Medtronic, Lucent, EDS, Cephalon lower in weak market; Blockbuster, Maverick, Equinix to price

By Rebecca Melvin

Princeton, N.J., Nov. 8 - Widespread selling in the convertibles market on Tuesday left players speculating about the threat of redemptions and whether funds are pulling money away from the strategy and dealers are pulling out of positions in advance of year end

"We see lots of things for sale," a buyside trader in Connecticut said. "We're hearing people have redemptions, but we don't know when and we don't know who."

Bids were softer yet again in a trend that started last month, and weak broader markets didn't help things in regard to convertibles Tuesday, sources said.

"Lots of speculation about funds of funds pulling money out of relative-value strategies and more closings," a Connecticut-based buysider said via email Tuesday. "Also speculation about dealers blowing out of positions in advance of year end. Who knows?"

Among issues that were lower in trade were Medtronic Inc., Lucent Technologies Inc., Electronic Data Systems Corp. and Cephalon Inc.

But not everyone agreed that the weakness was comprehensive.

"I saw it mixed. Some things were up, some things were down," a West Coast-based sellside trader said.

Last month, the convertible market fell by 2.2%, while the market's underlying stocks fell 3.8%, after posting relatively consistent positive monthly performance results, according to Citigroup's Convertible Market Monthly Snapshot report. "Due to the market's pull-back, its year-to-date return slipped into the red to the tune of -0.7%," the Citigroup report said.

"There's nervousness in the market and the problem of redemptions for year end and the overall market was weak," a Citigroup convertibles research director said about Tuesday. He added that the problems started last month amid the threat of redemptions.

In the primary market, a new issue was seen pricing late Tuesday and two were seen pricing on Wednesday. In addition price talk emerged on E*Trade Financial Corp., with a pricing date set Nov. 16.

Set to price late Tuesday was Blockbuster Inc., which launched at the beginning of the day an offering of $100 million of cumulative convertible perpetual preferred stock, talked to yield 7.25% to 7.75%, with an initial conversion premium of 20% to 25%.

The Rule 144A deal, sold after one day of marketing is coming to market via joint bookrunners Citigroup and JP Morgan, with CSFB as co-manager.

Also announced Tuesday, but this time to price after the close Wednesday, Maverick Tube Corp. launched $220 million of 20-year convertibles, which were talked to yield 1.75% to 2.25%, with an initial conversion premium of 20% to 25%.

The Rule 144A deal of convertible senior subordinated notes was expected to price Wednesday after the close, according to a syndicate source.

Also on Wednesday, Credit Suisse First Boston Capital LLC was seen pricing 4.3 million, or about $165 million, of mandatory convertibles exchangeable into Equinix Inc.

Price talk for the exchangeables was for a coupon of 5.25% to 5.75%, and an initial conversion premium of 18% to 22%.

Not a Blockbuster for hedge players

Blockbuster's deal appeared in the gray market in Tuesday's session, trading at plus 0.125, according to a buyside source.

But while the cumulative convertible shares, which are non-callable for five years, appeared cheap, they didn't seem to be attracting much interest from hedge players, sources said.

"Blockbuster has very tight borrow and weak fundamentals, so it's gonna be tough for hedgies to play even though optically it looks very cheap," a buyside source said of Blockbuster.

But the offering's relatively high coupon and low premium meant that it was cheap for convertible players looking at breakeven and not volatility or credit.

Using a credit spread of 1,100 basis points over Treasuries, volatility of 35%, and a 2% borrow cost, the Blockbuster deal looked 2.9% cheap at the midpoint of talk, according to one sellside shop. The same source said the deal looked 0.6% to 5.1% cheap at the ends of the talk.

A second source said the Blockbuster deal looked a couple points cheap using a credit spread of 1,200 bps over Libor and 38% volatility at the midpoint of price talk.

"The focus is on outrights who already have positions in Blockbuster," a sellsider said.

The Blockbuster offering has a greenshoe of $15 million. In addition to the $100 million offering, another $50 million were planned to be offered to Blockbuster's 25 largest existing common stock holders, with any unsold amount expected to be rolled into the base deal.

Blockbuster intends to use net proceeds to repay a portion of its borrowings under its revolving credit facility and for general corporate purposes.

The offering is being entered into in connection with amendments to Blockbuster's existing credit agreement made Nov. 4, which revise the agreement's covenants.

Blockbuster is a Dallas-based video rental chain company.

Maverick to price convertibles Wednesday

Maverick's $220 million of convertibles, talked to yield 1.75% to 2.25%, with an initial conversion premium of 20% to 25%, were to be sold via Morgan Stanley & Co. as bookrunner.

With a greenshoe of up to $30 million, the notes will be non-callable for eight years and have puts in years eight, 10 and 15.

Other features of the bond include takeover and dividend protection and contingent conversion.

The Chesterfield, Mo.-based steel tube maker intends to use proceeds to purchase its stock in the open market and in private transactions. Also the company plans to use proceeds to pay the costs associated with the convertible note hedge and warrant transactions.

Also on Wednesday, traders eyed a smaller deal of about $165 million of mandatory exchangeables that Credit Suisse First Boston Capital LLC will price that are convertible into Equinix Inc.

Equinix' largest shareholder, STT Communications, will enter a pre-paid forward contract with Credit Suisse to sell the mandatory convertibles, which will be offered concurrently with a public offering of 5.15 million of Equinix stock.

Foster City, Calif.-based Equinix is a provider of network-neutral data centers and Internet exchange services.

E*Trade to price Nov. 16

Finally in other new issue news, price talk emerged on E*Trade's planned $450 million of three-year mandatory convertibles. The deal is seen yielding 5.625% to 6.125%, with an initial conversion ratio of 20% to 25%, according to a syndicate source.

The mandatories, which are being offered concurrently with common stock and senior note offerings, will price on Nov. 16, after the close, according to a syndicate source.

The "pretty standard," three-year convertibles have dividend protection, but not takeover protection, a syndicate source said.

Morgan Stanley & Co. and J.P. Morgan Securities are joint bookrunners for the offerings made under an existing shelf registration statement.

Medtronic loses two points

The 1.25% convertibles of Medtronic traded down about two points to par, while its shares edged slightly lower by 16 cents, or 0.29%, to $55.41. The Minneapolis-based medical device maker had moved up smartly last week. But on Nov. 1 the 1.25s due 2021 had also traded at 100.

Meanwhile, Cephalon 2s were weaker after showing strength on Monday. The 2% convertibles traded at 111.5 versus a share price that was up by 36 cents, of 0.77%, to $46.82. That compared to trades of the 2% paper at 112 versus a share price of $46.40 on Monday.

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