Quantum downsizes, sweetens deal as late surge of deals find many players on summer break

By Ronda Fears

Nashville, July 25 - The surge of deals late in the week caught some offguard and many players were on summer break, sources said, but it made for a very decent $1.3 billion midsummer week.

"We were a bit surprised to see all these deals come out, because a lot of people took vacation this week," said a buyside convert trader in New York.

"It was a tough week all the way around, though. Some of the new deals probably got hurt by it being earnings week, which also surprised us, that they would bring a new deal during earnings week."

Next week, only Wabash National Corp.'s small $100 million offering is firmly on the calendar. And, after the surprise this week, market sources were reluctant to speculate about what next week may bring and banker types were cagy.

In junkland, high-yield market sources told Prospect News that there was some chatter about Crown Castle International Corp. tapping the capital markets for some cash to refinance a convert. There was nothing abuzz in convertland, though.

When Crown Castle sold its latest convert - the 4s - a month ago, those proceeds were earmarked to fund a portion of the previously announced redemption of its 10.625% senior discount notes due 2007.

At that time, the company said it plans to purchase or redeem by Dec. 15 all of its 12.75% senior exchangeable preferreds due 2010, which had a redemption value of $245.8 million at March 31.

"There's always deals waiting in the wings," said a capital markets source at one of the busier shops.

"It's all a matter of timing."

The week's slate of new issues, all converging on the market Thursday, met with mixed reactions, primarily gauged toward deal terms and credit concerns.

A low stock price and general credit concerns caused Quantum Corp. to trim its deal and sweeten the terms, a source said. Quantum ponied up an extra 0.375% in yield and boosted the premium by 2.5%, plus cut the deal to $160 million from $175 million.

Quantum sold the seven-year converts at par to yield 4.375%, up 35%. Co-lead Morgan Stanley closed it at 100.5 bid, 101.5 offered. The stock ended off 3c, or 0.93%, to $3.19.

The trouble Quantam faced came on the heels of Health Management Associates Inc.'s deal that was reoffered below par by the underwriters. HMA's new 1.5%, up 45% convert edged up 0.375 point to 99.875 bid, 100.125 offered, according to one of the bookrunners. HMA shares rose 29c, or 1.57%, to $18.80.

Those were not the only deals finding a tough market this week, however.

America West Airlines Inc.'s deal also was somewhat of a difficult sale, but it was a very small $75 million, a salesman said. The discount cash-to-zero structure was its biggest obstacle, he said. It priced at the cheap end of yield talk and with a sweeter premium - by 7.5 percentage points - than guidance.

America West sold the 20-year discount cash-to-zero convertibles at 34.361 to yield 7.25%, up 30%. Joint lead Merrill Lynch closed it lower by 0.25 point while the stock closed down 48c, or 5.82%, to $7.77.

Constellation Brands Inc.'s mandatory was the big home run, pricing at the aggressive end of guidance, then gaining 1 point in the immediate aftermarket. The $150 million issue priced at par of 25 to yield 5.75%, up 22%. The stock ended up 40c, or 1.43%, to $28.40.

Chiron Corp. also put a new convert into circulation without a hitch, as the A- rated convert priced at the middle of guidance. The $450 million of 30-year convertibles sold at par to yield 1.625%, up 47.5%. Lead manager Morgan Stanley closed it at 101 bid, 101.5 offered while the stock lost 13c, or 0.28%, to $46.27.

Otherwise, it was a slow trading session, and traders said even the new deals did not trade heavily.

"I don't think we wrote a ticket past noon," said one convert dealer.

"The go-go market had a good day, though. Amazon was coming in a little bit and Avaya saw a lot of action with the converts up to about 53."

A trader who moves a lot of distressed or busted converts said the market got "spooked a little bit" by headlines on HealthSouth Corp. saying more criminal actions may be coming, and after trading at 82 earlier in the week dropped to 79 bid, 80 offered on Friday.

Mirant Corp. converts, he said, "settled into a listless, trendless trading pattern" this week after being very active last week. They 2.5s closed the week at about 43 bid, 44 offered and the 5.75s around 42 bid, 43.5 offered.

It was another tough week for hedge funds, too.

The Merrill Lynch convertible hedge fund index, which runs Thursday-to-Thursday, showed a 0.12% drop for the week - hit by a combination of increasing long-term interest rates and declining volatility.

Increasing yields had the biggest negative effect on returns, Merrill convert analysts said, with longer dated securities like the Gap Inc. 5.75% due 2009 and the Micron Technology Inc. 2.5% due 2010 getting "smacked."

The pain from rising rates is not over yet, either, said Yaw Debrah, head of U.S. convertible research at Merrill.

He said investors should "refrain from viewing the 115 bp back-up in 10-year yields as a buying opportunity. In fact, we see reason to believe that the move toward 5% by year-end as a distinct possibility."

Falling volatility deducted 0.25% from Merrill's master hedge fund index, and Debrah noted that "floor traders are seeing a scramble for yield as retail continues to sell covered calls.

"There is talk in the market of a 15 VIX, where it traded between 1992-1996. We do not see the fundamentals currently justifying such low levels of volatility."

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