Motorola issues up 3 points on chip unit spin-off; Kodak ends dry spell in new deals

By Ronda Fears

Nashville, Oct. 6 - Trading was quiet in convertibles Monday, but Eastman Kodak Co. ended the dry spell in new issues by launching a $500 million deal for Wednesday's business.

Flow was rather stagnant because of the Yom Kippur holiday and it being a Monday, but, that said, traders noted that Motorola Inc.'s convertibles gained 3 points as buying interest picked up on the long-awaited news that the mobile phone maker will indeed spin off its semiconductor unit.

"It was pretty slow all over with the Jewish holiday," one dealer said.

Finally, however, the new deal hiatus - there were no new issues last week - ended.

Kodak launched $500 million of 30-year cash pay convertibles after the close but market sources said guidance would not likely be released until early Tuesday.

"We are hoping to get guidance out before the open," said a source working closely with the Kodak deal, who said it was just a matter of ironing out the exact parameters of the price talk with the company late Monday night.

Citigroup and Lehman Brothers are joint lead managers of the deal, which is slated to price in the Rule 144A market on Wednesday.

Looking ahead, buyside sources aren't expecting too much for the fourth quarter, but a decent showing in the way of new deals. Thus, there is expected to be more activity in the secondary market.

"It's often feast or famine," said Tom Dinsmore of Davis-Dinsmore Management Co.

"The thing that happens in convertibles is there will be a flurry of activity and then nothing for a little while. I think there will be continued rationalization of the market, from an issuer's perspective. Pricing has been getter a lot better from a buyer's perspective."

Early on in 2003, he said, issuers saw the equity market as priced too cheap to consider for raising capital and while the straight fixed income markets were reasonable, the bond market was a bit "flighty." So, the convertible market rose to the challenge.

"The convertible market came up with products that made the after-tax cost of issuing these converts close to zero," Dinsmore said.

There is still plenty of demand for new paper, he said, it's just that buyers are more demanding now. Another cooling effect on the primary market, he said, is the sheer volume of deals that have already tapped the market, creating a pace that would be difficult to maintain.

Thus, there has been and will continue to be more secondary activity.

"Six months ago, pretty much the only purchases we were making were new issues," Dinsmore said.

"Now, we're looking again at the market. The secondary market is getting a second look now from all the money managers."

As for the market being rich, or busted, he said it is a matter of perspective.

Many players, as well as analysts, have described the market as rich.

Merrill Lynch & Co. convertible analysts said the market richened dramatically in September with the drop off in issuance. The firm's research shows the average theoretical discount for the convertibles market dropped to just 0.27% at the end of September from 0.93% at the end of August.

Likewise, the market is being described as busted, although that dynamic has been shrinking as a portion of the whole market throughout 2003.

Citigroup convertible analysts said the convertible market finished September with a weighted average premium to conversion value of 52.9%. While the premium was up slightly from 51.6% at the end of August, the firm's research shows the market's average premium at year-end 2002 was 87.8%.

"Why does the market look rich? Because we look at it with an equity perspective," Dinsmore said.

"If you look at it as a fixed-income instrument with this extra warrant attached, then these make a lot of sense."

Traders on Monday were commenting that Motorola's spin-off of its semiconductor unit makes a lot of sense as the company concentrates more acutely on its battle with Nokia over the top spot in the mobile phone market.

"I think a lot of people were anticipating this was going to happen sooner or later, but it still buoyed the converts," a buyside convert trader said.

Motorola's 7% mandatory shot up 3 points to 41.5 bid, 42 offered.

The Liberty Media Group 3.5% exchangeable due 2031, which converts into Motorola shares, also gained 3 points to 81.625 bid, 82.625 offered.

Motorola shares rose $1.22, or 9.93%, to $13.50.

Otherwise, there was very little excitement in the trading trenches.

Some movement in Lucent Technologies Inc. and Corning Inc. sprang out of the Motorola news, traders said, along with Nextel Communications Inc. and Nextel Partners Inc. Those are very active names in the normal course of the market, however.

Airlines also saw some action, moving higher except for Mesa Air Group Inc. as it made an unsolicited bid for Atlantic Coast Airlines Inc. that was valued at more than $500 million in the current market.

Mesa's cash-to-zero convertible, which pays 2.4829% of principal through 2008, fell 3.25 points to 58 bid, 58.5 offered. The stock dropped 99c, or 7.98%, to $11.56.

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