Mentor Graphics up on debut; Citadel down on challenge by bondholders; ArvinMeritor to price new deal

By Kenneth Lim

Boston, Feb. 28 - New deals occupied the convertible market on Tuesday, with Mentor Graphics Corp.'s fresh 6.25% securities due 2026 opening about 1.5 points above par in early trading.

First Horizon Pharmaceutical Corp. traded down slightly in line with the stock after the company announced it plans an exchange offer for its 1.75% contingent convertible notes due 2024 in a move aimed at adding net share settlement and limiting dilutive effects on the stock.

Also offering a new deal was ArvinMeritor, Inc., which plans to price on Wednesday this week $200 million of 20-year convertible notes to help finance a debt buyback.

After the close Tuesday, HealthSouth Corp. priced an upsized $400 million offering of convertible perpetual preferred stock at the rich end of talk with a coupon of 6.5% and an initial conversion premium of 25%.

Meanwhile, Citadel Broadcasting Corp. was marked down slightly after the company said it had received a notice of default from a lawyer claiming to represent holders of 31% of the company's 1.875% convertible bonds due 2011. Citadel said it will "vigorously defend" itself against the lawyer's claims.

Other trades seen on Tuesday include Par Pharmaceutical Cos. Inc., whose 2.875% convertible due 2010 was better dollar-neutral despite reporting a fourth-quarter loss of $34.9 million compared to a $4.3 million profit in the year-ago period, a trading source said. The convertible was marked at 83.93 bid, 84.93 offered versus a $29.74 stock price at another trading shop. Par Pharmaceutical stock (NYSE: PRX) plunged after the results were announced early Tuesday, losing 10.88%m or $3.63, to end at $29.74.

Mentor Graphics opens higher

Mentor Graphics, which priced its new 6.25% convertible bonds due 2026 with an initial conversion premium of 60%, at the cheap end of talk, made its debut on Tuesday with about 500 units traded at 1.5 points above par, said a sell-side trader.

A sell-side analyst said the rise was no surprise. "Final pricing came in at the cheap end, so this was within our expectations," said a sell-side analyst.

Mentor Graphics priced its $175 million of 20-year convertible bonds late Monday. Price talk had guided for a coupon of 5.75% to 6.25% and an initial conversion premium between 60% and 70%.

Bookrunners Merrill Lynch & Co., Banc of America Securities and UBS Investment also have a greenshoe option of $25 million.

Wilsonville, Ore.-based Mentor Graphics provides software used in electronic design. It will use proceeds from the issue to buy back its existing 6.875% convertible bonds due 2007. If the greenshoe is exercised, it will use the extra proceeds to repurchase part of its floating-rate convertible bonds due 2023.

Mentor Graphics stock (Nasdaq: MENT) closed unchanged on Tuesday at $11.23.

ArvinMeritor to buy back bonds with convertibles

Also doing a debt buyback, this time of straight bonds, was ArvinMeritor (NYSE: ARM), which plans to price $200 million of 20-year convertible notes on Wednesday after the bell, with talk guiding for a coupon of 4.625% to 5.125% and an initial conversion premium of 30% to 35%, syndicate sources confirmed.

UBS, which is running the books, has a greenshoe option of $30 million.

ArvinMeritor said late Tuesday that it will use proceeds from the deal to partially fund a planned buyback of up to $450 million of its outstanding junk bonds. The Troy, Mich.-based car and truck parts maker earlier in the day made early tender offers for its 6.625% notes due 2007, 6.75% bonds due 2008, 6.8% bonds due 2009 and 7.125% notes due 2009.

The rest of the repurchase program will be funded with cash on hand and proceeds from the sale of its Purolator Filters business in North America.

First Horizon down with stock

First Horizon Pharmaceutical on Tuesday offered to exchange its current 1.75% contingent convertible bonds due 2024 with new convertible bonds bearing the same coupon and maturity but with a net-share settlement feature aimed at reducing the dilutive effect that the notes have on the stock.

