Outlook 2012: MF Global's two convertibles deals: A 'black eye' for the market

By Rebecca Melvin

New York, Dec. 30 - Ask anybody in the convertible bond space about 2011's notable deals and they will be hard-pressed to come up with even a single one that went notably well. At the same time, they will be able to tick off at least half a dozen deals that didn't do so well.

Winning the booby prize for the deal of the year that did the most poorly is MF Global Holdings Inc.

"The worst is MF Global - hands down. They priced two deals this year, and there is probably nothing worse than going bankrupt," and that's before the first coupon was paid, a New York-based syndicate source said.

"It certainly was a "black eye" for the market to have convert investors lose this much money, so quickly," the source said.

MF Global priced $250 million of 1.875% five-year convertibles in early February via Goldman Sachs & Co., Citigroup Global Markets Inc. and Deutsche Bank Securities Inc. Co-managers were Bank of America Merrill Lynch, J.P. Morgan Securities LLC, RBS Securities Inc. and Sandler O'Neill + Partners, LP.

Proceeds were to be used to repay debt under MF's $1.2 billion revolving credit facility, for general corporate purposes and to fund the cost of convertible note hedge transactions.

That deal did passably well on its debut in secondary market trading.

On Aug. 1, MF Global tapped the convertibles market again for an upsized $375 million of 3.375% seven-year convertibles via Goldman Sachs and Citigroup. Co-managers were Bank of America Merrill Lynch, JPMorgan, Deutsche Bank Securities and RBS Securities.

The second deal slipped below par on its debut to 99 bid, 99.5 offered.

Then this fall, after two weeks of gyrating shares and bonds, and amid efforts to right itself from under the staggering weight of losses related to more than $6 billion in European debt, the New York-based global broker-dealer succumbed to a bankruptcy filing.

The fall was sudden and surprising as MF Global was one of the leading brokers in markets for listed derivatives and one of 20 primary dealers authorized to trade U.S. government securities with the Federal Reserve Bank of New York.

The filing came amid talks with potential buyers of various MF assets. Interactive Brokers Group Inc. was reported to be a potential buyer. Those talks fell through.

Jon Corzine, former governor of New Jersey and former chief executive of Goldman Sachs & Co., was the man at the helm of the failed company and had intended to transform the offspring of Man Group into a firm that looked a lot like Goldman, moving away from a brokerage and toward an investment bank. Needless to say, the plan didn't work as investments in European sovereign debt went against it.

MF's three convertibles issues, including the two new issues and one older issue, fell to about 40 from 65 in those two weeks; and then took a leg lower to roughly 29 on news that MF's shortfall in customer funds was likely to exceed more than $1.2 billion, which is more than double previous estimates.

List of poor performers

Other than MF Global, other deals that were mentioned by market players as doing poorly included the following:

• ATP Oil & Gas Corp., which priced $150 million of 8% convertible perpetual preferred shares at a discount on June 15, 2011;

• JinkoSolar Holding Co. Ltd., which priced $125 million of 4% convertibles on May 12, 2011;

• A123 Systems Inc., which priced $125 million of 3.75% convertibles on April 1, 2011;

• Renesola Ltd., which priced $175 million of 4.125% seven-year convertibles on March 10, 2011;

• Savient Pharmaceuticals Inc., which priced an upsized $200 million of seven-year convertibles on Feb. 1, 2011;

• Molycorp Inc., which priced $200 million of 3.25% five-year convertibles June 10, 2011;

• Unisys Corp., which priced $225 million of mandatory convertible preferred stock to yield 6.25% on Feb. 23, 2011;

• Cemex SAB de CV, which priced an upsized $650 million of 4.875% five-year convertibles March 24, 2011;

• Regeneron Pharmaceuticals Inc., which priced $400 million of 1.875% convertibles that were reoffered at 98 on Oct. 13; and

• Air Lease Corp., which priced a downsized $200 million of seven-year convertibles, discounted to 96 on Nov. 16.

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