Goodyear doubled; Crown Castle falls to near parity; Lockheed off as merger with Titan falls through

By Ronda Fears

Nashville, June 28 - Novell Inc., Goodyear Tire & Rubber Co. and Nationwide Health Properties Inc. were in the convertible market Monday pitching quick-sale deals totaling $700 million, rushing to beat the almost-certain interest rate hike coming this week. All three launched before the open in order to have a full day of marketing, however, and before press time the tally was boosted to $850 million as the Goodyear deal was doubled in size.

The new issues helped Monday trading flow, dealers said, but the convertible market was described as weaker for a variety of reasons, not the least of which was a steep back-up in Treasury yields. The yield on the benchmark 10-year note spiked to 4.74% from 4.65% on Friday amid a sell-off fueled by renewed fears that the Fed might want to speed up the rate hike because of higher-than-expected inflation data recently.

"No matter what the Fed actually does, what we had today was a bloody mess in the Treasury market, so we had no choice but to react on that basis, deal with it," said a convertible trader at a huge hedge fund in New York.

Although Crown Castle International Inc. and Lockheed Martin Corp. converts suffered, a convertible dealer said the PMA Capital Corp. 4.25% convert was "doing much better, trading at 95" on news from Friday that the Pennsylvania Insurance Department has approved PMA Capital Insurance Co.'s request to dividend the shares of its subsidiaries back to parent PMA Capital.

Crown Castle converts lower

Crown Castle sank back to parity levels on confirmation that it would sell its U.K. business unit to National Grid Transco plc for a little over $2 billion.

In addition to there being widespread concern about the price tag and Crown Castle lowering its 2004 guidance as a result of selling those assets, a sellside convert trader said the Crown Castle converts were pressured because of market buzz that the company might attempt to take that debt out early. The Crown Castle 4% convertible bond is not callable until 2008, though, he noted.

Crown Castle International Corp. agreed to sell its U.K. unit to National Grid Transco plc for $2.035 billion in cash, with closing anticipated by Sept. 30, and the company earmarked $1.3 billion to fully repay Crown Castle Operating Co.'s credit facility and the remaining $740 million to invest in new business opportunities in the United States or to repay debt.

As a result of the sale, Crown Castle lowered its outlook for 2004 tower rental revenues, or site rental revenues, to between $524 million and $528 million, down from its previous target of $875 million to $885 million. For 2005, the company projected site rental revenue of $565 million to $575 million.

Adjusted EBITDA for 2004 was forecast at $270 million to $280 million, and at $305 million to $320 million for 2005.

Lockheed floater off

Lockheed Martin dropped after its merger with Titan Corp. fell through, which also put risk arbitrage players in a bind as they frantically unwound Titan shares.

Lockheed scrapped its $1.66 billion acquisition Titan after the San Diego-based defense contractor failed to meet a deadline to strike a plea agreement on bribery allegations pending with the Justice Department.

As a result, both stocks dropped, Titan rather sharply - by 8% - as risk arbs quickly unwound positions. One such player said: "We thought it would get done, at the eleventh hour," so the surprise caused a frenzied sell-off in Titan shares.

Lockheed's convertible floater dropped in tandem with the stock on the news, ending off about 0.625 point to 101.25 bid, 101.5 offered.

Novell ends at 100.5 in gray

Novell was pitching $450 million of 20-year senior notes talked to yield 0.5% to 1.0% with a 36% to 40% initial conversion premium. The deal is being sold on swap with up to $125 million of proceeds earmarked to buyback stock from short sellers participating in the offering, and includes dividend and cash takeover protection features.

The deal started off in the gray market early with a bid of 1.25 points over issue price, buyside traders said, but that likely was something thrown out like a weather balloon by the deal managers involved. Around noon the deal was bid 0.5 point over issue price with an offer at 0.875 point over.

By the close, the deal was still bid 0.5 point over issue price but the offer had slipped to 0.75 point over.

Novell shares dropped 57 cents on the day, or 6.48%, to $8.22 with 13.7 million shares changing hands. The running three-month average volume on the stock is 5.15 million shares.

Deutsche Bank Securities analysts put the Novell convert 1.55% rich to 1.92% cheap at the middle of price talk, using a credit spread of 325 basis points over Libor and a 45% volatility. The Deutsche analysts noted that, pro forma for this transaction, Novell will be 4.6 times levered, but added that as of April 30 the company had cash and securities of $636 million with no net debt on its balance sheet.

A convertible analyst at another sellside shop put the deal 0.03% cheap, at the midpoint of guidance, using a credit spread of 520 bps over Treasuries and a 50% volatility.

Novell said proceeds, after the stock buybacks, would be used for potential acquisitions.

The use of proceeds piqued considerable interest, with some convertible players speculating Novell might make a play for another convertible name like RealNetworks Inc. or Red Hat Inc. to flex more muscle in the Linux desktop game. Novell and RealNetworks already have a distribution partnership. RealNetworks and Red Hat also have a licensing agreement.

Goodyear prices aggressively

Goodyear finally drove a convertible deal by the market, as had been promised in its union labor negotiations last year, and the road-test, so to speak, was met with very few hazard flags. The deal, bolstered by full dividend and cash takeover features, was doubled to $300 million and got printed at the aggressive end of indicative terms.

After last year promising its union workers an equity weighted capital-raising effort to help restructure its balance sheet, in part due to a Securities and Exchange Commission probe, Goodyear bounced into the market early Monday in order to get a full day of road-showing in before setting the final terms. Proceeds were slated for general purposes, including temporarily repaying its bank revolver.

The Akron tiremaker sold the 30-year notes at par to yield 4.0% with a 30% initial conversion premium - at the aggressive end of price talk for a 4.0% to 4.5% coupon and 25% to 30% initial conversion premium.

In the gray market, buyside traders said the proposed Goodyear convert start out above issue price and just kept slowly bouncing higher during the session. It was last seen in the when-issued market at 1.875 bid.

Goodyear shares closed down 59 cents, or 5.99%, to $9.26 with 9.95 million shares trading, versus the average 2.2 million. A sellside trader said the only negative point on the Goodyear deal was a rebate on the stock.

From a market source who closely follows Goodyear stock, a big positive development at the company is that it is recalling workers to its Union City Plant, which would support some hope that the plant will not be closed as feared. He also said Wall Street estimates still anticipate a profit for the quarter ending June 30.

Nationwide also peddles deal

Nationwide Health, a Newport Beach, Calif.-based real estate investment trust, also was peddling a convertible preferred, and market sources noted again that the structure has been popular recently.

The $100 million of perpetual convertible preferreds were talked to price with a dividend of 7.25% to 7.75% and 20% to 25% initial conversion premium. There is a common stock dividend of 7.59%.

The REIT, which owns healthcare facilities such as nursing homes and assisted living centers, said it plans to use proceeds to repay outstanding debt under its unsecured revolving bank line of credit and general corporate purposes.

There was nothing heard about the deal in the gray market, which is not unusual for preferreds and mandatories. Nationwide Health shares dropped 54 cents, or 2.77%, on Monday, closing at $18.95.

© 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.