Linear gains on debut; Delta improves, BankUnited slips, St. Jude quiet in gray; International Game eases

By Kenneth Lim

Boston, April 19 - Linear Technology Corp. had a positive debut on Thursday as new deals continued to dominate the convertible market.

Linear gained outright as the stock rallied Thursday after the company priced the convertibles that will help fund a $3 billion stock buyback.

Delta Petroleum Corp. was better bid in the gray market despite continued concerns about a dearth of stock to borrow.

But BankUnited Financial Corp. slipped in the gray with the conversion premium on its deal seen as potentially too aggressive.

St. Jude Medical launched a $1 billion offering that was quiet in the preliminary market, although investors expect its short-term paper to do well.

Beyond the new deals, International Game Technology eased slightly after the Reno, Nev.-based gaming equipment maker missed estimates for its second-quarter results. International Game's 2.6% convertible due 2036 lost as much as half a point outright before recovering to close an eighth-point lower at 97.5 bid, 97.75 offered versus a stock price of $39.50.

International Game stock (NYSE: IGT) closed at $39.30, down by 1.01% or 40 cents.

"I saw the stock was down quite a bit this morning, but I don't think there's anything major for convert holders," a sellside convertible analyst said. "I think what happened this morning may have been a bit of a knee-jerk. They only missed by a bit, plus profit actually increased. I don't think the results were great, but I don't think it's that bad."

International Game on Thursday reported a fiscal second-quarter net profit of $128.2 million, or 38 cents per share, from $124 million, or 35 cents per share, in the year-ago period. International Game also raised its quarterly profit outlook for the second half of the fiscal year to between 35 and 40 cents per share, from the earlier guidance of 33 to 37 cents per share.

Linear gains with stock

Linear's new 3% convertible senior notes due 2027 and 3.125% convertible senior notes due 2027 got a boost from the stock on Thursday on hopes of a stock buyback, which will be partly funded with the proceeds of the convertible offerings.

The 3% convertible traded at 101.875 against a stock price of $37, while the 3.125% convertible traded at 102 against a $37.50 stock price. Both were offered at par. Linear stock (Nasdaq: LLTC) closed at $37.63, up by 4.41% or $1.59.

"They did fine," a buysider said. "It's a different type of structure, not commonly seen."

Linear priced the $1 billion of 3% convertibles with an initial conversion premium of 38.7% and the $700 million of 3.125% convertibles with an initial conversion premium of 40%.

The longer-structured 3% convertibles were talked at a coupon of 2.75% to 3.25% and an initial conversion premium of 38% to 43%, while the 3.125% convertibles were talked at a coupon of 2.75% to 3.25% and an initial conversion premium of 40% to 45%.

There is no over-allotment option.

Credit Suisse was the bookrunner of the Rule 144A offerings.

Linear Technology, a Milpitas, Calif.-based maker of linear integrated circuits, said it will use the proceeds of the deal to partly fund a planned $3 billion accelerated stock buyback.

A sellside convertible analyst said the deal appeared rich at pricing despite the outright gains.

"I thought they modeled a little rich," the analyst said. "It's up now, but it's probably because of the way the stock is reacting to the buyback. But just because the stock's up doesn't mean it's good for the converts. All that cash they just raised is pretty much going to go toward buying back the stock, which means 3.5 years and seven years from now they may have to figure out a way to raise some more money if guys want to put the bonds back."

But the deal looked interesting enough for the buysider.

"The premium on that one is pretty high, it's a little bit high," the buysider said. "But in this case the premium will kind of compress organically because each time a dividend is paid the ratio will be adjusted."

Delta Petroleum borrow a concern

Delta Petroleum was seen at 102.5 bid in the gray market on Thursday on widespread expectations of a tough borrow that could limit interest in the deal.

"I'm not going near that one," a buyside convertible trader said. "There's no borrow and the premium is too high."

The Delta Petroleum convertibles were offered at par. Delta Petroleum stock (Nasdaq: DPTR) slid 8.24%, or $1.91, on Thursday to close at $21.26.

The deal was talked at a coupon of 3.25% to 3.75% and an initial conversion premium of 42% to 48%.

