Mirant $370 million convertible overnight, talked at 5.5-6.0% yield, up 20-25%

By Ronda Fears

Nashville, Tenn., July 1 - Mirant Corp. was in the market Monday pitching an overnighter. The $370 million of five-year convertible senior notes are talked to yield 5.5% to 6.0% with a 20% to 25% initial conversion premium.

A "good chunk" of the paper traded in the grey market at 0.75 point over par, according to a trader at a hedge fund in New Jersey. It was bid at 0.5 points over with the ask price at 1.5 points over.

So, interest is fairly strong, the trader said, noting "there's so much money sitting out there to be put to use."

Joint book-runners are Banc of America Securities, Credit Suisse First Boston and Salomon Smith Barney.

Mirant has been split-rated since December, when Moody's cut the senior rating to Ba1, which would apply to the new convertible.

Standard & Poor's assigned a BBB- rating to the new deal, and Fitch said it expects to rate it BBB-.

That, in part has created a bit more difficulty in evaluating the new convertible.

Deutsche Bank Securities Inc. puts the new deal at 4.45% cheap at the midpoint of guidance, assuming a credit spread of 1,525 basis points over Libor and 60% volatility in the stock.

Wachovia Securities, Inc. puts it at 4.68% cheap, using a spread of 1,200 bps over Treasuries and 45% volatility.

Bear Stearns & Co. said it would be at fair value, using a 1,700 bps spread and 50% volatility.

"When you credit spreads all over the place - they started at 750 bps and then 1,200 bps and now 1,700 - it makes you wonder what's going on," said John Seibel, head trader at Silverado Capital Management.

"I don't know if you want to get involved with that kind of credit."

A week ago, Fitch downgraded Mirant senior debt to BBB- and assigned a negative outlook, citing concerns about aggressive project development and acquisition commitments combined with the impact on liquidity of energy marketing and requirements to post collateral to support hedging contracts and trading exposure.

S&P assigned a BBB- rating to the deal, with a stable outlook, and affirmed other ratings, saying the affirmation rests on positive expectations of Mirant's ability to maintain its current liquidity position and financial flexibility.

S&P said the rating incorporates high business risk, rating triggers, a somewhat speculative cash flow quality and relatively high consolidated leverage at 59.8%.

However, S&P noted strengths, including a diversified asset portfolio, adequate liquidity, limited construction risk and adequate credit protection measures in terms of consolidated funds from operations to total interest 4.1 times on average over the next five years.

Mirant CFO Ray Hill said last week in a conference call that it is in discussions with Moody's that should result in some rating action by third quarter.

The company also announced the convertible plans in the conference call, saying proceeds would be used to pay down its $1.125 billion bank revolver that matures July 17, which is currently in negotiations for amendment.

Mirant also has a 2.5% convertible bond due 2021 outstanding and a 6.25 % convertible trust preferred.

The market's familiarity with the name was given credit for being able to do the deal as an overnighter, in a tough market and a holiday week to boot.

The 2.5s were quoted down 3.125 points to 71.25 bid, 73.25 asked.

The 6.25s dropped 3.34 points to 26.3.

Mirant shares closed down $1.19 to $6.11.

Mirant CEO Marce Fuller said the company now sees second quarter EPS of 35c versus the previous guidance of 30c, citing strong energy marketing volume despite the scaling back of operations by other traders.

The company left its 2002 earnings projection at $1.60 to $1.70 a share, however.

Also, Mirant is discussing plans to create a separate unit for its energy trading and risk management operations, in order to reduce exposure to that segment of the industry.

Since December, Mirant has issued $759 million of common stock and made $1.4 billion in asset sales.

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