Convertible market higher, new deals get tighter

By Ronda Fears

Nashville, Tenn., Oct.25 - Convertible traders said the market was higher Thursday as stocks gained nicely in the face of a stream of poor earnings reports. New deals were showing signs of richening, but analysts said they still remain fairly cheap and syndicate sources said demand is strong enough to support the forward calendar. High demand prompted Motorola Inc. to boost its deal to $1 billion from $875 million and tighten the pricing guidance. LSI Logic sprung a surprise overnight deal on the market that buyside sources said priced considerably richer than the new issues of late.

"These last couple of deals are not as cheap as we've seen lately," said a convertible trader at a hedge fund in New Jersey. "We were disappointed that the terms were changed for Motorola. It would've been nice to not have it so tight that I've got to get myself between the wall and the wallpaper."

On heavy demand, Motorola upsized its mandatory convertible deal and revised pricing guidance, moving the yield to a range of 6.75% to 7.0% from 7.0% to 7.5% and the initial conversion premium was amended to a range of 20% to 22% from 18% to 20%. The registered deal was scheduled to price after the market close Thursday. Motorola shares closed off 37c to $17.28.

"It still looks attractive," said Catharina Kusuma, a convertible analyst at UBS Warburg, speaking of the Motorola convertible. "The original price talk was very cheap. It's a hot deal."

The CSX Corp. deal also was hot and "well over-subscribed," one syndicate source said. The railroad concern sold $400 million in proceeds of 20-year zero-coupon convertible notes at 81.914 for a variable yield-to-maturity of 1.0% and 37.5% initial conversion premium. The overnight registered deal, which sold at the middle of price talk.

In the immediate aftermarket, the new CSX convert edged up about 0.25 point from issue price to 82.125 bid, 82.375 offered as the underlying stock closed off 23c to $33.34.

LSI's new convertible, its third in as many years, was a surprise to nearly everyone in the market. The chipmaker sold $450 million of five-year convertible subordinated notes at 99 to yield 4.225% with a 41% initial conversion premium via lead manager Lehman Brothers.

"We heard the bankers were sitting on most of it until around noon when the stock got a bounce and then we heard they sold a decent amount in the afternoon," said a buy-side source. "We didn't know about and didn't buy any today. I don't know of anyone who bought it except this afternoon."

The new LSI Logic convertible closed up 0.75 point at 99.75, according to a trader.

Deutsche Banc Alex. Brown convertible analysts put the new LSI about 0.5 rich to fair value, assuming a credit spread of 500 basis points over LIBOR and 40% volatility in the underlying stock.

Merrill Lynch convertible analysts said the new LSI was priced aggressively compared to October's other new issues. The Merrill analysts suggest the new LSI convert was about 0.625 rich to fair value, assuming a credit spread of 875 basis points over the five-year U.S. Treasury note and 60% volatility in the underlying stock. But the analysts added that the new paper is relatively more attractive than the two existing LSI converts.

"By contrast, the old 4% bond due 2/15/05 is quite busted, trading at a yield-to-maturity of 9.4%," said the Merrill convertible analysts in a report, adding that the 4% convert due 2005 is trading about 3% above theoretical value. "At 123.5, the LSI 4.25% bond is in-the-money and will become a forced conversion candidate in March 2002 when call protection expires if it continues to trade at comparable levels. We estimate the 4.25%s are also at roughly a 3% premium to fair value."

The new LSI Logic convertible closed up 0.75 point at 99.75, according to a trader. The LSI 4% convert due 2005 (Ba/B) closed at 84.75 and the LSI 4.25% convert due 2004 (Ba3/B) closed at 131.375. LSI common shares ended down 70c to $17.98.

King Pharmaceuticals Inc. got a boost in interest Thursday when the company announced it was "substantially increasing production of its product Wycillin in preparation for potential demand to treat persons exposed to Anthrax. King Pharmaceuticals is selling next Wednesday $300 million of 20-year convertible senior notes that are talked to price yield 2.75% to 3.25% with a 28% to 32% initial conversion premium. The company also is selling 16 million shares of common stock and certain company officers are selling 4.5 million shares. King Pharmaceuticals shares ended up 84c to $39.04.

Dealers said the secondary market gained with stocks as investors seemed to shrug off the steady inflow of weak earnings. The Dow Jones Industrial Average closed up 117.28, or 1.25%, to 9462.90 and the Nasdaq gained 43.93, or 2.54%, to 1775.47.

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