Global Crossing, CBIZ gain in line on debuts; Midway sees narrow interest; Medtronic gets results boost

By Kenneth Lim

Boston, May 24 - A trio of new deals saw light action in the convertible bond market on Wednesday, with the lack of borrow cited for limited interest in two of the three names.

Global Crossing Ltd.'s new 5% convertible senior notes due 2011 were seen trading about one point above par, in line with gains in the underlying stock. Midway Games Inc.'s new 7.125% convertible due 2026, which was not widely publicized ahead of its early-Wednesday pricing, did not see any significant trades.

CBIZ Inc.'s 3.125% convertible due 2026 also gained on its Wednesday debut, pulled up on an outright basis by an increase in the stock. The convertible was seen bid at 100.375 against a stock price of $7.96, while CBIZ stock (Nasdaq: CBIZ) gained 2.89% or 23 cents to finish at $8.19.

CBIZ, a Cleveland-based business services provider, priced the $100 million deal late Tuesday within talk. The notes were offered at par, and the size of the deal includes a $15 million over-allotment option that was exercised. Price talk guided for a coupon of 2.875% to 3.375% and an initial conversion premium of 30% to 35%. The initial conversion premium was finalized at 33.5%.

In trading, Medtronic Inc.'s convertibles were flat to higher on an outright basis after the company reported fourth-quarter results that were slightly better than expected.

Oil and gas names ended lower on an outright basis as oil prices fell on higher gasoline inventories. Nabors Industries Ltd.'s newest 0.94% convertibles due 2011 were seen trading at 98.25 against a stock price of $34.75, less than its reoffered price of 99 on May 18. Shares of Bermuda-headquartered Nabors (NYSE: NBR), a land drilling contractor, slid 1.36% or 48 cents on Wednesday to close at $34.81.

Oil and gas producer Chesapeake Energy Corp.'s 4.5% preferred changed hands at 92.25 against a stock price of $29.40 early Wedneday, and closed down 1.64% or 1.51 points at 90.8. Shares of Oklahoma City-based Chesapeake (NYSE: CHK) slid 1.19% or 35 cents to end at $29.04.

The convertible market in general was healthy, with movements in the equity markets providing opportunities for investors, market sources said.

"The secondary market is still pretty strong," a sell-side convertible bond trader said. "There's an increase in volatility, which is good."

Global Crossing gains on debut

Global Crossing's new 5% convertible senior notes due 2011 were seen better bid on their first day of trading, but volume was limited by what investors described as a very poor borrow on the stock.

The convertible, which priced late Tuesday at the cheap end of talk, was marked at 101 bid, 102 offered early Wednesday, and traded at 101.25 against a stock price of $19.50 later in the day. Global Crossing stock (Nasdaq: GLBC) closed at $19.61, up 2.4% or 46 cents.

"The Global Crossing deal had a very difficult borrow, so that one trades pretty cheap," a sell-side convertible bond trader said.

Global Crossing's $125 million deal was offered at par, and price talk was for a coupon of 4% to 5% and an initial conversion premium of 20% to 25%. The initial conversion premium was finalized at 20%.

The first three years of interest payments for the convertibles are collateralized by a portfolio of U.S. Treasury securities. There is a greenshoe option for a further $18.75 million.

Goldman Sachs & Co. was the bookrunner of the registered off-the-shelf deal.

The lack of a borrow made the deal hard to swallow for hedge investors, but a concurrent stock offering may have eased the problem slightly, market sources said.

The convertible bonds were sold along with an upsized $240 million offer of 12 million shares, which excludes an additional 1.8 million shares in an over-allotment option. The share offer was originally for 6.75 million shares, but that was raised to 9 million shares before the final increase to 12 million shares.

Global Crossing is a Bermuda-headquartered provider of internet-based telecommunications solutions. It will use the proceeds from the convertible and stock offerings to fund general corporate purposes, which may include buying assets and businesses. Part of the proceeds will also be used to buy a portfolio of U.S. Treasury securities to pay for the first three years' interest payments for the convertibles.

