Convertible market hopeful of nice deal slate; NII to price $200 million overnight

By Ronda Fears

Nashville, Jan. 26 - Convertible players were busy Monday as another week of heavy earnings reports poured in but were hopeful of a nice new deal slate as well. After the close NII Holdings Inc. launched a $200 million overnighter, and sellside market sources said to look for two or three more new issues this week.

"We're expecting three or four, maybe five deals this week and probably something like that next week," said a convertible salesman at one leading convertible underwriting desk.

"After the bulk of the earnings are out, after next week, it's going to get busier, I think, and probably stay that way until around midyear, sometime toward the end of second quarter."

The NII, a $200 million deal, which was pricing before Tuesday's open, was talked to yield 2.75% to 3.25% with a 50% to 55% initial conversion premium.

NII shares, boosted by an upbeat report from the company earlier Monday on subscriptions in 2003, rose $4.48, or 4.39%, to $106.48.

Meanwhile, in the secondary market trading was hectic and a little choppy, dealers said.

"Everyone is looking for the big growth names right now, with the Dow hitting a 21/2-year high, you know," said a sellside trader.

"Virtually everything outside of the airlines was better today. We're still bid heavy, though. People are really getting antsy; they really want some new issues. Anything that models up halfway decent is getting bid up ridiculously."

Traders said new paper from last week, except the News Corp.-linked deal, was higher by 2 to 3 points.

L-3 shrugs off new dividend

L-3 Communications Holdings Inc. announced it would begin paying a common dividend, at 40 cents a share on an annual basis, right after reporting a good year in 2003 and forecasting a better year in 2004 due to higher U.S. defense spending.

But a trader said the convertible market "pretty much saw it as a non-event." He said the cost is estimated at about $40 million a year, and the company is projecting free cash flow of $425 million next year, "so it doesn't seem like it's going to threaten the income stream on these converts."

L-3's 4% convertible due 2011 was off by about 0.5 point to 111.75 bid, 112.375 offered, the trader said, and was moved most by the stock slipping 39 cents, or 0.73%, to $52.88.

For 2003, L-3, which tailors communication equipment to the defense industry, posted a 13.4% gain in sales and said operating income rose 21.2%. Diluted earnings grew by 19% at $1.93 a share.

For 2004, the company is predicting earnings per share in the area of $3.30 to $3.35 and expecting sales to gain 24%.

Credit analysts at Standard & Poor's agreed that the dividend does not seem threatening to L-3's balance sheet. S&P said the company's liquidity is solid, with $135 million of cash and $666 million in revolver availability at Dec. 31.

American Tower to call 6.25s

Along with dividend risk, as common dividends became more appealing to companies in 2003 because of new tax laws, call protection and puts are increasing concerns in the convertible market. (See a full story on the call/put subject elsewhere in this edition.)

On Monday, American Tower sold $225 million of eight-year senior notes and said it would use the proceeds to take out its $212.7 million of 6.25% convertibles due 2009, with the remaining going to repurchase a portion of its 5% convertibles due 2010.

The junk-rated bonds were sold at par Monday to yield 7.5%, according to a high-yield syndicate source. Price talk had put it in the 7.0% to 7.25% neighborhood.

The tower company has already redeemed the majority of its 2.25% convertibles, which were issued in a two-tranche deal with the 6.25% convertibles. Last year, however, American Tower sold a new convertible to fund some of those repurchases.

The anticipated call on the American Tower 6.25% sent the issue to around par, giving it a boost of about 2.75 points from Friday, a buyside trader said.

American Tower's new 3.25% convertible due 2010 gained 1 point to 125.625 bid, 126.125 offered.

American Tower shares rose 13 cents, or 1.15%, to $11.43.

Oilfield, tech names active

Elsewhere in the secondary market, traders said the technology and telecom issues were active, as usual, but there also was some interest in the oilpatch.

A positive fourth-quarter report from Schlumberger Ltd. on Friday helped boosted its securities, but a dealer said there is also some anticipation that higher gasoline prices and natural gas prices will support a lift in oil rig rates and will trickle down to more business in the oilfield services sector.

Schlumberger shares hit a new 52-week high of $61.06, gaining $1.29, or 2.16%, on Monday.

The Schlumberger 1.5% convertible due 2023 gained 1.5 points to 106 bid, 106.125 offered. Its 2.125% convertible due 2023 rose 1.25 points to 105.125 bid, 105.375 offered.

On Friday, Schlumberger reported net income in fourth quarter was $177 million, or 30 cents a share, versus a $2.86 billion net loss in fourth quarter 2002.

Hanover Compressor Co. got a boost Monday, as well, after it announced along with Schlumberger that they have sharpened their strategic alliance and will restructure a management committee to target specific geographic regions to pursue joint business opportunities. The alliance was established in August 2001 as part of Hanover's acquisition of Production Operators Corp. from Schlumberger.

Hanover's 4.75% convertible due 2014 shot up 4 points to 125.375 bid, 125.625. The stock gained 41 cents, or 3.19%, to $13.25.

Among the telecom and tech names, Lucent Technologies Inc. led the networking equipment and hardware names higher following an upbeat article in Barron's magazine over the weekend. Reported to be higher in sympathy were Nortel Networks, JDS Uniphase, Juniper Networks and Ciena.

Brocade Communications Systems Inc. also was mentioned.

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