By Ronda Fears
Nashville, April 24 - Convertible players were chewing on a breakfast deal from Mercury Interactive Corp. Thursday, noting a dearth of tech paper among new deals so far this year, although terms were described as aggressive even after being discounted 2 points to buyers by the underwriters.
The transaction also opened up a credit default swap market for the name, sources said.
Mercury sold $500 million in proceeds of five-year convertible senior notes at par to yield 0% with a 43% initial conversion premium in a breakfast deal in the Rule 144A market via sole lead manager UBS Warburg. It was repriced to buyers at 98, however, for a yield of 0.408%, up 40%.
The convertible traded lower in the gray market with the bid at issue price minus 2 points and the offer at issue price minus 1.5 points just before the open, traders said.
It was closed Wednesday by the underwriter at 98.125 bid, 98.25 offered.
Mercury shares dropped $1.13, or 3.13%, to $35.02.
There was no credit default swap market for Mercury prior to this deal, but a derivatives desk source said they came out with 280-320 basis points over Libor early Thursday when the new deal priced.
"We'll chew on technology issues if the premium is low enough," said Barry Nelson, a portfolio manager at Advent Capital Management.
"There are few balanced tech convertibles left in the wake of the bear market. We're overdue to seem more new issuance in the tech sector."
Players seemed to think the deal went very well, but no one could quantify it in terms of over-subscriptions.
"It's a good credit, nice vol. The numbers are tight but workable," one market source said.
"We're feeling pretty good about this one."
Bear Stearns & Co. head of convertible research, Rao Aisola, said the new Mercury deal was very similar to the recent Yahoo convert, but with a more reasonable premium.
The issue did not feature any quirky feature like warrant kickers, nor was it sold on call spread. But, like the Yahoo convert, the bonds have a 0% coupon with no accretion, which is similar to buying a call option 43% out of the money.
"The Mercury deal is an example of a relatively new structure brought to our market," Aisola said.
"Although this deal does not model as aggressive as Yahoo due to the more modest conversion premium, it still models out at a fair value below par (98.6%) with what may be an aggressive credit spread assumption on our part."
Bear Stearns put it 1.7% rich - at par with the stock at $36.15 - using a credit spread of 260 basis points over Treasuries and a 45% stock volatility.
Other sellside analysts modeled out the new Mercury convertible rich, as well.
Deutsche Bank Securities Inc. put it 1.5% rich - at par with the stock at $36.15 - using a credit spread of 350 bps over Libor and a 48% stock volatility.
Lehman Brothers put it 1.17% rich - at par with the stock at $36.15 - using a credit spread of 400 basis points over Treasuries and a 50% stock volatility.
Wachovia Securities, Inc. put it 0.66% rich - at par with the stock at $36.15 - using a credit spread of 400 basis points over Treasuries and a 50% stock volatility.
Merrill Lynch & Co. put it 2.7% rich - at 98 with the stock at $34.296 - using a credit spread of 430 basis points over Treasuries and a 50.5% stock volatility. With the stock at Wednesday's close of $36.15, Merrill put the deal right about fair value.
"I didn't play this one, I'd like to see cheaper paper. But I liked it," said Andrew Watts, a portfolio manager at Oaktree Capital Management.
"I liked it because I have the old bond and it marked mine up nicely."
The Mercury 4.75% convertible due 2007 was quoted up 3.5 points to 98.75 bid, 99.75 offered - moving north due to hopes of more buybacks in that issue by the company as an upcoming call approaches, traders said.
The old issue still has about $300 million outstanding, but the company has been buying back those bonds periodically. To date, the company has bought back some $183 million of the issue. It is callable in July at 102.714.
"They didn't need the cash; this deal brings them up to about $1.3 billion in cash, so it makes sense to be buying back the old issue with a 4.75% handle," said another buyside source on the West Coast, which runs both hedged and outright convertible strategies.
"They also may be looking at an acquisition they'd like to do in cash. That would make pretty good sense, too."
Venu Krishna, head of U.S. convertible research at Lehman Brothers, said the 0% financing certainly leaves room for Mercury to continue buybacks on the 4.75s.
Mercury said proceeds would be used for general corporate purposes, including potential acquisitions. The company did not mention debt repayments or buybacks, though.
Terms of the deal are:
Issuer: Mercury Interactive Corp.
| Issue: | Convertible senior notes
|
| Lead manager: | UBS Warburg
|
| Amount | $500 million (proceeds)
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| Greenshoe: | $100 million (proceeds)
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| Maturity: | May 1, 2008
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| Coupon: | 0%
|
| Price: | Par
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| Yield to maturity: | 0%
|
| Conversion premium: | 43%
|
| Conversion price: | $51.695
|
| Conversion ratio: | 19.344
|
| Call: | Non-callable
|
| Contingent Conversion: | 110%
|
| Settlement: | April 29
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