Red Hat, Symantec trade actively; Carnival gains; Group 1, American Medical launch new issues

By Rebecca Melvin

Princeton, N.J., June 19 - Software companies were among the most actively traded names in the convertible bond market on Monday, with Red Hat Inc. trading on expectations of an upside volatility event, while CSG Systems International Inc. and Symantec Corp. were also seen in trade amid no specific news, market sources said.

The market was described as relatively quiet and weaker, with volatility coming in early in the day and credit spreads pushing out, one market source said. But Carnival Corp. saw its convertible bonds trade a little better as the underlying shares of the volatility play continued to climb after its Friday earnings report.

Vornado Realty Trust also edged higher, in line with its underlying shares after Standard and Poor's affirmed its BBB+ corporate credit, BBB senior unsecured debt and BBB- preferred stock ratings, and said the outlook is stable.

And Walt Disney Co.'s 2.125% convertibles were spurred Monday by the day's regular weekend box office statistics feature. Ticket sales news on its Pixar division movie, Cars, helped the bonds regain ground lost last Monday on the movie's first weekend ticket sales. The bonds traded at 110.5 bid, 110.75 offered, versus a share price of $29.40, up nearly two points outright since Friday.

"The market's a little weaker. There's not a lot of trading; everybody is still out in the Hamptons," a New York-based sellsider said of the convertibles market.

On the primary side, final terms on Alleghany Corp.'s planned $260 million of mandatory preferred convertibles failed to materialize by press time. A syndicate source said that pricing might be delayed until Tuesday, but no further information was available.

Meanwhile two new deals were launched after the close that could bring more than half a billion dollars of new convertible issuance to the market if priced as planned later this week.

The deals include Group 1 Automotive Inc.'s planned $250 million of 30-year convertible senior notes and American Medical Systems Holdings Inc.'s planned $325 million of 30-year convertible senior subordinated notes.

Alleghany sees no gray

It was unanimous on Monday that Alleghany's planned $260 million deal, expected to price after the close, wasn't going to draw convertible hedge players, and there was no gray market reported. But there was some outright interest.

"I think it could make sense for outrights as an equity replacement," a New York-said sellside analyst said, noting that the dividend on the common is paid in stock instead of cash.

And, in fact, Alleghany was viewed favorably by one outright who said that the pricing was attractive, possibly because there was a recognized need to make up for the borrow problem associated with a stock that cost $260-plus per share. He put the issue at about 2% to 2.5% cheap, compared with an assessment by analysts at Merrill Lynch that the deal was 3% cheap.

In addition, the buysider said that the company is interesting due to smart investments and capable leadership under chief executive Weston Hicks, who is a former sellside analyst for insurance.

"They lost money in Hurricane Katrina, but first quarter combined ratio was around 70%, which means lots of margin," the West Coast-based buysider said.

The New York-based insurer's (NYSE: Y) planned mandatory convertible preferred stock was talked at 5.25% to 5.75% for the dividend with an initial conversion premium of 18% to 22%.

The registered deal was being sold via bookrunner Merrill Lynch.

Hats off to Red Hat

Convertibles players traded the 0.5% Red Hat bonds on Monday ahead of its quarterly earnings report expected next week and amid reports of growth seen in the vendors who work with the internet software and services company.

The 0.5% paper traded 115.5 bid, 116 offered, and held firm at that level even as its shares jumped in early trade, but sagged by mid-morning and languished in negative territory the rest of the session, closing down 40 cents, or 1.5%, at $25.53.

"There's a report from B of A that predicts an upside vol. event," a New York-based sellside convertible analyst said. "The stock has gotten hit, but even if the revenue and earnings per share are in line, cash flow is expected to be high. With $50 million to $60 million in cash flow generated in the quarter, you could see an increase in the stock."

A Banc of America survey found that most of 130 Red Hat partners queried expected their Red Hat business to grow by more than 31% in the 2006 calendar year, but that was lower than Banc of America's own revenue growth estimate of 35%.

"We would have liked to see an indication that the business is accelerating above our forecasts," Banc of America analyst Kirk Materne said in a research report Monday.

Partners from Europe, the Middle East, Africa and Asia expected even higher growth than Red Hat's partners in the Americas, which Materne said is not surprising given that these regions are in earlier stages of Linux adoption.

The survey also found that most of Red Hat's partners were excited about the opportunity presented by JBoss, a privately held open-source software company Red Hat acquired in April.

But, these partners added that they were still unfamiliar with JBoss' product.

Symantec paper slips back below par

One week after pricing its 0.75% convertible due 2011, Symantec's A tranche, five-year paper was trading at about 99.5, while its seven-year paper was at about 98.5 on Monday, a sellside analyst said at the close. Symantec stock on Monday ranged from lower, at $15.50, to about 1% higher, at $16.05. But the shares closed the session higher at $15.81.

The convertibles priced June 12 at a re-offered price of 9.5; but traded at 100.25 on Friday versus a stock price of $15.67.

The internet software and services company's (Nasdaq: SYMC) large, $2 billion issue wasn't seen to be trading on any particular news. "There's just lots of liquidity and its trading around. I don't see any catalyst," a New York-based sellside analyst said.

Group 1, American Medical launch deals

Retailer Group 1 Automotive plans to price $250 million of 30-year convertible senior notes after the markets close on Tuesday, according to market sources.

There is a greenshoe of up to an additional $37.5 million. Bookrunner for the Rule 144A deal is JP Morgan.

Price talk is for a coupon of 2% to 2.5%, with an initial conversion premium of 10% to 15%. The notes will be non-callable for five years, followed by a provisional call in years six through 10 at a 130% trigger.

Houston-based Group 1 (NYSE:GPI) owns and operates dealer franchises and repair centers in states including Florida, Colorado, New Jersey, Massachusetts and Texas.

American Medical Systems Holdings plans to price $325 million of 30-year convertible senior subordinated notes after the markets close on Wednesday, according to a syndicate source.

There is a greenshoe of up to an additional $48.75 million of notes.

Price talk on the registered deal is for a coupon of 3% to 3.5%, with an initial conversion premium of 25% to 30%.

Piper Jaffray & Co. is sole bookrunner for the notes.

The notes will be non-callable for five years, with puts in years seven, 10, 15, 20 and 25.

Based in Minnetonka, Minn., American Medical Systems (Nasdaq: AMMD) is a medical devices concern focused on erectile dysfunction, benign prostatic hyperplasia, incontinence, menorrhagia, prolapse and other pelvic disorders in men and women.

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