Inco prices $400 million, Watson launches quickie; Capital One dives on CFO departure

By Ronda Fears

Nashville, March 3 - In the common fashion of late, a couple of quickly marketed deals totaling $950 million emerged in convertibles Monday in an otherwise lackluster day.

"We're seeing these quick sales, drive-bys, overnighters because with the hedge funds playing converts so heavy, the stock gets hit hard right after a deal gets announced," said an investment banker.

"If the company is not very keen on that or their stock is not really where they'd like to issue a convertible, then they want to get the deal done as quickly as possible."

Inco sold a two-part deal planned at $400 million over the course of the day and after the close Watson Pharmaceuticals Inc. launched a $450 million to price after Tuesday's close.

Both deals were a bit richer than seen lately and the Inco traded under par in the gray market.

"I think people are getting too lax in pricing, the discipline is lax," said Rao Aisola, head of convertible research at Bear Stearns & Co.

"The Inco deal is another example of the current state of the convertible new issue market [where] the lack of low premium, high delta names in the universe has lead to an attractive pricing environment for companies looking to raise funds as arbs are paying up for new names in a stagnant market.

"We would expect more companies to look at the convertible market as a cheap financing alternative over the next few months. As we always said, the first to market will get away with rich pricing and Inco is an example."

The new Inco deals were estimated by sellside analysts to be anywhere from over 3% rich to 2.5% cheap.

"They look just okay," said Yuri Garbuzov, convertible portfolio manager for Pimco, of the Inco deals.

"This is a company/sector bet, not a valuation, in our view."

Inco's $200 million of 20-year convertible discount senior debentures was pitched with a 1% coupon to yield 1.25% to 1.75% and a 41% to 45% initial conversion premium.

The other $200 million tranche, 49-year convertible subordinated notes, were talked to yield 3.0% to 3.5% with a 26% to 30% initial conversion premium.

Bear Stearns convertible analysts put the discount Inco convert 2.75% rich, using a credit spread of 240 basis points over Treasuries and 35% volatility in the stock, and the subordinated notes 0.4% rich, using a spread of 400 bps over Treasuries and the same volatility.

The OID was seen appealing to more hedge funds while the subordinated tranche would favor outright convertible investors, although its below-investment-grade rating may deter some would-be buyers.

"Clearly, these are structured for the two different sides of the market," said Jonathan Cohen, convertible analyst at Deutsche Bank Securities Inc.

Both tranches were seen bid 0.125 point below par with offers at just 0.125 point over par.

Inco shares closed down $1.44 to $20.01.

Watson's deal was talked to yield 1.75% to 2.25% with a 38% to 42% initial conversion premium.

Watson shares ended down 48c to $30.45.

Deutsche Bank Securities analysts put the Watson deal between 1.3% rich to 2.5% cheap, using a credit spread of 225 bps over Libor and 35% volatility in the stock.

There has been a spate of new deals over the past week, which some attribute to a sense of urgency related to the potential war in Iraq, but market participants have noted several redemptions as well. Inco is planning to take out some of its 5.5% and 5.75% converts with proceeds from the new deals.

Merrill Lynch convertible analysts said in a report Monday that despite an almost flat performance in February, the convertibles market lost about 1.5% of its market value due to negative net issuance of about $2 billion.

The total market value for the master Merrill Lynch convertible index dropped to $216.4 billion at the end of February from $219.8 billion at the end of January to $216.4 billion at the end of February.

Merrill analysts also attributed the market's continued trend of richening to the supply/demand imbalance. In February, the analysts said the average theoretical discount for the master index reached a record low of 0.98%.

In the secondary market, it was a ho-hum day, traders said.

"The data put a damper on the mood of the broader market," said a convertible dealer.

Economic data released by the U.S. government showed gloom in personal spending, jobs, manufacturing and construction. Disappointing U.S. auto sales also were reported by Ford Motor Co. and General Motors Corp.

"In converts it wasn't so bad, with the new deals out there," the dealer said.

That said, Capital One Financial Corp. saw a sell-off in its mandatory, which plunged along with the stock as its chief financial officer resigned after being cited for alleged insider trading in a Securities and Exchange Commission notification.

The notification is expected to be followed by civil charges but was thought to be isolated to the one person as the SEC named no other Capital One employees nor the company in its notification.

Credit rating agencies commented on the SEC action and said they did not foresee it affecting Capital One's ratings.

Nonetheless, Capital One shares plunged, closing down $2.72, or 8.78%, to $28.25. The mandatory dropped 1.82 points, or 6.23%, to 27.38.

First Data Corp. also went south after headlines revealed it had lost the Bank One credit card processing contract when it expires in June 2004.

First Data's 2% convertible due 2008 dropped 1.5 points to 109 bid, 109.5 asked. The stock ended down 97c to $33.68.

Imclone Systems got a boost from positive developments on its Erbitux drug front, although its former CEO pleaded guilty to additional federal charges of tax evasion even as he was awaiting sentencing for insider trading related to the company stock.

Bloomberg reported that Merck KGaA plans to spend $324 million building a plant to make cancer treatment Erbitux, which was interpreted as an indication that the drug trials are going well.

Imclone's 5.5% convertible due 2005 added 3.5 points on the day to 82.5625 bid, 83.3125 asked. The stock closed up $1.02 to $14.35.

Neither Liberty Media or Comcast converts saw much action on the surprise move by Liberty to push the envelop on the QVC ownership.

Many onlookers expect Comcast will have to bow out of the process, as its funding capability is strapped after taking on the AT&T Broadband debt.

It was largely viewed as a credit neutral event for both names, but most of the Liberty Media and Comcast converts are linked to Sprint PCS, whose shares were little changed on the day.

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