Sepracor issue straddles par; Vitesse goes to 103; EDS firm despite warning; biotechs rally

By Ronda Fears

Nashville, Sept. 17 - Sepracor Inc. and Vitesse Semiconductor Corp. injected $590 million of new paper into the convertible market, with mixed reaction, although both issues were heavily traded in an otherwise thin market Friday.

Sepracor's new overnighter, a $500 million issue, straddled par from breaking out of the gate to the close while Vitesse's tiny $90 million issue shot up 3 points from par. Both were sold on swap with a portion of proceeds going to buy back stock from short-sellers participating in the bond offerings.

"It was all a matter of the terms, from what we heard," a sellside trader said, who was at a desk away from both lead manager shops involved with the Sepracor and Vitesse deals.

"People liked the size of the Sepracor deal because it will be something that will trade around, but no one could get too excited about a no-no [0% coupon, 0% yield] deal. Vitesse, on the other hand, is a tiny deal that probably won't trade much after today, but the terms were better, even with just a 1½% coupon to clip."

At the other end of the spectrum - taking convertibles out of circulation - Performance Food Group Co.'s call on its 5.25% convertible initially caused a collective gasp among convertible arbitrage players, but most reported that the damage was minimal as the hedge on this name was fairly light. And, outright holders came off making a little money on the issue.

Most of Delta Air Lines Inc. paper was "grinding sideways," as one sellside trader put it. Specifically mentioned were the long-dated bonds of the troubled airline, including the two convertibles, while the shorter 7.7% issue edged up by about a point.

There was no news, nor even rumors, about Delta's talks with union pilots - expected to continue throughout the weekend - to move the credit, traders noted, although the stock slipped by about 1.25% in very light trading. Delta's 7.7% notes due 2005 gained 1 point to 50 bid, 52 offered while all the longer bonds, including the convertibles were steady. The 8% converts were pegged at 34.5 bid, 35.5 offered and the 2.875% convert at 37.5 bid, 38.5 offered, as Delta shares dropped a nickel to $3.96.

Elsewhere, traders said Electronic Data Systems Corp.'s convertibles were holding firm against a drop in the stock after the company disclosed that the bankruptcy filing of US Airways Group Inc. would hurt its third quarter results.

Buyers also were out Friday picking up biotech issues, traders said, after those stocks rallied for most of the week. Specifically mentioned were Enzon Pharmaceuticals Inc. and Decode Genetics Inc.

Sepracor issue ends at 99.5 bid

Sepracor sold its new issue at the middle of indicative price terms, which were aggressive to begin with, and the issue traded heavily Friday but failed to move from off the par post.

The $500 million of 20-year convertible senior subordinated notes priced at par to yield 0% with a 30% initial conversion premium - at the middle of guidance for a 26% to 34% initial conversion premium.

"Before the open they were bid about par and a quarter and I think that was as good as it got all day," said a buyside trader at a convertible hedge fund in New Jersey. "At the open, the bid had dropped to 99 and I didn't see it get over 99½ all day."

Morgan Stanley, bookrunner on the new Sepracor convertible, took it out for the weekend at 99.5 bid, 100 offered.

Sepracor shares dropped $1.22, or 2.36%, to $50.47 on the deal.

Vitesse prices tight, trades up

Vitesse sold $90 million of 20-year convertible subordinated debentures at par to yield 1.5% with a 35% initial conversion premium - at the aggressive end of guidance for a 1.5% to 2.0% coupon and 30% to 35% initial conversion premium. Still, the issue shot up out of the chute.

Lehman Brothers, sole bookrunner and lead manager on the Vitesse transaction, closed the new issue at 103 bid, 104 offered. Vitesse shares gained 2 cents on the day, or 0.69%, to $2.92.

The Camarillo, Calif.-based firm, which makes optical devices used in the networking, communications and storage industries, said with cash on hand and deal proceeds - after using $20 million or so to buy back stock from short-selling note purchasers - it would take out the remaining amount of its 4% convertible due 2005.

There is about $195 million of the 4% convertible issue outstanding. The issue originally totaled $720 million.

Performance Food call mild

Food distributor Performance Food Group on Friday called its 5.5% convertibles, and initially that sparked concern among hedge fund players, but it turned out to be a mildly painful even for the arbs, while outright holders made a little money.

"Arbs got killed on this PFGC call, unless they were hedged very, very light, or you were holding it outright," said a hedge fund trader shortly after the market open.

Early Friday, Performance Food announced it would call the roughly $200 million issue at 103.143, and the Richmond, Va.-based food trucking firm said it would fund the redemption by drawing loans from its bank revolver.

Later, the hedge fund trader said, indeed, the hedge ratio on the Performance Food name was low, in the 20% neighborhood.

A sellside market source also noted that convert desks on that side of the market were not hearing "the usual volume of whining" from convertible arbs following an issue getting called unexpectedly.

"This thing [Performance Food convert] was trading at a pretty decent premium, like 38%," so there could have been "some wound licking going on," the sellside source said. But, he added, "I'm hearing that since it was a low delta issue that hedge guys didn't get too beat up on their underlying short."

Outright holders actually made about 1 point at the call price, the trader said.

Performance Food shares ended Friday up $1.465, or 6.39%, to $24.40.

EDS hurt by US Airways

EDS, previously hurt by reduced guidance and job cuts in addition to the downturn in technology spending, announced another wound that will arise out of US Airways' bankruptcy, which the Plano, Texas, company estimated would trim its third-quarter earnings by 3 cents a share - a significant portion of the 8 cents a share analysts had been expecting EDS to show for the quarter.

The EDS convertible bonds held up firmly against a drop in the stock of 20 cents on the day, or 1%, to $19.90, traders said. The 3.375% convertible was pegged steady at 100.625 bid, 101 offered.

"There were buyers for the EDS bonds yesterday [Thursday], nothing in reaction to today, though," a sellside convertible trader said.

"After the downgrades and since people saw the credit was holding up so well, we've started to see some buying in the EDS bonds."

EDS reported in a filing with the Securities and Exchange Commission that US Airways had an unpaid bill of more than $27 million at the time of its bankruptcy filing, which doesn't include more than $16 million in equipment EDS has tied up in its contract with the airline.

Earlier this summer, EDS credit fell to junk after the company announced around 20,000 layoffs, reduced its 2004 free cash flow estimate and tightened its project earnings range.

Before the downgrade, EDS credit had been tightening sharply, traders said. Since then, traders said, there has been some contraction in the widening that followed the downgrade to junk.

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