Deals totaling $1.9 billion at bat; Citi/News, Teva see only offers; Komag tightened, still bid higher

By Ronda Fears

Nashville, Jan. 21 - The year's first real jumbo-sized deal emerged as a two-part overnighter from Teva Pharmaceutical Industries Ltd., but buyside sources said the deal came with aggressive guidance from the otherwise popular generic drugmaker.

The News Corp.-linked $750 million floating-rate mandatory convertible also was labeled as an aggressive offering.

Buyside traders said neither the News Corp.-linked deal nor the pending Teva deal were seeing any bids, although Teva's did not get launched until after the market close and the management conference call was at 5 p.m. ET.

By contrast the two small deals getting priced off the Bear Stearns & Co. Inc. desk were viewed cheap and both were bid up in the gray market, buyside traders said.

Even after the coupon was squeezed on Komag Inc.'s $70 million deal by 50 basis points, it ended the day with a bid of 2 points over issue price in the gray market, with an offer at 4 points over.

Comtech Telecommunications Corp.'s $75 million deal was last seen 3 points over issue price on the bid side and 4.5 points over on the offer side.

All four deals were pricing after Wednesday's close, and all were expected to go very well, given the off-kilter supply-and-demand dynamic prevailing in the convertible market right now.

"Everyone groans about the structure or the coupon or whatever, but all these [new deals] will be way oversubscribed," said a convertible trader at a huge hedge fund in New York.

"There's always a way to play these deals, just ask the salesmen. Anyway, if the estimate is right that there could be $20 billion of new paper pumped into the market before we see any affect on the secondary, then these deals will have no problem at all."

The worm turns quickly

Both the Komag and Comtech deals had terms that were perceived to be cheap, even after Komag was tightened. As a result, the issues continued a short-lived trend of cheaper new issues in the market - until the News Corp.-linked and Teva deals emerged, that is.

"The worm turns quick," said a convert trader at a hedge fund in New Jersey.

"We were starting to get back to the place where you could make money flipping a new issue. Now it looks like we have rapidly reverted back to this awful situation where the new issue is priced so aggressively that it has nowhere to go but lower, right out of the gate."

Citigroup Global Markets Holdings Inc. is selling the $750 million five-year floating-rate mandatory exchangeable that converts into News Corp. stock with guidance putting it at the three-month Libor minus 50 basis points to the three-month Libor flat and an initial conversion premium of 153.5%.

Deutsche Bank Securities analysts put the Citigroup/News Corp. issue 1.65% rich, at the midpoint of price talk, using a credit spread of 20 basis points over Libor and a 20% to 26% stock volatility skew.

Modeling the deal is not a simple task, however, due to the unique structure.

Unlike a standard mandatory, the issue cannot be simply modeled as a put or call spread at different conversion ratios, Deutsche analysts said in a new issue report.

The structure compensates investors with cash payments and/or a distribution of News Corp. shares at varying rates when News Corp. shares are below $37.60 and above $57.72.

When all potential payoffs are calculated, they are equivalent to a position that is long one call at $57.72 and short one put at $31.96 plus the notional amount, Deutsch analysts said. As such, the simplest way to model this mandatory is using the long call, short put, long riskless bond at notional and long income method.

For some, the structure was a turn off.

"I didn't really look at that one [the News Corp. offering] since we won't be playing it," said a buyside convertible trader.

"I didn't see a gray market in it other than a plus 1 offer around lunchtime, then [I] heard [it] was issue offered this afternoon."

It was a similar case with Teva, which launched right after the close.

Teva's Tranche A, for $400 million, was talked to yield 0.25% to 0.5% with a 29% to 35% initial conversion premium and Tranche B, for $600 million, was talked to yield 0.0% to 0.25% with a 20% to 26% initial conversion premium.

A sellside analyst not associated with the Teva offerings put Tranche A about 2% to 4.5% rich and Tranche B about 2% to 5.5% rich.

"The Tevas sound very aggressively priced," the buyside trader continued.

"I see sellers at plus one-half, but no bids."

Two-way action in Comtech, Komag

Conversely, the smaller deals by Comtech and Komag saw good two-way action and bids that suggested buyers agreed with sellside analysts that the paper was cheap.

Comtech's $75 million deal is expected to price to yield 2.5% to 3.0% with a 33% to 37% initial conversion premium. It will be sold at par and pay cash interest for seven years, then become a 0% accreting bond.

At the middle of price talk, Lehman Brothers analysts put the Comtech deal 4.15% cheap, using a credit spread of 600 basis points over Treasuries and a 50% stock volatility.

Deutsche Bank Securities analysts put the Comtech deal 5.345% cheap, at the middle of guidance, using a credit spread of 500 basis points over Libor and a 50% stock volatility.

Comtech's pending convertible was last seen in the when-issued market with a bid of 3 points over issue price and an offer at 4.5 points over.

Komag's $70 million deal was originally talked to yield 2.5% to 3.0% with a 28% to 32% initial conversion premium. Guidance was amended during Wednesday's session to curb the yield to 2.0% to 2.5%.

At the middle of original price talk, sellside analysts put the Komag deal 3% to 4% cheap.

It had been bid 3.75 points over issue price in the gray market Wednesday morning, but after the price talk was tightened the bid was clipped to 2 points over issue price. The offer, however, remained high at 4 points over issue price.

Speculation on golden issuers

Perhaps issuers see the convertible market as a sort of goose that laid the golden egg. Certainly, market sources seem to agree that it is fertile ground for capital-seeking companies.

There has been considerable speculation in the convertible market on potential issuers, particularly as the primary market has lolled along so far in 2004 - outside of the two bigger chunks of paper on the table this week.

Some issuers seem more probable or ripe to tap the market, though, like gold miners - literally.

"With gold prices where they are, these guys would be silly to not issue something," said a savvy market source on the sellside, specifically mentioning Barrick Gold Corp. and Newmont Mining Corp.

Gold prices sank Wednesday but are still at remarkable levels.

The February gold contract closed down $1.70 to $411.20 an ounce on the New York Mercantile Exchange.

On Tuesday, Barrick Gold said it produced 5.51 million ounces of gold last year at an average cash cost of $189 an ounce and sees 2004 output of 4.9 million to 5 million ounces at an average cash cost of $205 to $215 an ounce.

Also, the Toronto-based mining concern said that sometime this year it will be building new mines, some of which will begin production as early as 2005.

There are several mining companies in the convertible universe, including the recent Cleveland-Cliffs Inc. and Coeur d'Alene Mines Corp. issues.

There also is an exchangeable linked to Barrick Gold. The 3% convertible, which matures in 2021, was issued by Trizec Properties Inc.

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