Convertibles mixed, players welcome slew of new deals

By Ronda Fears

Nashville, Tenn., Feb. 26 - Issuers plunged into the convertibles market suddenly late Tuesday, although players had been anticipating that General Motors Corp.'s $3 billion deal would nudge several companies from the bulging shadow calendar to the table. At bat after the bell were three deals totaling $750 million and Gap Inc. launched a $1 billion deal to price later this week in addition to the new structure from AmerUs. Sources also said that Qwest Communications' $1.25 billion deal is shaping up and looking to be brought to market soon.

In all, there is nearly $5 billion of paper coming to market this week, welcomed enthusiastically by investors. Traders said the secondary market was mixed ahead of the new deals, with some fairly heavy selling in some spots.

"It really was kind of a quiet day on the trading desks, but it will be extremely hectic tomorrow in light of the new deals," said the head trader at a major investment bank in New York.

"Everyone has known there were a bunch of deals waiting in the wings, and there still are some, several, but it's sort of stressful when several get launched at the same time."

Traders said there was some noticeable selling in retail issues before the Gap deal became clear, because it had been rumored and people wanted to unload some of the old paper for the new issue. Traders said, however, that the decline in consumer confidence also weighed on the retail group. Costco's 0% due 2017 dropped 2 points to 100 bid, 100.25 offered with the common off 93c to $43.47. The Lowes 0% due 2021 was down 1 point to 84 bid, 84.125 offered and the 0.861% due 2021 was down 1 to 100 bid, 100.375 offered with the stock losing $1.02 to $46.47.

"There isn't a lot of retail paper that isn't deep in the money, or a zero or OID (discount)," said a trader at a hedge fund in New York. "So, this (Gap) deal is a good, since it has a coupon and pretty decent premium. A lot of people will switch out of the old zeros into this one."

Gap's seven-year notes are expected to price to yield 6.0% to 6.5% with a 22% to 25% initial conversion premium. The Rule 144A deal is slated to price after the close Wednesday. Gap reported weaker earnings also Tuesdsay, although within guidance, and said on its earnings conference call that it anticipates the economy to continue to pressure its business throughout the first half of the year. The company said it will be limiting inventory buys because of that. Gap shares closed up 64c to $13.55, but were lower in after-hours trading.

More at-hand, however, overnighters came from Pride International Inc. and Abgenix Inc.

Pride returned to the convertible market pricing $250 million of five-year convertible notes with a 2.5% coupon and 30% initial conversion premium. Pride's older convertibles were mixed, traders said, but there was not a lot of activity in the issues. The 0% due 2021 was flat to slightly lower at 60.5 bid, 61 offered and the 0% due 2018 was flat to slightly higher at 44 bid, 44.5 offered as the stock dropped 46c to $13.09.

Abgenix also launched an overnight Rule 144A deal, pitching $200 million of five-year convertible subordinated notes with price talk of 3.25% to 3.75% yield and a 15% to 20% initial conversion premium. The biopharmaceutical company's stock closed up 65c to $23.98.

Also at bat was Ameren's $300 million of mandatory convertibles.

Most of the deals already on the table are ready to go already, buyside sources said, so eyes turn to deals to come, candidates for new deals.

"GM is cheap and ready to go. AmerUs is not very risky, not very interesting. It is cheap, but boring," said a trader at a hedge fund in New Jersey. The AmerUs deal is chiefly designed to target retail investors.

Qwest Communications is "on the way also," the trader said. Qwest announced several weeks ago that it planned to sell up to $1.25 billion of convertibles. Details have still not fully emerged, but market sources see it coming soon. The Denver, Colo.-based telecom's stock closed off 5c to $8.25.

In the secondary market, traders noted that Calpine Corp. was bouncing back. The 4% convertible notes due 2006 regained 4.5 points to 76.75 bid, 77 offered as the common added 97c to $7.80.

J.C. Penney also was rebounding from recent weakness and thus was not part of the sell off in retail convertibles, traders said. The 5% due 2008 added 2.5 points on the day to 94.25 bid, 94.75 offered with the stock up 92c to $20.73.

Otherwise, traders said there was no readily definable trend in the market.

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