Salesforce.com settles at par on debut after dipping lower; KKR up; Arris, Kodak, YRC add

By Rebecca Melvin

New York, Jan. 13 - Salesforce.com priced its $500 million issue of convertibles late Tuesday above the cheap end of talk, but the bonds slipped below par on their debut Wednesday as their underlying shares traded down early. Later the new paper regained some ground and closed at 100 bid, 100.25 offered, according to a syndicate source.

KKR Financial Holdings LLC's new 7.5% convertibles, which debuted Tuesday, extended gains Wednesday, trading up to 103.5 versus a share price of $6.25, compared to 102.25 bid, 102.75 offered on Tuesday.

Arris Group Inc. traded up about 3 points outright as its shares gained after the communications technology company raised fourth-quarter guidance.

Eastman Kodak Inc. was up to 100.5 bid versus a share price of $5.00 on Wednesday, continuing a move up that has been underway for several weeks.

YRC Worldwide Inc. convertible preferred shares, the result of an exchange offer on straight and contingent convertible notes late last year, were higher, with the market at 91 bid, 94 offered.

The YRC preferreds still represent a large premium to the common stock, and Barclays Capital analysts put out a note Wednesday recommending swapping out of the equity in favor of the convertible preferreds.

Overall the market was fairly quiet on Wednesday. The higher yielding paper in the convertible market has shrunk over the past 10 months due to rising stocks as well as debt retirement and other factors.

In response to a question about what is going on with "yield" names, a New York-based sellside trader said: "What Yield names. There are no more yield names."

The trader said that the market went through a considerable shock at the end of 2008, and even though the market is better now, particularly equities, "it doesn't mean that things are normal."

Based on Wednesday's market, Kodak's 7% convertibles have a slim 6.85% to 6.86% yield to call, according to the trader.

Salesforce.com flat on debut

Salesforce.com's 0.75% convertibles due 2015 ended at 100 bid, 100.25 offered on their debut, trading mostly flat, but slipping to trade with a 99 handle.

Shares of the San Francisco-based enterprise cloud computing company dropped early in the day but recovered to end the session nearly flat at $68.50.

Late in the session, the new convertibles were 99.75 versus a share price of $68.29.

"They aren't likely to do well," one sellsider said.

Late Tuesday, Salesforce.com priced $500 million of five-year convertible bonds to yield 0.75% with an initial conversion premium of 25%. That pricing was cheaper than initial talk, which was for a yield of 0.5% and a 27.5% initial conversion premium.

There is an over-allotment option to purchase up to an additional $75 million of notes.

Bank of America Merrill Lynch was the bookrunner of the Rule 144A offering.

Separately, the new KKR Financial convertibles were said to be offered on their debut Tuesday at 104.75, but they weren't heard to have traded at that level. Those bonds were 102-ish on Tuesday, and they were 103.5 on Wednesday.

Arris adds 3 points outright

Arris Group's 2% convertible senior notes due 2026 traded at 99.5 outright on Wednesday, compared to 96.625 outright with the stock trading in a $10.68 to $10.69 on Tuesday. Shares jumped 64 cents, or 5.9%, to $11.44 on Wednesday.

The Suwanee, Ga.-based communications technology company increased its earnings and revenue outlook for the fourth quarter. Arris, which sells products that enable high-speed data and video traffic, forecast revenue of $295 million to $300 million, which was up from October guidance of $265 million to $285 million.

The company also predicted in October that net income would be 13 cents to 17 cents a share. Excluding items, it forecast net income of 22 cents to 26 cents per share.

Arris said it had a moderate start to 2010, in part due to the strong fourth quarter, and expected a strong year assuming an economic recovery, with its quarterly profile similar to 2009.

YRC extends gains

YRC's convertible preferred shares were seen in the 91 bid, 94 offered context Wednesday, up from 89 bid, 90 offered previously and compared to a par value of 50.

Shares of the Overland Park, Kan.-based trucking company ended down 2 cents, or 1.8%, at $1.08 on Wednesday.

Investors may be swapping in the preferred shares from the common stock due to the better value there. But the big problem is the "stock borrow."

"It's a nightmare to borrow," a New York-based sellside trader said, explaining that based on a preferred price at 92 bid, 93 offered, which was the middle of the day's range, the share price would translate to 43 cents. But instead the company's common stock is trading above a dollar.

Barclays Capital analysts, recommending swapping into the preferreds from the equity, said the equity is trading at a 59% premium to the preferreds based on 89, 90 for the preferreds and a stock price of $1.10.

In its note published Wednesday, the Barclays analysts said that from a valuation perspective, YRCW equity is trading at a 59% premium to the equity price implied by the convertible preferreds at more or less $0.45.

"From a bottoms up perspective, the present equity price is pricing in a sharp margin recovery, at par with its past best years. Given the steep discount priced into the convertible preferreds, we believe investors who are long the equity should swap into the newly issued convertible preferreds instead," Kannan Venkateshwar, a cross asset strategy analyst, and Venu Krishna, head of equity linked strategies at Barclays, said.

"The entire capital structure of YRCW was under significant pressure in 2009 driven by the relatively large upfront debt maturities, sharply deteriorating fundamentals and the consequent concerns on covenant compliance," they said.

"Over the last couple of months, the company has been involved in an effort to reduce the debt load by converting most of the publicly traded debt instruments (8.5% 2010 notes, 5% 2023 convertibles and 3.375% convertibles) into equity and convertible preferreds," the analysts wrote.

"While the exchange process has been largely completed, the company still faces fundamental headwinds as well as potential uncertainty regarding shareholder approval to enable the conversion of convertible preferreds into equity," the analysts' report said.

Mentioned in this article:

Arris Group Inc. Nasdaq: ARRS

Eastman Kodak Inc. NYSE: EK

KKR Financial Holdings LLC NYSE: KFN

Salesforce.com NYSE: CRM

YRC Worldwide Inc. Nasdaq: YRCW

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