Microsoft slips below par on debut; Transocean weaker; National Financial, Cadence on tap

By Rebecca Melvin

New York, June 9 - Lots of the new Microsoft Corp. 0% convertibles traded Wednesday at mostly steady levels right around par, until near the market close, when the new paper dipped below par, along with lower shares.

Microsoft's $1.15 billion deal, which launched and priced Tuesday, was called a "marquee" name by one trader, who said, "This paper has an investment value of say 50 basis points. They are not going anywhere."

Transocean Ltd. paper was weaker in the convertible market as its shares sagged again and the credit default swaps widened.

What's happening to Transocean, BP plc, and other names associated with the April 20 oil rig explosion and resulting oil leak in the Gulf of Mexico, was going from bad to worse, sources said. But other smaller energy names have held in pretty well, a convertibles trader said. For example, the convertibles of Nabors Industries Ltd. have survived well, he said.

Elsewhere, Gilead Sciences Inc. saw its 2011 convertibles trade at 103 versus a share price of $33.45, which was better compared to Tuesday's 102.51 bid, 102.64 offered versus a share price of $33.47.

Meanwhile, two additional issues launched in the primary market Wednesday. National Financial Partners Corp. planned a $125 million offering of seven-year convertible senior notes, and Cadence Design Systems Inc. planned $300 million of five-year convertible senior notes.

An active gray market didn't seem to exist for the two offerings, although the National Financial paper was offered at various prices and as high as 103.

Cadence Design was seen as cheap at the midpoint of price talk, according to a couple of sellside traders.

Proceeds for buybacks

Both issuers are using proceeds to buy back their existing convertibles. National Financial said it has begun a cash tender offer for all $230 million of its existing 0.75% convertible senior notes due 2012, and Cadence Design said it will use up to $200 million of the proceeds from a $300 million offering of cash convertible senior notes to repurchase some of its 1.375% convertible senior notes due 2011 and its 1.5% convertible senior notes due 2013.

The National Financial 0.75% convertibles will be tendered at 95.5. The paper last traded on June 3 at 88.625 bid, 88.875 offered.

Overall, the convertible market "was not great," and was tending to mirror the high-yield market, which was called weak, but also flat, on Wednesday by various sources.

The new issues were seen as a positive for the convertibles space, even if pricing has not been energizing for investors.

Typically, new issues serve as a catalyst for the market, a trader said, but current pricing, which hasn't been that cheap, has tempered the reaction.

Nevertheless, the new deals were positive, he said, in that it shows companies are coming back to the convert market, and they have been able to raise money and strengthen their balance sheets.

"Microsoft snagged $1 billion, and bought back stock in a snap shot. That's what we like to see," a trader said.

Microsoft slips below par

Microsoft's newly priced 0% convertibles due 2013 traded early at 100 bid, 100.25 offered, according to a syndicate source, with lots of paper trading early right around the par mark.

Later, trading in the name quieted down, and shares slipped amid a late sell-off in the equity markets, leaving the new Microsoft 0% convertibles at 99.75 versus a share price of $21.81 for the close.

Shares of the Redmond, Wash.-based computer software behemoth closed down 32 cents, or 1.3%, at $24.79.

Pricing came at the talked price point for the coupon, and near the midpoint, but toward the rich end, of talk for the premium, which was 30% to 35%.

"Some hedge players played them, some didn't," a sellsider said.

The Rule 144A offering has a greenshoe of $100 million.

Citigroup Global Markets Inc. and Bank of America Merrill Lynch were the joint bookrunners, with co-managers Barclays Capital Inc. and UBS Securities LLC.

The capped call transactions are aimed at reducing potential dilution upon conversion of the notes and push the effective conversion premium from the issuer's perspective to about 48%.

Proceeds will be used to repay commercial paper, to pay for the call spread and to buy back common shares associated with the call spread transactions.

National deal sees offers in gray

The pending National Financial sale of $125 million of seven-year convertible senior notes was offered higher in the gray market Wednesday ahead of final pricing, with one sellsider seeing a plus 3 points offer and another quoting it lower later in the session.

Shares of the New York-based financial services distribution company slumped more than 12% in the early going of trade but closed slightly off their lows, down 11%, or $1.28, at $10.51.

"Everyone is trying to gauge how committed the company is to raising this money," a sellsider said, pointing to the 2 p.m. ET to 3 p.m. ET hour as a telling time when players make a move on shares.

The deal was talked to yield 3.5% to 4%, with an initial conversion premium of 22.5% to 27.5%.

Sources canvassed hadn't valued the paper.

As for the market overall, a trader said that given that deals haven't priced as cheaply as guys would have liked, the new deals weren't the catalyst that they are usually hoped for.

The National Financial offering was talked to yield 3.5% to 4% with an initial conversion premium of 22.5% to 27.5%.

Goldman Sachs & Co. was the bookrunner for the offering, with Bank of America Merrill Lynch as a co-manager.

Proceeds will be used to refinance debt under the company's existing revolver and to tender for its 0.75% convertible senior notes due 2012 as well as to fund the cost of the note hedge and warrant transactions.

National Financial priced $230 million of the 0.75% convertibles in January 2007.

The offer expires at midnight ET on July 7.

The company will pay $955 per $1,000 in notes, plus interest to, but excluding, the payment date, which is expected to be July 8.

Cadence looks cheap

Cadence was looking 2.5 points to 3 points cheap at the midpoint of talk, using a credit spread of 750 basis points over swaps and a 32% vol. Another valuation saw the company as a better credit, which made the paper cheap using a credit spread of 500 bps over swaps.

Shares of the San Jose, Calif.-based chip design company hung in there, settling up 2 cents, or 0.33%, to $6.16 on Wednesday.

The Rule 144A deal was talked to yield a coupon of 2.375% to 2.875% with an initial conversion premium of 20% to 25%.

Morgan Stanley & Co. Inc. and J. P. Morgan Securities Inc. are the joint bookrunners of the offering.

Proceeds will be used to repurchase a portion of the company's outstanding 1.375% convertibles due 2011, to repurchase up to $100 million of its outstanding 1.5% convertibles due 2013, to buy up to $40 million of common stock and to fund the cost of convertible note hedge transactions.

Mentioned in this article:

Cadence Design Systems Inc. Nasdaq: CNDS

Gilead Sciences Inc. Nasdaq: GILD

Microsoft Corp. Nasdaq: MSFT

Nabors Industries Ltd. NYSE: NBR

National Financial Partners Corp. NYSE: NFP

Transocean Ltd. NYSE: RIG

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