There is an over-allotment option for a further $15 million.

JPMorgan, Lehman Brothers and Deutsche Bank are the bookrunners of the registered offering.

There will be a concurrent offering of 6.2 million shares of Delta Petroleum common stock with an over-allotment option for an additional 930,000 shares.

Delta Petroleum, a Denver-based oil and gas company, said the proceeds of the stock and convertible deals will be used to reduce outstanding debt under its credit facility and fund capital expenditures and other general purposes. The company will also redraw some or all of the amounts paid down on its credit facility.

The buysider said the concurrent share offering was not enough to make the deal attractive enough for hedge investors.

"It will free up some borrow then, absolutely, but even if there's enough borrow, the premium's too high," the buysider said.

But a sellside convertible analyst said the offering appeared slightly cheap if there was no borrow problem.

"It looks like it could be interesting if you have a good borrow," the analyst said. "But the key word here is 'if'. I'm hearing that even with the share offering, guys are still concerned about [stock] liquidity."

BankUnited lower in gray

BankUnited's planned $160 million of three-year mandatory convertible senior notes was bid slightly below par on Thursday amid concerns that the deal could be too aggressively priced.

"It was less 15 cents bid, so that's hot," a sellside convertible trader joked.

The convertible was offered at par of $50. BankUnited stock (Nasdaq: BKUNA) gained 1.04%, or 24 cents, to close at $23.40.

"To be honest, it looks really not very good," a sellside convertible analyst said. "It looks like the premium's too high for this mandatory."

The convertible was talked at a coupon of 6.25% to 6.75% and an initial conversion premium of 40% to 45%.

There is an over-allotment option for a further $24 million, or 480,000 units.

JPMorgan is the bookrunner of the registered offering.

BankUnited, a Coral Gables, Fla.-based bank, said the proceeds of the deal will be used to buy back its common stock and to fund general corporate purposes.

"The premium's pretty high on this thing," the analyst said. "It just doesn't look that good even at the cheaps. It's almost fairly valued."

The analyst had a volatility assumption in the mid 30% region.

Interest in the convertible could come mainly from outright investors, the analyst said.

"It's going to be mostly outright guys," the analyst said. "It basically is a long-dated option that you're getting. There's no bond value, so the hedge guy doesn't get the limited downside on a more traditional bond."

But a buysider said there appeared to be enough demand for the deal.

"I think it's OK," the buysider said. "It is a little bit aggressive, but people are going to put in at the mids and hope for the best."

St. Jude quiet in gray

St. Jude's planned $1 billion of 20-month convertible senior unsecured debentures did not attract any bids in the gray market on Thursday, but onlookers said outright interest could make it better.

The convertible was offered at par and talked at a coupon of 1% to 1.5% and an initial conversion premium of 17.5% to 22.5%. St. Jude stock (NYSE: STJ) closed at $43.38, up by 5.47% or $2.25.

There is an over-allotment option for a further $200 million.

Banc of America is the bookrunner of the Rule 144A offering.

St. Jude Medical, a St. Paul, Minn.-based maker of cardiovascular medical devices, said it will use the proceeds of the deal to repay debt that was incurred in its $700 million stock buyback in February. It will also buy back up to $300 million of its common stock and fund convertible note hedge and warrant transactions.

"It really is just a commercial paper surrogate," a convertible analyst said. "They're doing this just to replace their short-term commercial paper. They can get away with paying a 1% to 1.5% coupon because they're offering you the equity option, so to them it makes sense...It's possibly that they don't think their stock's going to go up 17.5% next year or whatever the premium is on this thing. It's a cheap way for them to get funding."

The analyst said that with a delta in the mid 40% range, the upside participation of the convertible was "not that attractive per se, but it's not that bad compared to some of the other ones that are too bond-like."

A buyside convertible trader said the deal looked to be well-subscribed.

"I think it will do OK," the trader said. "It's a big deal, coming on a happy meal [stock buyback]. It's kind of a different type of structure, a very short paper, but I think if it comes on the mids it will do OK. There's pretty heavy demand for outright guys, even some equity funds because they don't currently pay dividends on the common."

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