on Jan. 25 after the market closes. Price talk has not been set, given the long roadshow.

The 600,000 preferreds offered will be sold at par of $250.

There is an over-allotment option for a further $22.5 million, or 90,000 preferred shares.

UBS Investment Bank and Bear Stearns are the bookrunners of the off-the-shelf offering.

Baldor will concurrently offer $200 million of common stock and $550 million of unsecured senior notes. UBS is the bookrunner of the common stock offering, which has a $30 million greenshoe, and BNP Paribas Securities Corp. and Lehman Brothers Inc. are the bookrunners of the senior notes offering.

Baldor, a Fort Smith, Ark.-based maker of electric motors, drives and generators, said the proceeds of the deals will be used to finance its previously announced acquisition of Rockwell Automation Inc.'s Reliance Electric industrial motors and Dodge mechanical power transmission businesses. The proceeds will also be used to repay substantially all of Baldor's debts.

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