CIT up for second session; Janus tightens terms amid takeover rumor, demand; Merix jumps

By Rebecca Melvin

New York, July 15 - The convertible market remained firm Wednesday with strong buy interest, but volumes tapered off due to a lack of sellers, market sources said.

"I don't think volume was as good as it was yesterday," a New York-based sellside analyst said. "Everything was bid."

The improvement due to strength in credit, which has been better since last week, was attributed to better sentiment and more confidence.

On Tuesday, the better-than-expected earnings from Goldman Sachs Group helped everything move up, the sellside analyst said. "Today we had Intel, which was good news, and the semiconductor space is looking better; but I'm not sure if they are big enough to move the market."

CIT Group Inc.'s convertible preferred stock was a touch better for a second consecutive day on speculation that the New York-based commercial lender will be able to negotiate a deal with regulators to save itself - although after the close CIT said talks had ended.

Janus Capital Group Inc. was not heard in the gray market, but it was able to tighten the terms of its offering of $150 million of five-year convertible senior notes, expected to price after the end of trading, as its common stock moved higher amid a rumor that Franklin Resources was willing to pay about $13.50 a share in stock for Janus.

Janus announced its convertible note and common stock offerings on Tuesday at the same time that it reported slightly larger second-quarter income and that Janus chief executive officer Gary Black resigned from the company.

Merix Corp. convertibles traded up on Wednesday after the Beaverton, Ore.-based maker of printed circuit boards reported a good quarter and improved liquidity. In addition, the company is exploring options for using cash and liquidity, including possibly repurchasing a portion of its convertibles, a market source said.

Although a reportedly oversubscribed Janus offering was set to price after the close of markets, no new launches were made Wednesday.

The lack of launches this week may be due to earnings season, a syndicate source said. "Many issuers are in blackout to do a deal until they release earnings."

CIT improves

CIT's 8.75% perpetual convertible preferreds traded at about 10 bid, 11 offered, which represented about 20% of par and a premium of about 5 points over parity, compared with trades at 9.23 and 9.5 on Monday.

CIT common stock settled higher by 3 cents, or nearly 2%, at $1.64 on Wednesday.

There was speculation concerning several different schemes afoot to help pull the company out of its tailspin, including possible debt exchanges and a preferred exchange. It was believed that the Federal Deposit Insurance Corp. would view such actions favorably, according to a sellside analyst.

"Although a common/preferred swap won't directly resolve the liquidity shortfall, FDIC may still view the incremental common capital as a positive when assessing CIT's qualification for the TLGP," Bank of America-Merrill Lynch research analyst Alan Yu wrote in a report published Wednesday.

. "Past bank exchanges generally point to a modest haircut to the par value of the preferred stocks to be exchanged. This could provide some upside potential for CIT's preferred stocks in a similar exchange, since they are trading around 20% of par most recently," Yu wrote.

For risk arbitrage investors, a potential concern is that stock borrow could get extremely tight as common shares issuable for the exchange may account for over 100% of CIT's current floating shares, according to the report.

The company has so far not indicated an intention to pursue such an exchange.

" Under a non-chapter 11 scenario, we think a distressed debt exchange and/or a preferred/common swap may take place. Participating debt investors and the US Treasury (who owns preferred stocks) will likely require the suspension of the preferred dividends," Yu wrote.

Recent examples of preferred exchanges include Citigroup's preferred exchange in which investors took a haircut to par of 5% to 15%; KeyCorp'e exchange, in which there was a 28% to 39% haircut to par; and Fifth Third Bancorp, in which there was a 5% haircut to par.

With these models and CIT preferreds currently trading at an 80% haircut to par, there is likely to be a higher recovery in the form of an exchange, Yu said.

Nevertheless, a convertibles buyside analyst said the name was not a focus because CIT is in dire straits, arguably more so than Fifth Third and KeyCorp, "even though there is money to be made simply because you have to take a leap of faith to how it funds itself going forward."

But well after the close CIT announced talks with government agencies had ceased.

In a statement, the company said it "has been advised that there is no appreciable likelihood of additional government support being provided over the near term. The company's board of directors and management, in consultation with its advisors, are evaluating alternatives."

The CIT's 7.75% mandatory convertibles due 2015, which have a par value of 25, were not heard in trade and were last at 7.51.

Janus to price

Janus' convertible offering was not seen in the gray market prior to pricing, and one sellsider said that it wasn't getting too much attention due in part to terms that weren't that appealing, given the 3.5% to 4% coupon.

Nonetheless, the Denver-based asset management company was able to tighten deal terms even lower to 3.25% to 3.75% due to circulating rumors and high demand.

"The equity is rallying today on a takeover rumor," a buysider said. "That allowed them to revise the terms of the convert, and we are hearing it is several times oversubscribed at this point. It's a small deal. Ninety-six percent of assets are equity so it's very high beta to the market."

The company also talked a 20% to 25% initial conversion premium. But that was revised up to 27.5%, according to a syndicate source.

When Janus announced its convertible and stock deals, it reported second-quarter net income from continuing operations of $15.8 million, compared with a net loss from continuing operations of $818.1 million in the first quarter 2009, and net income from continuing operations of $65.6 million in the second quarter 2008.

Results in the first quarter of 2009 included a goodwill and intangible asset impairment charge of $856.7 million, and other charges.

The company said its operating profit margin for the second quarter 2009 was 23.5%, down from 34.5% in the second quarter 2008.

Proceeds from the two registered off-the-shelf offerings, together with cash on hand, will be used to repurchase up to $400 million of the firm's outstanding 2011, 2012 and 2017 senior notes in a tender offer and for general corporate purposes, including the repayment or repurchase of any of series of notes that remain outstanding.

J.P. Morgan Securities Inc. and Goldman, Sachs & Co. are acting as joint book-running managers of both offerings.

Merix jumps

The Merix 4% convertible senior notes due 2013 traded at 35 bid, 35.50 offered early in the session, and moved up to 42.50 bid, 43 offered. They were left Wednesday at 44 bid.

"I pity the client who sold them at 35 this morning. It is a cross 35.00 - 35.50 1mm+ and next print 20 minutes later was 42.50 -43.00 1mm+ and than five minutes later again 42.50 - 43.00 1mm+. Clearly someone got screwed," a buysider said.

Mentioned in this article:

CIT Group Inc. NYSE: CIT

Janus Capital Group Inc. NYSE: JNS

Merix Corp. Nasdaq: MERX

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