A123 Systems falls, regains some ground after bankruptcy filing; Clearwire slips back

By Rebecca Melvin

New York, Oct. 16 - A123 Systems Inc. filed for Chapter 11 bankruptcy on Tuesday after failing to make a $2.8 million interest payment to convertible bondholders, sending that paper of the electric car battery maker down to 25 from 30. But the paper recovered some ground to end of the session at around 28, market players said.

In addition to the filing, the battery maker also reached a deal to sell its automotive assets, including two Michigan factories and its lithium-ion battery technology, to auto parts maker Johnson Controls for $125 million, the Associated Press reported.

Clearwire Corp.'s convertibles peeled back a chunk of gains notched on exuberance over the planned Softbank Corp. purchase of Sprint Nextel Corp. The retrenchment came on the heels of a merger call that suggested Clearwire was not looking likely to be integral to the deal for now. Clearwire shares were off 17%.

The Clearwire convertibles were "all over the place." They were 98 to 99 on Monday, but were seen early Tuesday at 93.25, and near the end of the session, they were back to 95 to 96, a West Coast-based trader said.

In the primary market, Walter Investment Management Corp. was getting a look from would-be purchasers, many of which were turning up their nose at the $265 million of new convertible subordinated notes because of their seven-year term. The Walter deal was expected to price after the market close on Wednesday.

"The fact that they are seven-year and subordinated makes them not very appealing," a New York-based trader said of the paper of the Tampa, Fla.-based asset manager and mortgage services and portfolio owner.

Also in the primary, ZaZa Energy Corp. said it plans to price up to $40 million of five-year convertible senior notes in a private placement that were talked with a 15% to 20% initial conversion premium, provided that the conversion price doesn't fall below $2.50 per share, according to a company news release.

Elsewhere Intel Corp.'s convertibles were said to be "a little better" after the Santa Clara, Calif.-based chip maker forecast fourth-quarter revenue and margins below Wall Street's expectations due to weak demand for personal computers.

Electronic Arts Inc. saw hedged buyers of the Redwood City, Calif.-based video game publisher's convertibles at firm to slightly stronger pricing.

But in-the-money homebuilders were said to be "coming in" somewhat amid of lack of volatility that was fostering what one trader called, "time decay."

"Because of no vol. as time goes by, people become impatient and lose interest," the trader said.

A123 drops to 25

A123 Systems' 3.75% convertible subordinated notes due 2016 didn't fall off a cliff but traded down to 25 from 30 in the early going before recovering some ground to trade at 28 and 28.5, market sources said. A month ago, the convertibles were in the 36 bid, 37 offered range with the stock at $0.55.

On Tuesday, shares of the Waltham, Mass.-based electric car battery maker fell 74% to $0.0621 in extremely heavy volume.

The filing wasn't unexpected, sources said, but sudden.

The shares have been cascading lower for at least a year. On Jan. 14, 2011, shares were $10.50.

Traders noted that the filing comes at a timely or untimely moment depending on your political views as it was likely to be brought up at the presidential debate Tuesday night as ammunition for governor Mitt Romney.

The company had received $249 million in government grant money that was used to help build a plant in Michigan.

Another trader said, "A few months ago they raised $50 million in a private placement and only $35 million outstanding. The people who bought that deal had stringent terms."

The company filed for Chapter 11 bankruptcy protection a day after it said it would be unable to make a $2.8 million interest payment to the convertible bondholders due Monday, and now it has a plan to sell its auto-business assets to auto-parts maker Johnson Controls Inc.

The convertible bondholders, which owned $143.75 million plus interest, are listed as the battery maker's largest unsecured creditor.

The company priced the $143.75 million of five-year convertible subordinated notes in April 2011 concurrently with $108 million of common stock, or 18 million shares, at $6.00 per share.

The Johnson Controls deal is valued at $125 million and the sale is subject to higher offers at a bankruptcy auction.

Johnson Controls is providing the company with $72.5 million in debtor-in-possession financing to fund the bankruptcy case.

Clearwire peels back

Clearwire's 8.25% convertibles due 2040 traded as low as 93 to 93.25 and were seen at 90 bid, 93 offered early Tuesday before settling around 95 bid, 96 offered, traders said.

That level was down from 98 bid, 99 offered late Monday with trades as high as par.

There were "definitely mixed signals," a New York-based trader said, referring to a merger teleconference Monday.

"Both the Softbank CEO and Sprint management said that Sprint will be a player in the M&A market right away. But Softbank's CEO also said on the call that his vision involves a rapid build-out of a 4G network," the trader said.

The underlying shares of the Bellevue, Wash.-based company fell 46 cents, or 17%, to $2.23 in heavy volume.

Monday's news is that Softbank has procured the funding it needs to acquire Sprint. Sprint owns 49% of Clearwire, which owns U.S. spectrum and is planning a next-generation network using technology called TDD LTE.

The planned $20 billion deal that gives Softbank a 70% stake in Sprint doesn't directly involve Clearwire.

Walter seen long-dated

Walter Investment's $265 million of convertible bonds were optically not bad, and some people thought they were cheap, market sources said.

But the fact that it was seven year, senior subordinated debt was a black eye for the deal.

"It's bad enough that it's seven-year, and that long duration, but when you add that it's subordinated with a greater ROE exposure and lower in the cap structure, it's too much. If it had been five-year, people might have had a different face on it," a New York-based trader said.

Another New York-based trader said that using a credit spread of 1,000 basis points over Libor and a 35% vol. the bonds looked fair value.

He noted that the base business was "OK," but that it has a portfolio of subprime mortgages, which is a problem.

"Financial sub paper, not great," he said.

The deal was launched Monday with price talk for a 4.5% to 5% yield and 35% to 40% initial conversion premium.

Credit Suisse Securities (USA) LLC, Morgan Stanley & Co. LLC, Bank of America Merrill Lynch and Barclays are the joint bookrunners.

The company is doing a concurrent offering of common stock.

ZaZa eyes up to $40 million

ZaZa is a an onshore oil and gas exploration and development company that was formed through the merger of Paris-based Toreador Resources Corp., a former convertible bond issuer, and ZaZa, an oil and gas exploration and production company in Houston.

The small, $192 million market cap company said that it wanted to do the five-year deal with a 15% to 20% premium over its common stock, if the conversion price didn't fall below $2.50 per share.

Proceeds of the private placement, being sold under section 4(a)(2), are earmarked to fund drilling capital expenditures and leasehold transactions and for general corporate purposes.

No further details were immediately available.

Mentioned in this article:

A123 Systems Inc. Nasdaq: AONE

Clearwire Corp. Nasdaq: CLWR

Electronic Arts Inc. NYSE: EA

Intel Corp. Nasdaq: INTC

Walter Investment Management Corp. NYSE: WAC

ZaZa Energy Corp. Nasdsaq: ZAZA

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