Nuveen exchangeables up in gray; El Paso slates preferreds; Mentor Graphics falls on new guidance

By Sara Rosenberg

New York, April 5 - Nuveen Investments Inc.'s new convertible exchangeables headed into the gray market on Tuesday with when-issued trades going off in the mid-par context on market anticipation of the deal being solidly received. Meanwhile, a new convertible perpetual preferred stock surfaced for El Paso Corp. and Mentor Graphics Corp.'s paper slumped on news that the company revised first quarter downwards.

Nuveen's exchangeables were seen quoted at ¼ over issue price and offered at ¾ over issue in the gray market on Tuesday afternoon, according to a market source.

"From what we're hearing the deal should be pretty well received. [People] think it will work," a second source added.

The two-part $700 million convertibles exchangeable deal is scheduled to price after the close on Wednesday via joint bookrunners Morgan Stanley & Co. and Merrill Lynch & Co.

The $350 million tranche 1 of 2.5-year notes is talked to yield 6.25% to 6.75%. The $350 million tranche 2 of 3.5-year notes is talked to yield 5.75% to 6.25%. Both tranches carry a premium of 20%.

According to an analyst, the deal is theoretically overvalued by approximately $0.09, or 0.2%, based on a stock price of $33.45, volatility of 30% and a credit spread of 138 basis points.

Nuveen's stock closed on Tuesday up $0.95, or 2.86%, at $34.18.

Tranche 1 will be issued by Merrill Lynch, which will be on the left as bookrunner. Tranche 2 will be issued by Morgan Stanley, which will on listed on the left as bookrunner.

The registered deals are non-callable and both carry dividend protection. The issues are expected to be rated Aa3 by Moody's Investors Service and A+ by Standard & Poor's.

The offerings are part of The St. Paul Travelers Cos. Inc.'s divestiture of its stake in the money manager Nuveen as the property and casualty insurer tries to free up cash for other uses. St. Paul announced a three-pronged plan recently to sell its 78% equity stake, or roughly 73.4 million shares, in Nuveen.

St. Paul is selling 39.6 million Nuveen shares in a secondary public offering. In addition, Nuveen is repurchasing $600 million of stock from St. Paul. Then, St. Paul is selling its remaining Nuveen stake, about 13.5 million shares, in forward sale agreements to Merrill and Morgan, which is the source of the stock underlying the exchangeable.

As part of the secondary public offering, Nuveen announced guidance for the first quarter. Based on assets under management of $119 billion at the end of February, Nuveen forecasts first-quarter revenues of about $135 million and earnings of between 42 cents and 44 cents per share.

El Paso launches new deal

El Paso Corp. launched $750 million of convertible perpetual preferred stock after the close Tuesday that were talked to price with a 4.375% to 4.875% dividend and 25% to 30% initial conversion premium, according to a market source.

The Rule 144A deal is scheduled to price after the close Thursday via joint leads Bank of America and Deutsche Bank, and almost every one has signed up to participate on the offering, including Citigroup, Credit Suisse First Boston, Morgan Stanley, Merrill Lynch, Goldman Sachs, ABN Amro, BNP Paribas, Scotia Capital, SGC, Hypo and Fortis.

The issue will be non-callable for five years, then with a 130% hurdle through maturity.

There is a $150 million greenshoe.

El Paso, a Houston-based energy company, plans on using proceeds to redeem the $300 million of outstanding 8.25% cumulative preferred stock of its subsidiary, El Paso Tennessee Pipeline Co. and prepay its Western Energy Settlement obligations, estimated to be approximately $442 million.

Mentor Graphics weaker on new guidance

Mentor Graphics' 6.875% convertible due 2007 ended the day down by nearly half a point and the 3.86% floating-rate note due 2023 ended the day down by nearly seven points as the company lowered its first quarter financial guidance, according to a trader.

The 6.875% closed at 102.53 bid, 103.03 offered and the 3.86% closed at 92.19 bid, 92.69 offered, the trader said.

"Short-dated paper so I guess people are still fairly confident of getting paid," a sell-side source said about the 6.875% convertible.

The stock closed down $3.61, or 26.45%, at $10.04.

After the close Monday, Mentor announced that it now expects first quarter revenue to be approximately $165 million compared to previous guidance of $177 million, earnings per share before severance costs and amortization of intangibles to be approximately break-even compared to previous guidance of $0.05 to $0.10 and loss per share on a GAAP basis to be approximately $0.05 compared to previous guidance of $0.01 to $0.06.

"This quarter saw significant year-over-year weakness in all notable product lines and in all regions," said Walden C. Rhines, chairman and chief executive officer of Mentor Graphics, in the release. "Book-to-bill was extremely weak and the company consumed substantial backlog."

The company is scheduled to announce earnings after the close on April 26 and will review 2005 annual guidance at that time.

Mentor Graphics is a Wilsonville, Ore.-based company that develops, manufactures, markets, sells and supports electronic design automation products and provides related services.

GM shrugs off downgrade

General Motors Corp.'s convertibles appeared to essentially disregard a downgrade by Moody's Investors Service as some issues ended the day marginally higher and one ended the day marginally lower.

General Motors' GBM issue was up $0.6, or 0.32%, at $18.56, the GPM issue was up $0.6, or 0.30% at $20.36 and the GXM issue was down $0.09, or 0.38%, at $23.41.

The Detroit, Mich.-based automaker's stock closed down $0.01, or 0.03%, at $29.04.

"It's not the big jump into the abyss that people were waiting for," a sell-side source said about the downgrade. "I think people already incorporated that one-notch downgrade. You might see more movement if they get downgraded below investment grade but I would think a lot of the people who would need to get out of it, like pension funds, have already pared back their positions."

On Tuesday, Moody's said it lowered the long-term and short-term ratings of General Motors Corp. to Baa3 and Prime-3 from Baa2 and Prime-2 and also lowered the long-term rating of General Motors Acceptance Corp. to Baa2 from Baa1.

The outlook for both companies is negative.

The downgrade reflects Moody's expectation that formidable long-term challenges in the company's automotive operations - an uncompetitive fixed cost structure including burdensome healthcare costs, steadily declining market share and an increasingly competitive pricing environment - will extend the time frame over which a recovery will occur and will also moderate the strength of any eventual rebound in earnings and cash flow.

The downgrade of GMAC's ratings reflects the significant business and financial ties between GM and GMAC that influence GMAC's auto finance operations - its origination volumes, asset mix and asset quality - and its capitalization.

Xoma convert seen up

In the biotech sector, some traders said Xoma Ltd.'s $60 million convertible was up around 10 points, though not particularly active, after the company's stock inexplicably jumped $0.34, or 32.38%, to close at $1.39 Tuesday.

One trader said he would mark the convertible around 88½ versus a stock price of $1.38 compared to 77½ versus Monday's stock price of $1.05.

Another source, however, said he felt that was too high.

"That seems high as I was offering them at 72 yesterday," that source said. "I would close them at 83 to 86."

One of the sources said he believes Xoma's converts move at about 0.5 per penny change in the stock.

The Xoma convertible was issued back in February with a seven-year maturity, a 6.5% coupon and a 15% initial conversion premium through JP Morgan Securities.

(Sheri Kasprzak contributed to this report.)

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