XM Satellite deal seen at 98.75 but most new issues zoom; Sirius pounded; Williams hit

By Ronda Fears

Nashville, Nov. 18 - New paper for the most part zoomed as demand raged among convertible players, who this week were handed the biggest tally of deals in quite some time. XM Satellite Radio Inc.'s breakfast deal was the exception in terms of aftermarket performance, though, slipping a tad from the re-offered price of 99.

Including the four new issues that broke to trade Thursday morning - most of which were upsized due to strong demand - the week's tally comes to $1.81 billion and could hit $2.2 billion if all the greenshoes are exercised. It was a "very, very nice week," as one banker type put it, following a dry summer insofar as new issues are concerned.

"I think that the supply and demand imbalance will drive 2005 [convertible issuance] as well," the capital markets source said. "Up markets will increase issuance, like we've seen in the last month but, also, I think, small-cap issuers. Small deals is what we should expect, for my two cents worth."

That would be a return to a more traditional profile of the convertible market, as many big cap, investment-grade issuers either don't need additional capital right now or are turned off by the new accounting rule to require earnings per share dilution related to contingent conversion features. It has been somewhat of an adjustment for the market, as well.

"We were involved with the new GY, PKS, LVLT, and CHTR issues [GenCorp, Six Flags, Level 3, Charter Communications]. These names obviously each have some hair on them, but were priced attractively. As you know, the CHTR bonds were particularly cheap, despite the lack of borrow and the myriad of issues that the company has," said a buyside source.

"When you've got a over-levered telecom with a busted business model, a poorly run and over-levered cable company, an over-levered theme park company that has operated in the worst environment for theme parks in years, and a heavily shorted internet retailer with a with loose cannon for a CEO, you know you're in for an interesting week with respect to credit quality."

Aside from new issues in trade, sellside sources commented that Advance Micro Devices Inc. converts were slightly lower at 115 and Medtronic Inc.'s issues dropped a couple of points - both on earnings news. A buyside source also remarked that the Williams Cos., Inc. convertible preferred came in about 3 points on news from late Wednesday that it would boost its common stock dividend fivefold.

XM breakfast deal too rich

While XM Satellite Radio's $300 million deal was a coup for bookrunner Bear Stearns & Co., some players thought it was too rich to serve up for breakfast. The issue, five-year non-callable convertible notes, was pitched before the open with terms set at 1.75%, up 41%.

Bear Stearns re-offered the issue at 99, but a buyside source said it was last seen at 98.75 bid. XM Satellite shares dropped 83 cents, or 2.234%, on the event, closing at $34.65.

"We thought that Bear was a bit on the aggressive side on pricing the deal," said a trader at a hedge fund.

Another buyside source said "XMSR is universally hated," and agreed the deal was brought at what looked like rich terms but, "out of most, or all, of the latest new deals, XMSR is the best credit."

Bear Stearns did not comment on the deal, but a sellside source at another shop said market buzz suggested the issue was fully placed.

The Washington, D.C.-based subscription radio broadcaster's deal comes closely behind the new convertible from its main competitor, New York-based Sirius Satellite Radio Inc., which about six weeks ago sold $200 million of new 3.25%, up 32.8% converts.

Neither satellite radio concerns are new to the convertible market as both began to ramp up operating funds with convertible and stock offerings going back four or five years. According to recent industry reports, Sirius has about 600,000 subscribers to XM Satellite's 2.5 million.

Sirius slammed, set to rebound

Sirius had a coup of its own, announcing after the market close Thursday that it has hired former Viacom Inc. president Mel Karmazin as its new chief executive. However, on a Bank of America downgrade to the stock before the opening bell, partly based on Sirius' cash burn rate, the Sirius converts tanked by 3.5 to 4.5 points but were positioned to rebound Friday on the CEO news.

If nothing else, convert traders said short covering will push Sirius shares on Friday and prop up its converts. In after-hours trading Thursday following the CEO announcement, the stock shot up as much as $1.12, or 23.75%, at one point. The stock was last seen in after-hours trade up 86 cents, or 18.22%.

"BoA says they are burning cash since the cost of acquiring new customers will go higher and higher, plus the burden of paying Howard [Stern, controversial disc jockey]," a buyside trader said.

The new Sirius 3.25% convert due 2011 (CCC-) dropped 3.5 points on Thursday.

Sirius is targeting 1 million subscribers by the end of 2004 and recently got a boost by signing on controversial shock jock Howard Stern who will begin broadcasting on Sirius Satellite in 2006. Now, the Karmazin news is expected to provide another boost, as Stern has an established relationship with Karmazin since the deejay is leaving Viacom's Infinity Broadcasting unit to join Sirius.

Entertainment trade magazine "Variety is reporting that Stern might discuss ending his tenure at Infinity Broadcasting earlier than planned" with an announcement on The Late Show with David Letterman, said a buyside trader holding Sirius converts. "The noise amounts to Viacom and Infinity negotiating with Stern and Sirius to provide for an earlier exit than the January 2006 date. Stern was splashed all over CNBC today and he's expected to make some sort of announcement on Letterman tonight."

