Many players welcome influx of new deals, though rich; hoping raging demand will be curbed

By Ronda Fears

Nashville, May 13 - Trading in convertibles largely revolved around the $3.3 billion of new and pending deals, dealers said, with LSI Logic Corp. and SLM Corp. generating the bulk of market buzz, if not activity.

LSI's $350 million deal was repriced below par and still lost ground, while Sallie Mae's $2 billion overnighter was seen bid 1.5 points below issue price in the gray market after-hours.

While many of the new deals are thought to be rich, buyside sources are glad to see them come - in hopes that they will serve to sop up the raging demand for convertible paper right now.

"Lots of them are bought deals, but even those are getting placed with new entrants to the market that don't particularly care if they are rich or cheap," said a hedge fund manager based in Connecticut.

"I think there needs to be at least another $20 billion of new deals before demand gets to a place where we'll see more rational pricing."

In the latest round of new deals - LSI Logic Corp., KV Pharmaceutical Co. and Global Imaging Systems Inc., all of which freed to trade Tuesday morning - one continued a recent pattern of getting repriced by the underwriter at below par.

LSI Logic's $350 million of seven-year noncallable convertible notes, with a 4% coupon and record 135% initial conversion premium, was sold on a call spread and, according to market sources, remarketed by sole lead manager Morgan Stanley at 96.

The new LSI convert opened at 96.5 bid, 97.5 offered, according to a buyside trader.

Morgan Stanley closed it at 95 bid, 95.5 offered, while LSI shares closed down 13c, or 2.28%, to $5.58.

"I think some of the thinking behind the underwriters being willing to sacrifice the banking fees, especially when they are the sole manager, is that they can make up some of that in trading volume in the secondary," said the buyside trader.

"They can hedge their risk a number of ways, with puts, options, what have you, so they probably aren't losing anything in the long run."

At par, Lehman Brothers put the new LSI issue 7.24% rich, using a credit spread of 600 basis points over Treasuries and 55% stock volatility.

Deutsche Bank Securities put it 4.7% rich, at par, using a credit spread of 550 bps over Libor and 60% stock volatility.

Venu Krishna, head of U.S. convertible research at Lehman, said LSI's pro forma cash position of $1.35 billion appears adequate to manage debt obligations coming due over the next three years, including the outstanding convertibles.

LSI said that after purchasing about $25 million in call options, remaining proceeds would be used for general corporate purposes, including the possible repayment, repurchase or refunding of outstanding debt, including its other three convertible issues.

That boosted the existing LSI convertibles nicely, which total about $1.25 billion, especially the two 4% issues. All have been considered candidates for refinancing, due to maturity or nearing call schedules.

LSI's 4% due 2005 jumped about 3 points, one dealer said, to 97.375 bid, 98.375 offered and the 4% due 2005 gained about 2.5 points to 91.625 bid, 92.625 offered. The 4.25% due 2004 was up fractionally to 99.875 bid, 100.5 offered.

After LSI's deal, guidance on Sallie Mae's jumbo deal still managed to get a few gasps.

"It was pretty exciting to see the Sallie Mae name in the convertible market, and the terms are not really so surprising considering what we've seen lately, but I guess I did let out a groan of disappointment," said a hedge fund manager based in New Jersey.

"It will get a lot of orders just because people want to own Sallie Mae, though, is my guess."

Sallie Mae is selling $2 billion of 32-year cash-to-zero floater convertibles, with pricing before Wednesday's open.

The issue will pay a floating cash coupon for four years, at the 3-month Libor minus 5 to 25 basis points, then become an accreting 0% bond.

The conversion premium was to be set at 75% for a conversion price of $197.925.

In the gray market after-hours, the issue was quoted bid at issue price minus 1.5 points with the offer at minus 0.5 point. Sellside analysts not associated with the underwriters put the deal about 2% rich, which corresponds with the gray market levels.

Sallie Mae shares closed up 75c, or 0.67%, to $113.10.

