Digital River, CSG deals emerge; Wild Oats at bat; Genworth edges up; Wyeth sinks; Calpine spikes

By Ronda Fears

Nashville, May 25 - New issues returned to the forefront of the convertible market's collective mind Tuesday as banker types said now that the earnings season is over issuance will pick up again. And it did.

"Everyone is looking for a big, blockbuster deal, but the question is where can you get a big deal done at," a convertible origination source said, referring to the difficulty in setting terms when stocks have been backtracking and rates heading upward.

"No one knows what the benchmark is right now."

Genworth Financial Inc.'s $600 million mandatory issue was really outside the wrangling that convertible bankers are having, since it was not in a bond structure. But, Genworth priced within original guidance and ticked a bit higher in the immediate aftermarket, although a tepid response for the General Electric Co. insurance unit's initial public offering led to the stock getting priced cheaper than planned.

At bat after the close was Wild Oats Markets Inc. with a $100 million issue talked to yield 2.75% to 3.25% with a 40% to 45% initial conversion premium. Wild Oats shares gained 14 cents, or 1.12%, to close Tuesday at $12.64.

Meanwhile, CSG Systems International Inc. and Digital River Inc. floated deals for Wednesday's business. CSG Systems' $200 million issue was expected to price to yield 2.25% to 2.75% with a 43% to 47% initial conversion premium. Digital River's $175 million deal was talked to yield 0.75% to 1.25% with a 33% to 38% initial conversion premium.

In the secondary market, drugmakers Wyeth and Medtronic Inc. dropped on bad reports about their drugs or trials for new drugs. Calpine Corp., however, powered up by more than 5 points, but traders said there was some skepticism from the credit-oriented ranks.

Genworth trades up slightly

Genworth sold its $600 million of three-year non-callable mandatory convertibles at par of 25 with a 6.0% dividend and 21% initial conversion premium - at the middle of yield talk for a 5.75% to 6.25% dividend and at the aggressive end of premium guidance of 18% to 22%.

With the mandatory not encountering the difficulty seen in the Genworth stock, Morgan Stanley & Co. Inc. closed the convertible up 0.16 point from par of 25 at 25.16 bid, 25.66 offered.

The Genworth shares closed Tuesday unchanged at the pricing level of $19.50, which was below the price range in the IPO filing of $21 to $23 per share as well as sweetened guidance of $20 to $20.50 per share.

Genworth also issued $100 million of straight preferred stock.

In all, GE raised $2.83 billion from the spinoff of the 30% stake in Genworth, below its earlier target for as much as $3.34 billion.

GE announced in January that it would spin off a 30% interest in Genworth and later might sell the remaining stake. The IPO, which comprises substantially all of GE's life insurance and mortgage insurance businesses, has been anticipated as far back as November, however. GE said proceeds would be used to invest in growth initiatives and reduce parent-supported debt at GE Capital Corp.

Wyeth loses to other floaters

Wyeth's convertibles sank in tandem with the stock Tuesday, but traders said holders of the floating-rate converts were switching into other convertible floaters like SLM Corp. (Sallie Mae) and Mandalay Resort Group.

Traders attributed the movement to a story in The New York Times that underscored trouble with the Big Pharma's antidepressant drug Effexor. Also pressuring Wyeth securities, traders said, was an adverse decision regarding diet pill lawsuits.

After the close Tuesday, Wyeth said it would seek a rehearing of an appeals court decision in Pennsylvania that excluded certain evidence in state court diet drug trials. The company said it has 14 days to file a petition for rehearing.

Wyeth's floating-rate convertible fell 1.375 points on the news to 99.5 bid, 100 offered, while the stock lost $2.66 cents, or 7.13%, to close at $34.65.

Calpine bid up over 5 points

Without any real news, traders said Calpine's convertibles spiked up more than 5 points Tuesday. A buyside trader, however, said he was glad to shed the paper on any uptick.

"They have some refinancing issues, still, and the conditions in the credit markets for this name are not really getting a whole lot better," the buyside trader at a hedge fund in Connecticut said.

"So, we just took an opportunity to get out."

Credit analysts are skeptical of recent levels in the Calpine bonds, too, although not just the convertibles.

Calpine's 4.75% convertible on Tuesday closed at 74.75 bid, 75.25 offered, up from about 69.5 bid on Monday, the buyside trader said. Calpine shares ended Tuesday up 37 cents, or 11.46%, to $3.60.

Gimme Credit bond analyst Kim Noland in a report Tuesday panned levels for Calpine debt, including but not limited to the convertibles.

"We are not tempted by the unsecured debt in the high 50s because of the risk of further subordination, and we see trading downside in the second priority secured notes if Calpine announces a refinancing of the first lien securities," Noland said

"As bond and equity prices continue to drop and high-yield market conditions worsen, unsecured financing looks improbable. Given little improvement in the power markets, Calpine is likely to raise cash using asset sales, project financings, and contract monetization, all of which strip value from existing bondholders."

Medtronic converts lower

Medtronic Inc. shares slumped Tuesday after analysts said the tests in one of its stent products were disappointing, but the stock rebounded before the closing bell. The Medtronic convertible, however, held onto a lower position.

The Medtronic 1.25% convertible ended Tuesday's session down by 0.625 point at 101.625 bid, 102.125 offered, while the stock was higher by 67 cents, or 2.87%, closing at $24.01.

A report by an equity analyst at CIBC World Markets apparently caused an initial slump in Medtronic shares - by as much as 2%, a convertible trader said, but the stock recouped before the day's end. Some of the stock's rebound may have been due to short covering by hedge funds, he said, thus, the convertible never saw any of the turnaround.

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