Countrywide, Beazer up with rates down; Medtronic rises on merger talk; AMD, XM stock and convertibles diverge

By Evan Weinberger

New York, Sept. 19 - A day after the Federal Reserve's rate cut sparked a market dash, Countrywide Financial Corp. convertibles continued their rally. Beazer Homes USA, Inc. continued a rally among homebuilders, and US Bancorp moved up as well.

The action wasn't only in the banking and housing sectors as Medtronic Inc. convertibles moved up on word that its merger with Kyphon Inc. had moved closer to completion. Advanced Micro Devices Inc. and XM Satellite Radio Inc. convertibles continued to gain even though their stocks didn't.

The flow of new issues continued to grow Wednesday as Powerwave Technologies, Inc. priced its $130 million in 3.875% convertible subordinated notes due Oct. 1, 2027 before the market open. The convertibles came in with a 30% initial conversion premium. While the coupon and initial conversion premium were already set, investors were waiting for the conversion price - $8.71 - and the reoffer price - 98.5. The reoffer price, which had been talked at between 98.5 and 99.5, came in at the cheapest end.

Powerwave is a Santa Ana, Calif.-based wireless communications networks services provider. The company plans to use the proceeds for working capital and general corporate purposes, including paying back debt. In its statement, Powerwave raised the possibility of buying back a portion of its 1.25% convertible subordinated notes due 2008.

PetroQuest Energy, Inc. announced its intentions to offer $50 million in series B cumulative convertible perpetual preferred stock Wednesday before the market open. They were scheduled to price the same day after the market close.

The preferreds are talked at a coupon of 6.375% to 6.875% and an initial conversion premium of 25% to 30%.

PetroQuest is a Lafayette, La.-based oil and natural gas company that drills primarily in the Arkoma Basin, East Texas, South Louisiana and the shallow waters of the Gulf of Mexico. The company plans to use the proceeds to repay the majority of its borrowings outstanding under its bank credit facility and for general corporate purposes. The company plans to continue borrowing under the credit facility to fund its 2007 capital expenditures to step up its drilling and leasing activities in its longer lived areas in Arkansas, Oklahoma and East Texas.

And from Canada comes a bought deal from Cominar Real Estate Investment Trust. The deal is C$110 million in 5.8% convertible unsecured subordinated debentures due Sept. 30, 2014. The debentures have an initial conversion premium of 15.56%.

Cominar is a retail, office and industrial REIT based in Quebec City, Quebec. The company plans to use the proceeds to pay down existing debt in its principal credit facility and for general corporate purposes.

One characteristic that's been common to a lot of new convertible issues in recent days is the relative cheapness.

Equity markets were on the rich side again Wednesday as investors continued to feel the sugar rush of Tuesday's 50 basis point federal funds rate cut. But just like a kid in front of a heaping bowl of Halloween candy, the markets needed a breather in the middle of the trading day before staging a late-day mini-rally.

The Dow Jones Industrial Average gained 76.17 points, or 0.55%, for a close at 13,815.56. The Nasdaq closed at 2,666.48, a gain of 14.82 points, or 0.56%. And the Standard & Poor's 500 tacked on a 9.25 point, or 0.61%, addition to close at 1,529.03.

Talk is cheap, so are deals

The Powerwave deal came in cheap, which is not a surprise to many market watchers.

"I think they brought it cheap and had to because of the questionable market we are in," a sellside analyst said. "They definitely took advantage of the Fed cut yesterday and did an overnight to get it out while stocks were high."

Deal cheapness appears to be a trend in recent weeks, the analyst added. Market conditions, even with the Fed rate cut Tuesday, still appear unsettled to enough market players that convertibles issuers still feel the need to bring their new deals cheap to attract any interest.

"I am noticing that all these deals coming over the next week are talked much cheaper than deals were before the credit crisis, which is to be expected," the analyst said.

The nature of the convertibles is also contributing to the cheapness of deals, another analyst said. The majority of new issues, including the forthcoming Equinix Inc. convertibles scheduled to price this week, are from small cap companies with small deals. "The deals that we've seen in recent weeks, and the handful of deals in September, are what I refer to as classic convertibles," the analyst said. "It's a little harder for some of these small guys."

It is possible that if the rate cut helps improve market conditions, the big boys may come in again with the big deals soon. "We haven't seen the big ones. But if the market holds these gains, I think the big ones will start coming," another analyst said.

Financials, home builders ride high

Countrywide continued its rally on the rate cut. The Calabasas, Calif.-based home lender saw its Libor minus 350 basis point series A convertible senior debentures due April 15, 2037 close Wednesday at 92.5 versus a closing stock price of $20.54. They closed Tuesday at 92 versus a stock price of $19.88.

Countrywide's Libor minus 225 bps series B convertible senior debentures due April 15, 2037 closed at 89.5 versus a stock price of $20.54. They finished trading Tuesday at 89.5 versus a stock price of $19.88.

Countrywide stock (NYSE: CFC) added 66 cents, or 3.32%, on Wednesday.

Atlanta-based home builder Beazer Homes saw its 4.625% convertible senior notes due June 15, 2024 close at 76.75 versus a closing stock price of $11.03. They finished trading Tuesday at 74 versus a stock price of $11.18.

The day wasn't as kind to Beazer stock (NYSE: BZH), which slipped 15 cents, or 1.34%, on Wednesday.

Minneapolis-based US Bancorp, a commercial bank, had both its stock and its convertibles rise Wednesday. US Bancorp's Libor minus 175 bps convertible senior debentures due Feb. 6, 2037 closed at 99.45 versus a closing stock price of $33.98. They finished trading Tuesday at 99.25 versus a stock price of $33.62.

US Bancorp stock (NYSE: USB) picked up 36 cents, or 1.07%, on Wednesday.

Medtronic up as merger nears

The German Federal Cartel Office ruled the pending merger between Minneapolis-based medical device producer Medtronic and Sunnyvale, Calif.-based medical device maker Kyphon did not violate European antitrust rules. That meant another hurdle cleared for the deal and sent stock and convertibles in Medtronic up Wednesday.

Medtronic's 1.5% convertible senior notes due April 15, 2011 closed at 109.5 versus a closing stock price of $56.22. They finished trading Tuesday at 106 versus a stock price of $55.36.

The company's 1.625% convertible senior notes due April 15, 2013 closed at 111.388 versus a stock price of $56.22 on Wednesday after closing Tuesday at 108 versus a stock price of $55.36.

Medtronic stock (NYSE: MDT) added 86 cents, or 1.55%, on Wednesday.

AMD, XM continue rise

Sunnyvale, Calif.-based Advanced Micro Devices saw its convertibles and its stock go in opposite directions Wednesday. The semiconductor producer's 6% convertible senior notes due May 1, 2015 closed at 89.5 versus a closing stock price of $13.10. They finished trading Tuesday at 88.5 versus a stock price of $13.30.

AMD's 5.75% convertible senior notes due Aug. 15, 2012 closed at 3 versus a stock price of $13.10 Wednesday after ending Tuesday at 90.94 versus a stock price of $13.30.

AMD stock (NYSE: AMD) closed down 20 cents, or 1.5%, on Wednesday.

XM Satellite Radio continued its recent path up Wednesday, although its stock followed AMD's trajectory. The Washington, D.C.-based company saw its 1.75% convertible senior notes due Dec. 1, 2009 close at 86.75 versus a closing stock price of $14. They finished Tuesday at 86 versus a stock price of $14.82.

XM stock (Nasdaq: XMSR) gave back 82 cents, or 5.53%, on Wednesday after a downgrade from UBS.

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