"If it's indeed better for stockholders and the stock does better, than in that case it would be better for bondholders, but it probably doesn't matter otherwise for bondholders," said a sell-side analyst.

First Horizon's 1.75% convertibles slid slightly in line with the stock on Tuesday. A major trading house marked the securities at 103.23 bid, 103.73 offered against the stock's $20.52 close. First Horizon stock (Nasdaq: FHRX) ended 41 cents, or 1.96%, lower.

The analyst said First Horizon was simply reacting to new accounting rules by using the net-share feature, where the principal of the bonds can be cash-settled upon conversion, to reduce dilution for equity holders. The net-share feature may be negative for First Horizon's credit, but that would not apply to holders of the 1.75s, only future debt issues by the company, the analyst said.

First Horizon is an Alpharetta, Ga.-based specialty pharmaceutical company.

Citadel challenged on put terms

Citadel Broadcasting Corp.'s 1.875% convertible due 2011 was marked down in line with the stock on Tuesday after the company said late Monday that it had received a notice of default from a lawyer claiming to represent holders of 31% of the convertibles.

A trading shop had the securities at 82.6 bid, 83.6 offered versus the closing stock price of $11.14. Citadel stock (NYSE: CDL) was down 16 cents, or 1.42%, on Tuesday.

In its statement, Citadel said the letter is claiming that a planned merger between Citadel and Walt Disney Co.'s ABC Radio arm constituted a "fundamental change," which would trigger a change-of-control put option that could allow bondholders to force redemption of the bond.

Citadel reiterated its stance that the merger was not a fundamental change and said it would "vigorously defend itself against the demands of the letter."

The letter confirmed recent rumors that major bondholders of the company had organized a conference call to discuss the possibility of legal action against the company to get the put enforced. Sources have identified hedge fund Whitebox Advisors LLC as a participant, but Whitebox declined to comment on Tuesday.

The lawyer who sent the letter did not return messages left through buy-side sources. Citadel's acting chief financial officer also did not return messages left for her.

Despite the news, trading in the Citadel convertible was muted on Tuesday, trading sources said. A convertibles analyst who covers the company said there wasn't anything substantially new in the announcement partly because the rumor had already made its rounds in the market.

"Nothing has really changed with the 8-K filing other than that the wheels are now in motion," the analyst said. "Citadel's and the bondholders' arguments haven't changed, and I don't think the relative merits have changed either since there are no new facts."

But he noted that Citadel must close this issue before the merger can go through, which opens the possibility that the company may be open to making concessions if sufficient bondholders are determined enough. "They're not going to let that derail the merger because the stakes are too high," he said.

Still, the merger is unlikely to close until the fourth quarter, which means Citadel is in no rush to give in and "that's plenty of time for there to be more clarity on this," he added.

Major bondholders of Citadel include Farallon Capital Management, Advent Capital Management and SAC Capital Advisors, based on Securities and Exchange Commission filings.

HealthSouth prices upsized deal

Late in the day Tuesday, HealthSouth priced an upsized $400 million of convertible perpetual preferred stock at the rich end of talk with a dividend of 6.5% and an initial conversion premium of 25%, sources confirmed.

The deal's size was originally set at $300 million, while price talk was for 6.5% to 7%, up 20% to 25%.

JP Morgan, Merrill Lynch and Citigroup are the bookrunners of the Section 4(2) deal.

The preferreds may be converted into HealthSouth common stock at a conversion price of $6.10.

They are non-callable for five years, and are callable after that subject to a 150% trigger. They are protected from changes in dividend payouts and in takeover situations, syndicate sources confirmed.

HealthSouth, a Birmingham, Ala.-based provider of outpatient surgery, diagnostic imaging and rehabilitative health care services, is using proceeds from the deal to reduce its indebtedness. The company's stock currently trades on the Pink Sheets.

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