Novellus top convertible issuance in dealReporter poll

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Novellus Systems (NASDAQ:NVLS) edged out TiVo (NASDAQ:TIVO) to claim the top spot in dealReporter’s poll of convertible bond market participants to find the best offering of 2011.

“We have been very happy with the deal”, John Hertz, the chief financial officer at Novellus, said in an interview. “We reduced our cost of capital by replacing roughly 20% of the company’s equity with low-cost debt, paying a cash coupon of 2.625%.”

The transaction represents a “perfect case study” regarding how convertibles can be issued to boost share repurchase programs, helping companies that are intent on delivering shareholder returns, said Prasanth Burri Rao-Kathi, head of equity-linked capital markets at BofA Merrill Lynch, which led the offering.

dealReporter polled investment bankers, portfolio managers and convertible analysts to find the best new convertible issue of the year. In a slow year for deals, Novellus and TiVo emerged as offerings that ended 2011 over par and with outrights and hedge funds enjoying gains.

Novellus’ offering also had benefits for the San Jose, California-based semiconductor equipment company. The notes’ 30-year maturity provides long-term flexibility and the contingent interest structure generates a positive NPV. Combined with the share buyback, the deal is accretive to earnings per share, Hertz said.

He felt the timing of the deal was just right, with the optimal market conditions in the marketplace allowing the company “access to capital at a good price.”

Rao-Kathi said, “This offering enabled the company to issue 30 year debt at an extraordinary low rate of 2.625% and repurchase over 10% of its shares outstanding in a single day”.

The stock rose by 6.5% during the marketing period, indicating shareholders supported the new convertible issue, said Rao-Kathi. When new convertible deals are announced, typically, the share price falls, said an industry source.

“We were pleased to help Novellus with this financing,” Rao-Kathi added.

In May, NVLS priced its USD 700m 2.625% senior convertible notes due 2041. The deal, which was upped from USD 525m to USD 600m (plus the USD 100m shoe was exercised), was underwritten by JPMorgan and BofA Merrill Lynch.

A second industry source said it was a large deal, and both outright accounts and hedge funds made money by investing in the convert this year.

This news service previously reported on the attractiveness of the convert at the time of issuance.

The convert’s low premium and long call protection made the convert an “excellent equity alternative,” said a portfolio manager at the time. Meanwhile, holders of the convertible also have some downside protection, the manager noted.

Novellus used the proceeds for the simultaneous repurchase of common stock from purchasers of notes in private transactions, repurchase of additional shares and general corporate purposes. The repurchase of stock helped make it attractive to hedge funds, said the industry source.

Last month, Lam Research (NASDAQ: LRCX) announced that it entered into a definitive merger agreement to acquire Novellus Systems in an all-stock transaction that was valued at USD 3.3bn.

Though the deal will not trigger Lam’s change of control provision, the converts traded up after the announcement due to Novellus’ implied credit improvement when the deal is completed, said the second industry source and sellside trader.

S&P placed its ratings of Lam’s debt on CreditWatch positive, citing the company’s expected improved business risk profile to product diversity and LRCX’s only moderate increase in leverage due to the deal.

Lam’s USD 450m 0.5% convertible senior notes due 2016 and USD 450m 1.25% convertible senior notes due 2018 are currently rated BB+.

Moody’s has a Baa1 rating on the converts, which was affirmed.

Overall, 2011 was a slow year for convertible bond issuance, with only about USD 24bn of new issues. There were not those many issues that ended the year above par, noted a second portfolio manager, whose top choice was also Novellus.

However, TiVo’s USD 172.5m 4% convertible senior note, upsized from the original USD 120m, was mentioned as the second choice by the second industry source and the second portfolio manager.

TiVo was also a top or second choice by other participants in the survey. It was another deal where outrights and hedge funds made money, said the second industry source.

The Alviso, California-based developer and provider of software, hardware and services, has a well-known brand, the industry source added. TiVo has been pursuing patent litigation against technology companies.

On the opposite end of the spectrum, most participants mentioned the two MF Global (NASDAQ: MFGLQ) converts as the worst deals of the year. The USD 287.5m 1.875% convertible senior notes due 2016 was issued in February, while the USD 325m 3.375% convertible senior notes were issued in late-July. The latter did not pay a coupon since the company filed for bankruptcy.

MF Global filed for bankruptcy on 31 October. Both converts currently trade in the low-30s, said the sellside trader.

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