In terms of market interest, CenterPoint Energy Inc.'s deal was described by several buyside sources as one of the best home runs of the day, which was upsized to $500 million from $400 million amid strong demand.

"The [CenterPoint Energy] terms were decent - of course we'd like to clip a little more coupon - and it's a name and a space we want to be in right now," said an outright convertible fund manager in New York.

CenterPoint Energy upsized its deal and sold the 20-year convertible notes at par to yield 3.75% with a 50% initial conversion premium - at the aggressive end of guidance that had been tightened before pricing.

Talk was revised to put the coupon at 3.75% to 4.0% with a 45% to 50% initial conversion premium, versus original guidance for 4.0% to 4.5% of yield with a 40% to 45% initial conversion premium.

It was no surprise, market sources said, as the deal was seen trading as much as 6 points over issue price in the gray market before the terms were revised.

Even after the revised talk squeezed some juice out of the deal, it closed in the gray market at 3.5 points over issue price on the bid side and was offered 4 points over. CenterPoint Energy shares ended down 28c, or 3.5%, to $7.72.

Given that the original terms were uncommonly cheap relative to the prevailing market trends, Merrill Lynch convertible analyst Tatyana Hube had noted early Tuesday that she anticipated they would very likely be tightened before final pricing.

At the middle of original price talk and with CenterPoint Energy shares at $8, Merrill put the deal 5.6% cheap, using a 35% volatility and a credit spread of 350 basis points over the 5-year Treasury note.

At the middle of revised talk, Merrill put it 4.3% cheap.

Lehman Brothers put it, at the midpoint of original guidance, 4.32% rich, using a credit spread of 350 bps over Treasuries and 35% stock volatility, with the stock at $8.

Another home run, on the international scale, was a euro convert from Pinault Printemps Redoute S.A.

PPR, the French retailer, sold an upsized €940 million of premium redemption convertible bonds at par of €86.36 with a 2.5% coupon for a yield to maturity of 3.625% and a 43% initial conversion premium. The quick-sale deal was upped from €850 million and sold aggressively amid strong demand.

A source in London said the new PPR deal gained 4 points in trade Tuesday. The stock closed in Paris up €1.60, or 2.5%, to €64.90.

KV Pharmaceutical Co. also met with some success, as it upsized its deal to $175 million from $130 million, on good demand. The overnighter sold at par to yield 2.5% with a 37.5% initial conversion premium - smack in the middle of price talk.

Deutsche, a joint lead on the KV Pharmaceutical deal, closed it at 100.5 bid, 100.75 offered. The underlying Class A shares of KV Pharmaceutical stock ended off 66c, or 2.63%, to $24.44.

There was a good deal of interest Global Imaging Systems Inc.'s tiny $50 million issue, too. The 5.5-year convertible notes sold at par to yield 4.0% with a 32% initial conversion premium - at the aggressive end of guidance.

Because it was a more vanilla convertible - a rare event these days - buyers pushed it to 102.25 bid right out of the gate. Wachovia Securities, lead manager of the deal, closed it at 105 bid, 105.75 offered, as the stock ended up 30c, or 1.66%, to $18.40.

Also launched after Tuesday's close were deals from New Plan Excel Realty Trust Inc. and Triarc Cos. Inc.

New Plan is pitching $100 million of registered convertibles in the overnight market with guidance for a 3.5% to 3.75% coupon and a 20.89% initial conversion premium. New Plan shares closed off 17c, or 0.82%, to $20.68.

Deutsche puts the deal 1.85% rich, using a credit spread of 150 bps over Libor and 20% stock volatility.

Triarc launched $125 million of convertible notes to price after Wednesday's closed with guidance for a 5.0% to 5.5% coupon and 43.88% initial conversion premium. Triarc shares ended Tuesday off 14c, or 0.5%, to $27.80.

Deutsche puts the deal 0.45% rich, using a credit spread of 600 bps over Libor and 20% stock volatility.

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