KKR trades up on debut; Salesforce.com bid fades in the gray; Hutchinson active; Amylin mixed

By Rebecca Melvin

New York, Jan. 12 - KKR Financial Holdings LLC's newly-priced 7.5% convertibles were seen late in the session up about 2.5 points on their debut Tuesday, having priced before the markets opened. The gains came despite a drop in their underlying shares during the session, market sources said.

Salesforce.com saw a gray market bid for its planned $500 million of convertibles fizzle ahead of pricing expected after the market close.

The Salesforce deal was getting mixed reviewed, as the deal was of large enough size to ensure some liquidity and the company itself seen as a solid credit, but the coupon was talked at the low level of 0.5%, making the paper unappealing.

"You might as well buy Treasuries as buy this one," a Connecticut-based sellsider said.

Hutchinson Technology Inc. was a heavy trader on the day after the Hutchinson, Minn.-based company supplier of suspension assemblies for disk drives pre-announced earnings late Monday, that one sellsider called "decent."

The shorter-dated Hutchinson 2.25% convertibles mature in mid March and only have about $41 million left outstanding, but the Hutchinson 3.25% convertibles due 2026 looked to be up about 0.25 point at 81.75 even though Hutchinson's stock dropped nearly 5%.

Amylin Pharmaceuticals Inc. was actively trading, with its shares actually eking out a gain on a day when equities were mostly on the downside as some give back from recent gains occurred.

Amylin's 2.5% convertibles due 2011 traded at 96.625, which was down 0.275 point according to Trace data. The Amylin 3% convertibles due 2014 were at 80 after the session ended, which was up 0.375 point. Shares of the San Diego, Calif.-based biopharma company added 22 cents, or 1.4%, to $15.99.

Bonds were strong as investors allowed the S&P 500 stock index to drop for the first time in more than a week, and for the first time this year, after Alcoa Inc.'s earnings disappointment set an uneasy tone for earnings season going forward.

KKR moves up on debut

KKR's newly priced 7.5% convertible senior notes due 2017 traded at 102.25 bid, 102.75 offered late in the session.

Sellsiders said that the company represented a "challenging credit," but even so, its pricing was strong, especially given that shares of the San Francisco-based real estate investment trust and specialty finance fell.

One New York-based sellsider said that Libor plus 800 basis points was used as a credit spread to value the bonds.

Another source said that borrow was tough on this issue.

The company priced an upsized $150 million of seven-year convertible senior notes at par of Tuesday to yield 7.5% with a 22.5% initial conversion premium.

The registered offering was originally going to be $125 million in size. There is also an over-allotment option to purchase up to an additional $22.5 million of notes, upsized from $18.75 million.

The deal priced at the midpoint of talk for the coupon, which was 7.25% to 7.75%, and at the cheap end for the initial conversion premium, which was 22.5% to 27.5%.

Bank of America Merrill Lynch, Citigroup Global Markets Inc. and J.P. Morgan Securities Inc. were acting as joint bookrunners for the offering. KKR Capital Markets LLC was acting as a co-manager.

KKR Financial intends to use substantially all of the proceeds to repay a portion of its existing senior debt, with the remaining proceeds to be used for general corporate purposes.

The fact that KKR can terminate investors' conversion rights after year three wasn't considered a significant issue because holders would be able to convert out during a notification period, and they would probably want to do so given that shares would be at least 150% of conversion price at that point.

Salesforce.com gray market bid eases

Salesforce planned to price $500 million of five-year convertible bonds after the market close that were talked to yield 0.5% with an initial conversion premium of 27.5%.

The deal was initially bid at 100.375 in the gray market, but later that bid sank to 99.75, according to a Connecticut-based sellside analyst.

The paper was modeling at fair value to slightly rich, with the low coupon labeled the culprit.

"From a modeling standpoint, it's not that attractive of a piece of paper," a Connecticut-based sellside analyst said, who got the paper 0.2% cheap.

A New York-based sellside analyst said that using 300 basis points of Libor with a vol of 33%, the paper was 2% rich.

"The big question is why even do the deal because prior to the deal they had over $1 billion in cash and cash equivalents, and this is its first piece of debt, and it's not like they needed the cash to address an approaching debt maturity," the analyst in Connecticut said.

He went on to say that while the company is saying it just wants to have the funds on hand to take advantage of business opportunities, the market was convinced that the cloud-computing company was going to do a large acquisition that could impinge on its credit standing.

Standard & Poor's downgraded the San Francisco-based software company to "neutral," citing such concerns.

"The consensus is that they may do a large acquisition, and the largest acquisition that they've done to date was for $31.5 million, and this one has the potential to be $1.5 billion or $1.6 billion in cash, assuming the shoe is exercised," a sellsider said.

"It's a solid credit, but the coupon is so small that it's not attractive," the sellsider said.

Modeling required looking at comparables in the software sector that are mostly BBB, but Salesforce is a bigger and better credit than most, including Terremark Worldwide Inc. But Salesforce could also be a takeover target as well for the likes of Oracle, Microsoft or SAP.

The gray market slid from plus 0.375 point bid to minus 0.25 point.

Salesforce.com plans to price $500 million of convertibles Tuesday that were talked to yield 0.5% with an initial conversion premium of 27.5%. The Rule 144A offering is being sold via Bank of America Merrill Lynch.

The San Francisco-based provider of relationship management service plans to use proceeds to cover the cost of convertible note hedge transactions and for general corporate purposes including possible acquisitions of complementary businesses, services or technologies, working capital and capital expenditures.

Mentioned in this article:

Amylin Pharmaceuticals Inc. Nasdaq: AMLN

Hutchinson Technology Inc. Nasdaq: HTCH

KKR Financial Holdings LLC NYSE: KFN

Salesforce.com NYSE: CRM

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