Novellus up in the gray ahead of pricing; MGM gains on swap; Alaska Communications quiet

By Rebecca Melvin

New York, May 4 - Novellus Systems Inc.'s planned $525 million of 30-year senior convertible notes were higher in the gray market by about 0.75 point to 1.25 points ahead of final pricing seen late Wednesday, with shares of the San Jose, Calif.-based semiconductor equipment maker making a pretty significant jump, outperforming the overall equities markets.

"The stock is obviously being supported by Novellus' comments that it intends to use up to approximately $400 million of the net proceeds of the proposed offering to repurchase shares of Novellus' common stock from purchasers of the notes," a Connecticut-based sellside analyst said.

Alaska Communications Systems Group Inc. was also expected to price a $100 million offering of seven-year, non-callable for life, convertible notes after the market close on Wednesday. But its shares sold off into the close.

MGM Resorts International saw its convertibles expand on a hedged basis by 0.75 point as its shares surged up 10% in reaction to a narrower quarterly loss posted Wednesday.

Elsewhere the convertibles of a couple of communications equipment makers were in trade, including JDS Uniphase Corp., which was expected to release earnings after the market close, and Ciena Corp.

Overall, volumes were described as light. Equities markets sold off on Wednesday.

Novellus up in the gray

Novellus' planned $525 million offering of 30-year, non-putable bonds were seen about a point higher in the gray market ahead of pricing.

Novellus' shares closed up $2.01, or 6.5%, at $32.92 in strong volume. Intraday, the shares' climb was even higher, up to $33.25 per share.

At the middle of price talk, the coupon on the planned deal is 2.75% with a 17.5% conversion premium.

The reason for the high coupon and low premium is the 30-year maturity on the instrument and an investment value of only $27 at a 700 basis points spread or $34 at a 400 bps spread ," according to analysis published by CRT Capital LLC.

"Novellus probably will be attractive...despite [its being a] very long dated issue with no put," according to CRT Capital. "The premium is pretty low and the common pays no dividend."

The long-term, good credit profile cast it as primarily an outright play, market sources said, in the same vein as other big Blue Chips like Intel, a New York-based sellside analyst said. "The arbs don't want that long of paper."

"A low coupon and a very long maturity puts downward pressure on the investment value (which we imagine is calculated differently by different models, however, at some point the value is so low that it does not appear any higher than an average recovery an investor would expect in the event of default)," according to CRT Capital's analysis.

The new Novellus convertible is senior unsecured paper, which contrasts with the norm in the convertible space of non-putable paper of about 30 years, CRT Capital's analysis noted.

For instance, the following convertibles are all subordinated paper: Xilinx Inc.'s 3.125% convertibles of 2037, Microchip Technology Inc.'s 2.125% convertibles of 2037, Intel Corp.'s 2.95% convertibles of 2035, VeriSign Inc.'s 3.25% convertibles of 2037, Sunrise Senior Living Inc.'s 5% convertibles of 2041, Peabody Energy Corp.'s 4.75% convertibles of 2041 and West Pharmaceutical Services' 4% convertibles of 2047.

"It seems that the semiconductor/technology space has been a popular issuer of these instruments," CRT Capital said. Of these instruments, the Xilinx, Sunrise Senior, Peabody and Intel 2.95% have a 130% soft call, while the Microchip, VeriSign, West Pharmaceutical and Intel 3.25% have a 150% soft call. The new Novellus convert has a 150% soft call.

"Because the Novellus convertible, like many of the other issues, has a fairly low premium and low bond floor, it will probably be viewed by arbs on a break-even basis; investors tend to look at these deals as a substitute for common stock with a bit of a coupon (although as this instrument is senior, investors may look at it as slightly less pure equity-like than some of the subordinated issues). We calculated the raw breakeven on the new Novellus convertible as 5.41 years," according to the CRT Capital analysis.

The Rule 144A deal was being sold via J.P. Morgan Securities LLC and Bank of America Merrill Lynch as joint bookrunners, and there is a $75 million over-allotment option.

The notes will be non-callable until May 21, 2021 and then will be provisionally callable at a price hurdle of 150%. There are no puts.

Proceeds of up to $400 million will be used to repurchase shares from purchasers of notes in this offering in privately negotiated transactions.

Novellus may also use a portion of the net proceeds to repurchase additional shares of Novellus' common stock from time to time under Novellus' $940 million share repurchase program.

The $940 million share repurchase program includes $340 million remaining from Novellus' previously authorized share repurchase program and an additional $600 million of newly authorized share repurchases.

Any remaining proceeds will be used for general corporate purposes, which may include the acquisition of complementary businesses, products or technologies.

MGM gains on hedge

MGM's 4.25% convertibles due 2015 traded at 109 versus a share price of $13.75 on Wednesday, according to a New York-based sellside desk analyst, after the Las Vegas-based casino owner and operator posted quarterly results.

The premium on the MGM convertibles with the stock higher came in, while the paper's value expanded on a hedged basis.

The MGM convertibles are a very large issue of about $1 billion, and it has "got a good following across the spectrum of investors" in terms of both hedged and outright players," a New York-based sellside trader said.

The paper trades on a theoretical delta of roughly 70%, so it is "not moving up one for one. You would expect the premium to come in with the stock up 10%, but the bonds also expanded on their own," the trader said.

The company reported a loss of $89.9 million, or 18 cents a share, for the just-ended quarter, compared with $96.7 million, or 22 cents per share, for the year-earlier quarter.

Excluding one-time items, MGM Resorts said its loss was 16 cents per share, beating analysts' forecast of a loss of 19 cents per share.

The company's revenue rose 3% to $1.5 billion, which just about matched estimates.

Alaska Communications eyed

Alaska Communications' planned $100 million of seven-year convertible notes had a par offer in the gray market.

The Anchorage-based provider of broadband, wireline and wireless services talked its deal at a 5.75% to 6.25% coupon and 15% to 20% initial conversion premium.

Although the underlying shares sold off into the close Wednesday, and ended down 66 cents, or 7%, at $8.94, that wasn't seen as being a high enough deterrent to the issue pricing for the issuer.

I highly doubt it gets pulled," one buyside source said.

JPMorgan is the bookrunner of the Rule 144A offering with Oppenheimer and Evercore as the co-managers.

Proceeds will be used for general corporate purposes, including repayment of existing debt and to fund capital expenditures.

Mentioned in this article:

Alaska Communications Systems Group Inc. Nasdaq: ALSK

Ciena Corp. Nasdaq: CIEN

JDS Uniphase Corp. Nasdaq: JDSU

MGM Resorts International NYSE: MGM

Novellus Systems Inc. Nasdaq: NVLS

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