New structure in Nuveen exchangeable seen as springboard for more convertibles

By Ronda Fears

Nashville, March 29 - With a flagging new issue calendar in the convertible market, many onlookers are hopeful that the innovation of Morgan Stanley & Co. and Merrill Lynch & Co. in bringing the exchangeable that converts into Nuveen Investments Inc. will inspire more issuance.

To date, convertible issuance this year is running far behind year-ago levels. Including investment bank deals, Prospect News has tallied $7.76 billion thus far for 2005 versus $18.63 billion in the same period of 2004.

"This is a unique structure," observed a top convertible origination official, referring to the Nuveen exchangeable. "I think any company with a large block of secondary stock should look at this" as a means of raising capital.

Morgan and Merrill technically are making the offerings off their own balance sheets, chiefly because Nuveen and The St. Paul Travelers Cos. Inc. did not want to issue a convertible, according to one party involved in the deal. So, St. Paul is selling about 13.5 million shares - in forward sale agreements - to Merrill and Morgan, which is the source of the stock underlying the exchangeable.

Morgan and Merrill on Monday launched a two-part issue of exchangeables, convertible into Nuveen, at $350 million each. Tranche 1, which is being offered by Merrill, is for 2.5-year notes talked to yield 6.25% to 6.75% with a conversion premium of 20%. Tranche 2, which is being issued by Morgan, for 3.5-year notes is talked to yield 5.75% to 6.25%, also with a premium of 20%.

It is part of St. Paul's divestiture of its 78% equity stake in Nuveen, wherein St. Paul is selling 39.6 million Nuveen shares in a secondary public offering and Nuveen is buying back $600 million of stock, in addition to St. Paul making the forward sale agreements to Merrill and Morgan for the exchangeable.

Liquidity barrier breakthrough

Synthetic convertibles, or investment bank deals that are exchangeable into another underlying stock, have been on the rise for months. In a report earlier this month, Merrill convertible analyst Tatyana Hube suggested that synthetically created convertibles may be a new frontier for opportunities for both buyers and bankers amid the dearth of issuance in the standard convertible market.

"Before, issuing a synthetic was mainly driven by broker/dealers wanting to monetize their holdings of stock in various companies and secondarily by investors looking for a very specific exposure that the non-synthetic convertible market could not offer," Hube said.

"However, with the slowdown of traditional convertible new issuance, the synthetic convertible market witnessed a revival in 2004, when approximately 200-plus deals were priced for an estimated $3.5 billion in proceeds. Going into 2005, with the convertible primary market still looking lackluster, the synthetic convertible product remains very relevant and popular in the institutional marketplace."

The Nuveen deal, however, breaks through a long-standing barrier to the scale of these deals in the overall picture - the lack of liquidity.

"By going to this type of structure, the deal size can be significantly larger," one investment banker observed. "A broker/dealer typically won't have the volume of stock necessary to make a big offering, but there are lots of companies that have huge blocks of secondary stock available. I think it's a breakthrough for [convertible] issuance."

© 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.