Cytyc bid 3 points over par in gray market; XL brings $750 million mandatory as expected

By Ronda Fears

Nashville, March 16 - Convertibles shook off the unseasonable cold snap in the Northeast, taking a cue from the stock market, but traders said a lingering defensive tone eclipsed the small gains seen late Tuesday. Moreover, volatility plays were the biggest excitement in convertibles.

"There wasn't like a big spike in volatility today. It's been creeping up steadily and the bears that dominate in the hedge fund community look to take advantage of any further pullback, today's little bounce aside," said a dealer.

"The Fed held rates where they are and stocks turned around slightly after that, but the news was not all that good when you read between the lines. What the Fed was saying, aside from the headlines that they were going to be 'patient' with raising interest rates, is that jobs growth is not stimulating the economy. So, without that key data point, there cannot be a lot more enthusiasm generated."

The Federal Funds rate was left unchanged at 1.0%, suggesting that the policy on interest rates would be on hold for several months perhaps. The next FOMC policy meeting is scheduled May 4.

Placer Dome Inc. was bumped up about 1.75 points outright, or another 0.75 point on swap, the trader said, as "one of the smart vol plays," noting that the 2.75% convertible also shot up Friday. The underlying stock closed Monday up 34 cents, or 2.12%, to $16.40.

He mentioned a drop in Corning Inc. over the past few sessions as an example of the lingering defensive tone in convertibles. The Corning 3.5% convertible has lost something like 10 to 15 points since around the first of the month, he noted, on selling as risk aversion increases in the wake of renewed terrorism worries, not to mention a lack of faith in the so-called economic recovery.

XL Capital deal surfaces

XL Capital Ltd., as expected, launched a $750 million mandatory convertible, which was first mentioned by the company a couple of months ago. It was launched after the close with price talk of a 6.75% to 7.25% dividend and a 20% to 24% initial conversion premium. The deal is scheduled to price after Wednesday's close.

It is a straightforward non-callable three-year mandatory with no special bells or whistles.

In mid-January, XL Capital discussed the convertible offering, with a time frame of sometime during the first half of 2004, when it announced higher-than-anticipated reserves charges for 2003 and the impact of that on its earnings. XL Capital expects, however, that 2003 events should finally lay to rest the ill-fated claims legacy stemming from its Nac Re Corp. acquisition in 1999.

XL Capital shares closed Tuesday up $2.19, or 3%, to $74.63. The offering was not launched until after the close; during the session the only news on the tape regarding XL Capital was an upgrade in the stock by Merrill Lynch & Co. to buy from neutral. The stock has dipped from $79.15 when the company discussed the reserve charges and convertible offering plans Jan. 15.

Cytyc bid up in gray market

Cytyc Corp.'s pending convertible, at bat after Tuesday's close, was bid at 3 points over issue price in the gray market with an offer of 3.75 points over, according to buyside sources.

Cytyc is pricing $220 million of 20-year convertible notes talked to yield 2.25% to 2.75% with a 45% to 50% initial conversion premium.

Merrill Lynch & Co. analysts put the Cytyc convertible 2.07% cheap, at the middle of guidance, using a credit spread of 375 basis points over Treasuries and 35% volatility.

Deutsche Bank Securities analysts put the Cytyc convert 0.55% rich to 2.87% cheap, at the middle of price talk, using a credit spread of 350 basis points over Libor and 35% volatility.

Cytyc shares closed Tuesday down 55 cents, or 2.71%, to $19.78.

CapitalSource, Providian flag

New paper injected into the market early Tuesday by Providian Financial Corp. and CapitalSource Inc. was basically flat at around par in the immediate aftermarket.

CapitalSource wrapped up a $225 million offering of 30-year convertible notes to yield 1.25% with a 32% initial conversion premium - at the wide end of guidance for a 0.75% to 1.25% coupon and a 32% to 37% initial conversion premium. It was sold on swap, using an estimated $38.9 million of proceeds to buy up to 1.3 million shares of stock from note buyers to limit dilution. Also, the company bought call options to create an effective conversion premium of 75%.

Deutsche analysts put the CapitalSource convertible 2.785% rich, at the middle of price talk, using a credit spread of 350 basis points over Libor and 32% volatility.

Providian sold $250 million of 12-year convertible notes at par for a yield to maturity of 2.75% with a 45% initial conversion premium - also at the cheap end of guidance for a 2.25% to 2.75% yield to maturity and 45% to 50% initial conversion premium. The notes will pay a 2.75% cash coupon for seven years, then 1.75% plus an accreting amount for the full yield to maturity during the remaining five years.

Veritas weaker; Cendant gains

Veritas Software Corp. continued sliding Tuesday in the wake of announcing Monday that it would delay the filing of its 2003 10-K annual report at the Securities & Exchange Commission. Traders said there was not a mass exodus in the convertibles; however; the underlying stock Tuesday dropped another $1.85, or 6.35%, to close at $27.29.

There were offers to sell the Veritas converts, a trader said, but no takers.

Cendant Corp., on the other hand, was slightly higher even after it announced the travel and real estate services firm initiated its first quarterly cash dividend of 7 cents a share. The New York City-based firm will pay shareholders of record as of Feb. 23 and indicated that it expects to increase the dividend at some future point.

Because of the company's optimism on its performance, traders said convertible investors were heartened. One dealer also said investors were glad to see Cendant raise some capital through the initial public offering of unit Jackson Hewitt Tax Service Inc., which was announced Monday.

The Cendant 7.75% mandatory was up 0.625 point to 50.625 bid, 50.875 offered, and the 3.875% due 2011 was up 1 point to 108 bid, 108.5 offered. Cendant shares closed Tuesday up 54 cents, or 2.37%, to $23.30.

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