Newell Rubbermaid adds more than 2 points of premium; Teleflex plans $350 million deal

By Rebecca Melvin

New York, Aug. 2 - Newell Rubbermaid Inc. moved higher in active trade Monday - adding about 2 points of premium to become a focus of trade - after the Atlanta-based consumer and commercial products company said it intended "to launch later this quarter" an exchange of all of its 5.5% convertible senior notes due 2014.

The news, which was part of a package of Newell transactions aimed at simplifying its capital structure and interest expense, rekindled speculation about other convertible candidates that might be subject to similar issuer "flushouts."

"This is leading convert investors to bid up the premiums on several other deep in the money, high coupon issues," according to market commentary published Monday by Citi's convertibles sales and trading desk.

Among the names Citi mentioned as potential candidates are the following:

• Alcoa Inc.'s 5.25% convertibles due 3014;

• Alexandria Real Estate Equities Inc.'s 7% preferred due 2013;

• Alliance Data Systems Corp.'s 4.75% convertibles due 2014;

• Amkor Technology Inc.'s 6% convertibles due 2014;

• Incyte Corp.'s 4.75% convertible due 2015;

• Ingersoll-Rand plc's 4.5% convertibles due 2013;

• Saks Inc.'s 7.5% convertibles due 2013;

• Sandridge Energy Inc.'s 8.5% preferred due 2014;

• SBA Communications Corp.'s 4% convertibles due 2014;

• US Airways Group Inc.'s 7.25% convertibles due 2014; and

• Wyndham Worldwide Corp.'s 3.5% convertible due 2012.

Potential takeout candidates

"Everyone bid up Newell, Alcoa and anything else issued in that timeframe. I think it's going to be a theme for convert buyers, but I'm not so sure it will be a theme for convert issuers. It was not last time," a New York-based trader said.

Other issues of "that timeframe" were priced in the first half of 2009 when common stock prices were at a low, and since then stock and convert prices have run up dramatically. Potential candidates are generally trading at about 150 to double par.

According to the commentary published by Citi, interest in potential flush out transactions, or those in which the issuer offers convertibles holders stock or a combination of stock and cash with value in excess of current trading levels to induce the exchange, spiked following the offer from Johnson Controls Inc. for its 6.5% convertible last September.

"The $400 million issue, which had been brought to market only six months prior to the takeout offer, was exchanged at roughly 12 points of premium, or about six points higher than where the bonds were trading just prior to the offering," Citi wrote.

"For the convertible bond market, the transaction served to lift premiums on a number of deep-in-the-money converts, issues which would normally trade with very little premium relative to remaining cash flows. The rationale for the market having bid these issues higher was that similar offers would be forthcoming as companies sought to remove relatively high coupon, equity sensitive convertible issues from their balance sheets."

But aside from Alexandria Real Estate in May - their 8% bonds were trading around 12 points over parity and were exchanged for 18 points in stock and cash - that trend largely failed to materialize, leading the unusually wide premiums on these issues to creep back in over time, the Citi commentary said.

Secondary trades

Elsewhere in the secondary market, trading was quiet, sources said.

Continental Airlines Inc. saw its 4.5% convertibles changing hands at 145 versus a share price of $25.00 on Monday concurrently with Continental Airlines' launch of a roadshow for $750 million five-year first-lien notes.

The low interest-rate environment continues to lure would-be issuers to the straight bond side with Omnicom Group Inc. and subsidiaries also to price $750 million of 10-year notes via JPMorgan.

Arch Coal Inc., also a one-time convertible issuer, was shopping $500 million of 10-year notes on Monday.

For names like Arch Coal, with its BB rating, the low rate environment means that its credit default swaps are much tighter than they were. This is particularly true of commodity names that have seen their spreads tighten significantly since the recession, and the return of significant cash flow.

"That drives the spread pretty tight," a New York-based sellside analyst said, citing the Arch Coal 6.75% notes of 2013 as yielding 175 basis points on a spread basis.