Karmazin left Viacom as chief operating officer of Viacom in June in a management shakeup. Sirius said current CEO Joseph Clayton would remain chairman.

GenCorp size could be tripled

By the time it's done, GenCorp Inc.'s new convert - which a big stockholder tried to derail completely last week - could be triple the original size planned by the aircraft parts maker. Right out of the gate, the new issue gained 4 points.

GenCorp sold an upsized $80 million of the 20-year convertible subordinated debentures, from $50 million, plus, the greenshoe was bumped up to $80 million from $25 million. Thus, the deal could balloon to $160 million versus the original $50 million.

Market sources said it was unusual for a deal that has also had a shoe equal to the deal size, but not entirely unheard of. Still, one sellside desk analyst said his recollection suggests that most instances where the shoe was as large as the deal involved tiny deals, even below the small $50 million threshold.

GenCorp sold the issue at par to yield 2.25% with a 22.5% initial conversion premium - at the aggressive end of yield talk for a 2.25% to 2.75% coupon and smack in the middle of premium guidance for 20% to 25% - with proceeds earmarked to repurchase part of its 5.75% convertible subordinated notes and to repay or repurchase other debt.

Last week major GenCorp stockholder Steel Partners II LP criticized the convertible offering and made a bid of $17 a share, or roughly $770 million, to acquire all the shares of the company it does not already own. But on Monday, GenCorp rejected the offer, calling it "inadequate," and said it would go ahead with plans to sell 6.6 million common shares and the convertible debt.

The company upped the stock offering, too, to 7.5 million shares, at $16 each, for another $114 million of proceeds.

Bookrunner Wachovia Securities closed the new GenCorp convert at 107.5 bid, 108.25 offered. GenCorp shares closed up 88 cents, or 5.39%, to $3.45.

Overstock.com books overrun

Overstock.com Inc.'s deal was upsized as well, with the books running way over-subscribed, sources close to the deal said.

The $100 million of seven-year convertible senior notes, boosted from $75 million, priced at par to yield 3.75% with a 32.5% initial conversion premium - in the midrange area of price talk for a 3.625% to 4.125% coupon and smack in the middle of premium guidance for 30% to 35%.

It zoomed 3 points over par right out of the chute, a buyside trader said, "and didn't look back." Bookrunner Lehman Brothers Inc. closed the issue at 106.5 bid, 107.5 offered, while the underlying stock ended up 57 cents, or 0.99%, to $58.10.

The Salt Lake City based online retailer said proceeds would be used for general corporate purposes, including possible acquisitions although no acquisition plans are pending. The company also sold 1.2 million shares of common stock at $57.53 each, for another $65.3 million.

Level 3 lags other new issues

The most obvious laggard among new issues was Level 3 Communications Inc.'s new convert as it edged up just 1 point after breaking to trade, and floundering a bit from there.

"It priced and after dipping below par is now a shade better than par bid," a buyside source said around midday.

Level 3's deal was upsized, though, to $320 million from $200 million and the seven-year notes were printed with a 5.25% coupon and 20% initial conversion premium - smack in the middle of price talk for a 5.0% to 5.5% coupon and 17.5% to 22.5% initial conversion premium.

Bookrunner Merrill Lynch & Co. closed the new issue at 101 bid, 101.5 offered, while the Internet access provider's stock gained 13 cents, or 3.92%, to end at $3.45.

The Broomfield, Colo.-based company plans to use a portion of proceeds, along with borrowings under a $730 million senior secured term loan, to fund the tender offers for $1.1 billion of debt. Also, Level 3 used 17.8% of proceeds to enter into bond hedge and stock warrant transactions to limit dilution from the conversion of the notes by boosting the conversion premium to 80.7%.

The bank loan was boosted from $450 million, thus helping the company up its debt targeted in the tenders. The Level 3 junk bonds targeting, including the 11s of 2008, firmed by as much as 3.5 point on the news.

Swisscom issue seen pricey

Abroad, the Swiss Confederation sold CHF1.2 billion of 1.5-year exchangeable bonds which convert into Swisscom AG shares at 99.75 with a 0% coupon and 10% initial conversion premium. The deal priced at the cheap end of price talk for an issue price of 99.75 to 100, but market sources said the issue still looked pricey.

"The Swiss government came back to market with another exchangeable bond. This was their third such exchangeable. All this delta and gamma in the market is having a serious dampening effect on Swisscom, and, my, were the terms ... expensive," said a convertible market source in London.

"Like last year, you may see more government-inspired selldowns or other monetizations for the rest of this year. Aside from this, the market is still very, very quiet."

No close was available on the newest Swisscom exchangeable, but the other two Swisscom issues were described as easier by about 0.375 point by a sellside market source in London. Swisscom shares closed Thursday down CHF1.00, or 0.22%, to CHF444.50.

© 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.