New deals boost trading activity while stocks retreat

By Ronda Fears

Nashville, Feb. 19 - New deal activity spurred some trading activity in convertibles Wednesday as Affiliated Managers Group Inc. and Deutsche Telekom priced issues before and during the session.

Hutchinson Technology Inc.'s new deal slid from where it was in the gray market before pricing, but other new paper was gaining ground.

"Some people were picking up the more recent new deals that were offered today to buy into the new deals," said a convertible dealer.

"A lot of the newer deals are still under par, though, like Micron, so they are a little more appealing than, say, the McData at 108."

Micron Technology also was getting a bit of support from convertible investors, the trader said, as it announced a 10% workforce reduction to stem costs.

The Micron 2.25s were quoted up 1.625 points to 92.75 bid, 93 asked while the stock added 27c to $7.44.

Hutchinson's new 2.25s were quoted at 100.25 bid, 100.75 asked after closing in the gray market Tuesday at 1.625 points over par on the bid side. Hutchinson shares closed down 72c to $21.23.

AMG and DT took the limelight Wednesday, however.

In what sources said was a complicated structure, AMG sold an upsized $250 million of 30-year convertible floaters at par to yield the three-month Libor minus 50 basis points with a 77.79% initial conversion premium.

Sellside analysts modeled the deal, which priced at the aggressive end of guidance, to be rich but traders said it gained ground in the immediate aftermarket.

AMG's floater was talked to price to yield a range of three-month Libor minus 50 bps to three-month Libor minus 100 bps.

It was quoted at 101 bid, 101.25 asked as the stock closed down $1.61 to $44.09.

AMG's 0% convertible due 2021 (BBB-) added 2.5 points to 90.5 bid, 91 asked. The 6% mandatory (BBB-) was quoted by a dealer down 0.5 point to 16.81 bid, 16.92 asked, and it closed on the New York Stock Exchange off by 0.44 point to 17.01.

There were "too many moving parts" in the AMG deal, said Michael Revy, who manages a convertible hedge fund for Froley Revy.

He was seriously eying the DT deal, however, which he said appears to be a better credit and the issue was a plain vanilla PEPS mandatory.

Indeed, DT's jumbo €2.3 billion mandatory was chiefly marketed abroad but was getting significant interest from U.S. buyers.

A market source in London said price talk on the deal put the yield at 6.375% to 6.875% with a 15% to 25% initial conversion premium, but a U.S. market source put it at 6.375% to 6.625% yield with a 20% to 25% premium.

The market source in London quoted the issue in the gray market 1.125 points over par on the bid side and 1.375 points over par on the offer side. DT shares closed in Frankfurt down €0.96 to €11.84. In the U.S., DT shares closed down $1.15 to $12.60.

Sellside analysts put the deal about 1.5% cheap.

While the DT pricing was said to have been accelerated by a day to price after the market close in Frankfurt, final terms were not expected to reach the U.S. until early Thursday.

Elsewhere, traders said a good deal of the convertible market was slightly higher although stocks softened amid renewed war concerns and other factors.

Tighter credit spreads amid a flight to quality also helped convertibles hold firm as bond floors were supported, traders said.

L-3 Communications Holdings Inc. rebounded on buying due to the weakness from Tuesday while Lennar Corp. lost ground on profit taking after a run-up on Tuesday before the housing start report on Wednesday.

"The noise on L-3, the military contracts dwindling, caused some selling and it was overdone," a dealer said.

L-3 Communications on Wednesday reiterated its prior guidance of 2003 EPS of $2.67 and $2.72 with sales growth in 2003 in excess of 16% and operating income growth of about 25%.

Housing starts surprised The Street pundits with a small 0.2% increase in January, whereas a decline had been expected after the strongest level of starts in 15 years seen in December. Lennar was stronger Tuesday ahead of the report, but traders said many of those buyers sold off on the resulting strength.

Imclone Systems Inc. saw another spike, this time on a rumor that European approval of Erbitux may come ahead of schedule, a buyside trader said. She noted that Imclone has spiked in recent weeks due to another rumor about it getting a merger bid, which has yet to pan out.

Imclone's 5.5% convertible due 2005 was quoted up 4.75 points on the day to 78.875 bid, 79.875 asked. The stock closed up $2.41 to $13.50.

Tyco International Ltd. weakened on new concern about cash flow, with its new 2.75s down 0.75 point and the 3.125s down 1 point. Both are quoted at about the 98.125 bid level. Tyco shares ended off 29c to $15.26.

Nortel Networks Corp. was steady, traders said, amid a Reuters report that Nortel said a price war in wireless equipment could cause the entire market to fall by 10% in 2003, slightly revising an earlier forecast that the market would decline in single digits.

That news was somewhat offset, traders said, by a new $750 million credit facility for Nortel.

Wireless names, however, could be hurt by the news in conjunction with another report out of France that Motorola Inc. sees another $4 to $5 of price erosion on average for handset prices.

Nextel Communications Inc.'s 6% converts were quoted a bit weaker while the 4.75s were firmer ahead of its earnings on Thursday.

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