On a positive note, the analyst said, "We're not going to have this hangover forever. Rates are going to go higher, and companies with equity where it is will be comfortable with issuing convertibles."

Teleflex comes to the primary

In the primary market, a deal emerged after the close Monday when Teleflex Inc. said it planned to price $350 million of seven-year convertibles.

The registered deal, seen pricing after the close of markets Tuesday, was being talked to yield 3.5% to 4% with an initial conversion premium of 15% to 20%.

Newell adds about 2 points of premium

Newell's 5.5% convertibles due 2014 traded at 202.5 on Monday versus a share price of $16.15, which compared to Friday when they were 193 versus a share price of $15.60, according to a sellside analyst.

That pricing was equal to the bond's premium widening to about 14.5 points from about 11.8 points before the announcement.

In addition to Newell's plan to hold an exchange offer for its 5.5% convertibles later this quarter, the company has already begun a cash tender offer for its $300 million of 10.6% notes due 2019.

These are part of a series of transactions designed to simplify the company's capital structure and reduce interest expense. The plan also includes a $550 million issue of new senior notes due 2020 and the repurchase of $500 million of shares.

In the exchange offer, holders will be offered common stock and cash for their convertibles. For any convertibles exchanged, the company plans to settle, for cash, the hedge transactions that were entered into when those convertibles were issued.

The share buybacks and the tender offer will be funded by a combination of cash on hand, short-term borrowings and proceeds from the new notes.

If all the 10.6% notes are tendered and all the convertibles are exchanged, approximately $600 million of long-term debt will be refinanced.

"The series of transactions we announced today will simplify our capital structure, lower our interest costs and reduce potential future dilution from the convertible notes," president and chief executive officer Mark Ketchum said in the release. "The convertible note financing played an important role helping us refinance our debt in the middle of last year's credit crisis, but we believe it is an appropriate time to revisit it and our overall capital structure. This has been one of our top priorities for 2010."

On Friday, Newell reported second-quarter earnings of $130.4 million, or 41 cents a share, up from $105.7 million, or 37 cents per share, a year earlier. Excluding items, it earned 51 cents a share, which was better than the 44 cent per share that analysts' estimated.

Teleflex plans $350 million offering

Teleflex's planned $350 million of seven-year convertibles is being made as part of a refinancing package that includes amending certain terms of Teleflex's senior secured credit facilities from 2012 to 2014, repaying $200 million under the senior secured credit facilities, and prepaying Teleflex's $196.6 million outstanding of senior notes issued in 2007 and maturing in 2012 and 2014.

Goldman Sachs & Co. is left lead bookrunner, with joint bookrunners including Jefferies & Co. Inc., Morgan Stanley & Co. Inc., Bank of America Merrill Lynch and JPMorgan.

A portion of proceeds are earmarked to pay the cost of convertible note hedge transactions, with remaining proceeds used to repay the $200 million of term loan borrowings, to prepay all of Teleflex's outstanding senior notes issued in 2007 and to pay related transaction fees and expenses.

Teleflex expects to enter into privately negotiated convertible note hedge and warrant transactions.

Limerick, Pa.-based Teleflex is a provider of single-use medical devices, including catheters and surgical products.

Mentioned in this article:

Alcoa Inc. NYSE: AA

Alexandria Real Estate Equities Inc. NYSE: ARE

Alliance Data Systems Corp. NYSE: ADS

Amkor Technology Inc. Nasdaq: AMKR

Continental Airlines Inc. NYSE: CAL

Incyte Corp. Nasdaq: INCY

Ingersoll-Rand plc NYSE: IR

Newell Rubbermaid Inc. NYSE: NWL

Saks Inc. NYSE: SKS

Sandridge Energy Inc. NYSE: SD

SBA Communications Corp. Nasdaq: SBAC

Teleflex Inc. NYSE: TFX

US Airways Group Inc. NYSE: LCC

Wyndham Worldwide Corp. NYSE: WYN

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