Aon's new deal trades up in gray market despite lack of yield advantage

By Sara Rosenberg

New York, Nov. 4 - Market tone in the convertible market remained positive on Monday, according to participants, with relatively limited trading activity taking place. One of the main focuses of the day was the emergence of price talk on Aon Corp.'s offering of $200 million 10-year convertible senior unsecured notes, which was expected to price after market hours on Monday.

The deal was not met with high enthusiasm by investors, as the coupon and the stock yield are basically the same. However, the convertible did trade as high as plus three points in the gray market.

"Generally [it's] an upbeat market. It's not the busiest of days but it's alright," said Rao Aisola, head of convertible research at Bear Stearns & Co., regarding Monday's convertible market performance. "Retail is holding up pretty well. Even distressed bonds like Charter [Communications Inc.] are up about three points [as of approximately 1.40 p.m. ET]."

Charter's 5¾% convertible was quoted around 23 at 1.40 p.m. ET. The convertible closed the day with further gains at 25 3/8, according to a trader. The stock closed at $1.45, up 8 cents or 5.84%.

Nextel Communications Inc. was another example given by Aisola of a convertible that was "bid up" on Monday. At approximately 1.40 p.m. ET, the 4¾% convertible was up about two points with an offer around 881/4. However, by the end of the day, the convertible dropped slightly to close at 86 7/8, according to a trader. The stock closed at $12.97, up 49c or 3.93%.

"The company has been executing very well," Aisola explained. "They've been on a tear for the past month, so on any bullish day they get bid up."

"Things are better," said Jeff Seidel, head of U.S. convertible research at Credit Suisse First Boston. "The market seems stronger. Some of the tech names are doing quite nicely on the back of the Microsoft news.

"Given the better equity market, I expect credit spreads to continue to tighten," Seidel continued. "I'm more bullish than I've been in a while."

Furthermore, "new issue product is starting to percolate a little bit," Seidel added.

The most recent name expected to hit the market is Aon. Price talk puts the coupon and yield to maturity at 3.50% and the initial conversion premium at 22% to 26%, according to a syndicate source.

Using the mid-point of talk, the deal is 1.83% cheap to theoretical value, according to Wachovia Securities, inc. analyst Kimberlee Brody. Her calculation was based on a stock price of $16.64, a volatility assumption of 45%, a credit spread assumption of 484 basis points and a stock dividend of 60 cents.

"It seems pretty good," Aisola said in reference to Aon's new offering. "The underlying stock is yielding around 3.51% and this is a 3.50% [so] at best it seems fairly valued. There's not much juice here. Given the lack of supply [though], any new deal is welcome."

A trader, in agreement with Aisola, told Prospect News "There's no yield advantage to owning the convertible. I've heard them quoted as high as plus three in the gray market. It has definitely traded at and was bid at 21/2, but I don't think I will be participating in it. We'll see what happens when they issue the final pricing on this thing."

The convertibles were bid up by about 1¼ points in the gray market by approximately mid-day, according to Aisola.

Morgan Stanley Dean Witter is leading the Rule 144A deal, which will be used by the company to repay short-term debt.

There is a $30 million greenshoe.

Moody's Investors Service is expected to rate the deal Baa2 and Standard & Poor's is expected to rate the deal A-.

Aon is a Chicago, Ill. holding company whose subsidiaries provide insurance brokerage, consulting and insurance underwriting services.

Monday morning before the market open, Durban Roodepoort Deep Ltd. sold $60 million of 6% senior convertible notes due 2006 at par for a yield to maturity of 6.56% and an initial conversion premium of 21.4%, according to a syndicate source.

The Rule 144A deal was led by CIBC World Markets.

Last week alone, three new deals - Allergan Inc., Platinum Underwriters Holding Ltd. and New York Community Bancorp Inc. - were brought to the market.

Allergan sold $450 million in proceeds of 0% convertible senior notes due 2022 at $77.941 for a yield to maturity of 1.25% and with a 25.45% initial conversion premium.

The Irvine, Calif. global healthcare company's deal, led by Salomon Smith Barney and Banc of America Securities, priced after market hours on Thursday.

Platinum sold $125 million of three-year mandatory convertibles in the ACES (adjustable conversion rate equity security) structure at par of $25 to yield 7% and with a 22% initial conversion premium.

The property and casualty reinsurer's deal, led by Goldman Sachs & Co., Merrill Lynch & Co. and Salomon Smith Barney, priced after market hours on Monday of last week.

Lastly, New York Community Bancorp, the $10 billion holding company for New York Community Bank, sold $240 million of convertible trust preferred securities using the Bonuses structure at par of $50 to yield 6% and with a 27% initial conversion premium.

Salomon Smith Barney was bookrunner with Lehman Brothers as joint lead manager on the deal, which also priced after hours on Monday of last week. Bear Stearns & Co., Keefe Bruyette & Woods Inc. and Sandler O'Neill and Partners were co-managers.

And still to come is The Phoenix Cos. Inc./Hilb, Rogal & Hamilton's $125 million of three-year mandatory convertibles sale, which is expected to price on Nov. 7 via lead managers Banc of America Securities, Merrill Lynch & Co. and Morgan Stanley.

The yield is talked in the 7% to 7.5% range and the initial conversion premium is now being talked in the 18% to 22% range, according to market sources. The issue price is expected to be the same as where the common stock is trading.

However, not everyone feels optimistic about the market. "With all the uncertainty [such as Tuesday's election, Wednesday's FOMC meeting and situation in Iraq] there are too many potential landmines out there for me to get bullish," one trader told Prospect News.

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