By Ronda Fears
Nashville, Jan. 7 - Tyco International Ltd. advanced by a day the pricing on an upsized $3.75 billion of new convertible paper in two parts with aggressive terms, amid very strong demand as the market's first new deal of the year.
"We got great feedback. Demand was in excess of $25 billion on aggregate," said a source among the investment bankers from six firms that were book-running managers of the Rule 144A deal.
"The markets really rallied behind [Tyco] too. The stock market, bond market and convertible market were in agreement. The stock shot up throughout the day. Credit spreads, at least on the short end, came in about 200 basis points, so the yield curve, which had been inverted, is no longer inverted."
The series A 15-year senior note priced at par to yield 2.75% with a 32% initial conversion premium. Talk put it to yield 3.0% to 3.5% with a 28%-32% initial conversion premium. A total of $2.5 billion of this tranche was sold.
The series B 20-year senior note priced at par to yield 3.125% with a 26% initial conversion premium. Talk put it to yield 3.125% to 3.625% with a 22% to 26% initial conversion premium. A total of $1.25 billion of this tranche was sold.
The total amount sold was upped from $3.25 billion to $3.75 billion.
In another gauge of interest, gray market quotes on tranche A at the end of the day were 3.75/4.0 points over par and on tranche B 3.0/3.25 points over par.
Tyco shares closed up 73c to $17.26, with 107.9 million shares changing hands versus the average volume of 13.5 million shares.
Tyco's existing 0% convertible due 2021 was flat at 75.75 bid, 76.25 asked and the 0% due 2020 edged up 0.5 point to 73.25 bid, 73.625 asked.
At the final terms, analysts put tranche A at 3% to 5.5% cheap and tranche B at 0.83% to 3.81% cheap.
Deutsche Bank Securities Inc. analysts put tranche A 5.5% cheap using a credit spread of 375 basis points over Libor and 40% volatility in the stock and tranche B 3.81% cheap using a spread of 400 basis points over Libor and 40% volatility.
Lehman Brothers analysts put tranche A 3% cheap using a credit spread of 425 basis points over Treasuries and 40% volatility in the stock and tranche B 3.81% cheap using a spread of 450 basis points over Treasuries and 40% volatility.
Wachovia Securities, Inc. analysts put tranche A 4.86% cheap using a credit spread of 400 basis points over Treasuries and 40% volatility in the stock, and tranche B 0.83% cheap using a spread of 500 basis points over Treasuries and 40% volatility.
"The market is desperate for equity-sensitive paper. This should go fine," said Rao Aisola, head of convertible research at Bear Stearns & Co.
"This is a credit people understand now. A year ago that was not the case."
Tyco said the convertible sale along with a new $1.5 billion bank line under negotiations will help bridge a projected funding shortfall of about $3.6 billion as it approaches more than $11 billion of debt maturities this year.
In February, Tyco faces a nearly $2 billion put on the 2021 convertibles and $3.6 billion borrowed against its existing bank facility.
Tyco reaffirmed its previously announced guidance for fiscal first quarter 2003, with earnings per share from continuing operations in a range of 30-33c and free cash flow at zero to $300 million.
"This addresses all the liquidity needs of the company for 2003," said a source working on the Tyco deal.
Not everyone was convinced this is the saving grace for Tyco, however.
Moody's Investors Service noted that while the new convertible and new bank line will address nearly half of the debt maturities in 2003, Tyco will require a combination of free cash flow, net proceeds from asset sales and/or refinancing actions in order to met the $11 billion of total obligations.
"This gives them [Tyco] some breathing room, through the middle of the year, but I think they will need to do some asset sales or some refinancing before year-end," said Michael Revy, who manages a convertible hedge fund for Froley Revy.
"By the end of the year, Tyco will be a different company."
Revy did not participate in the deal.
Final terms of the Tyco deal are:
| Issue: | Tranche A
|
| Issuer: | Tyco International Group SA
|
| Amount: | $2.5 billion
|
| Greenshoe: | $500 million
|
| Global coordinators: | Banc of America, Morgan Stanley and Salomon Smith Barney
|
| Bookrunners: | Banc of America, Morgan Stanley, Salomon Smith Barney, Credit Suisse First Boston, Goldman Sachs & Co. and JPMorgan
|
| Maturity date: | Jan. 15, 2018
|
| Coupon: | 2.75%
|
| Issue price: | Par
|
| Yield: | | 2.75%
|
| Conversion premium: | 32%
|
| Conversion price: | $22.7832
|
| Conversion ratio: | 43.892
|
| Call: | Non-callable for three years
|
| Put: | In years five and 10, at par
|
| Ratings: | Moody's: Ba2
|
| S&P: BBB-
|
| Settlement date: | Jan. 13
|
|
|
| Issue: | Tranche B
|
| Issuer: | Tyco International Group SA
|
| Amount: | $1.25 billion
|
| Greenshoe: | $250 million
|
| Global coordinators: | Banc of America, Morgan Stanley and Salomon Smith Barney
|
| Bookrunners: | Banc of America, Morgan Stanley, Salomon Smith Barney, Credit Suisse First Boston, Goldman Sachs & Co. and JPMorgan
|
| Maturity date: | Jan. 15, 2023
|
| Coupon: | 3.125%
|
| Issue price: | Par
|
| Yield: | | 3.125%
|
| Conversion premium: | 26%
|
| Conversion price: | $21.7476
|
| Conversion ratio: | 45.982
|
| Call: | Non-callable for five years
|
| Put: | In year 12, at par
|
| Ratings: | Moody's: Ba2
|
| S&P: BBB-
|
| Settlement date: | Jan. 13
|
|
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