Midway sees limited borrow, interest

Midway Games' $75 million offering of 20-year convertible senior notes were seen as cheap but also had a poor borrow, and the security was not actively traded on Wednesday, sources said.

The notes priced on Wednesday before the market opened at a coupon of 7.125% with an initial conversion premium of 10%. They were offered at par, and there were no price talk terms, market sources said. Midway stock (NYSE: MWY) fell 5.98% or 59 cents on Wednesday to end at $9.28.

There is no greenshoe option.

Banc of America Securities was the bookrunner for the Rule 144A deal.

Midway is a Chicago-based maker of video games. It will use the proceeds of the deal for general corporate purposes and for possible acquisitions and strategic alliances with other video game development companies.

Syndicate sources said marketing for the deal started "a while ago," although several traders and analysts remained unaware of the deal as late as Wednesday afternoon.

"It was like a stealth overnight, that's what it was," a sell-side analyst said.

A convertible bond trader who said the name was not seen the entire day commented that the notes "probably went to selective hands."

A syndicate source who was not involved in the deal said the offering could have been a "club deal," noting that a previous deal by the company was placed among six or seven hedge funds.

"I'd be surprised if this hadn't been done in exactly the same way," the source speculated.

The sell-side analyst said the deal likely received limited interest because of the stock borrow.

"The borrow is like impossible," the analyst said. "It's a very, very expensive borrow."

But the offering modeled at 102 using a credit spread of 650 basis points over Libor and a volatility of 35%, the analyst said. That would work out to a theoretical break-even point in 1.3 years, "which is obviously very attractive relative to call protection," the analyst said.

"Of course, we realize that this valuation is based on a prohibitive cost of borrow," the analyst said.

The deal was probably more attractive to an outright investor than a hedge fund, the analyst added.

"But it's probably a couple of outrights that bought this," the analyst said. "I can't imagine that it went to too many people."

Medtronic higher outright on results

Medtronic convertible bonds were slightly higher on an outright basis on Wednesday after the company's fourth-quarter results were not as bad as expected.

"In general, there's a relief rally in the stock," a sell-side convertible analyst said.

Medtronic's 1.25% convertible due 2021 and its 1.5% convertible due 2011 traded at 99 versus a stock price of $48. The 1.625% convertible due 2013 was 98.5 against a stock price of $49. Medtronic stock (NYSE: MDT) closed at $50.17 on Wednesday, higher by 4.63% or $2.22.

Medtronic said late Tuesday that net profit for the quarter ended April rose to $746.6 million, or 62 cents per share, from a profit of $194.4 million, or 16 cents per share, in the year-ago period. The Minneapolis-based medical devices maker also raised its profit guidance for fiscal 2007 to between $2.52 and $2.60 per share, up from the previous range of between $2.50 and $2.55

"Their results were in line to slightly better, but the fact that they came in line was a big relief," the analyst said.

Investors had been concerned about Medtronic's performance after product recalls by rival Guidant Corp. in 2005 hurt implantable heart defibrillator sales, and competing implantable cardioverter defibrillator (ICD) maker St. Jude Medical Inc. reported disappointing sales earlier this year, the analyst said.

"The stocks have not been doing well because of slowing growth in the ICD market," the analyst said. "Clearly it has slowed, but things could have been worse."

The question on investors' minds now is how quickly the ICD market will recover to the high-teens growth of previous years, but that is unlikely to happen until the market stabilizes, the analyst said. Concerns about whether proposed changes in Medicare reimbursements will affect sales of medical heart device makers like Medtronic are also creating an overhang on the stock, but there is "potential for upside" if the issue is resolved, the analyst said.

"It's probably a longer-term story for equity guys," the analyst added.

For outright investors, Medtronic's convertible bonds are a "vol play," and near-term volatility has spiked.

"People who bet on that, in general, it's not a bad bet because there's a lot of demand for investment-grade paper," the analyst said.

Hedged investors can also benefit, "because the bonds would have picked up on near-term vol," the analyst said.

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