Convertible market bounces with stocks, new deal pricing

By Ronda Fears

Nashville, Tenn., Oct.31 - Convertibles got a lift as the Nasdaq rebounded and buyers were trying to snap up bargains before the climb got too steep, traders said. There also was lots of excitement about the King Pharmaceuticals Inc. new deal that was at bat to price after the closing bell. New issuance is at a whopping $90 billion so far this year, far surpassing the $60 billion record of 2000.

Dealers said the secondary market gained ground although stocks were mixed. Because tech issues were on the rise, and that is still a strong focal point for convertible holders, converts got a lot of buying interest. The Dow Jones Industrial Average dropped another 46.84, or 0.51%, to 9075.14 while the Nasdaq gained 22.79, or 1.37%, to 1690.20.

Activity in the secondary market consisted of buyers early in the day, traders said, as investors shopped for bargains. There was some selling associated with the new deal pricing after the close, as well, but the King Pharmaceuticals deal is not big enough to cause a lot of selling.

King Pharmaceuticals is selling $300 million of 20-year convertible senior notes that are talked at a yield of 2.75% to 3.25% with a 28% to 32% initial conversion premium alongside a stock offering. King Pharmaceuticals shares closed up $2.54 to $38.99.

Moody's on Wednesday assigned a Ba1 rating to King Pharmaceuticals's proposed convertible while Standard & Poor's assigned it a BB.

Buyside sources said the King Pharmaceuticals deal terms were some of the most favorable seen in the post-Sept. 11 stream of cheap new deals coming to market. Healthcare is a hot sector right now as investors search for shelter, and King Pharmaceuticals has said boosted its production of branded penicillin approved for treating anthrax, joining other drugmakers who are scrambling to get in on the pharmaceutical market's answer to the bioterrorism threat.

In the other hot new issue area, insurance, Anthem Inc.'s new mandatory convertible rose again. The 6% issue, which sold at par of 50, gained another 1.35 points to 56.85 as the common added 98c to $41.88.

Convertible issuance rebounded sharply in October after taking a break in September while the financial markets were shut down due to the terrorist attacks on the U.S. In October, convertible issuance came to $10.3 billion, versus $4.5 billion in October 2000, according to data compiled by Prospect News. Year-to-date, there was $90.4 billion of new convertibles, compared with $51.32 billion for the first 10 months of 2000.

While there continues to be intense competition among the investment banks to capture the fees on new deals, the majority of the market still rests with the top five underwriters - Merrill Lynch & Co., Goldman Sachs & Co., Salomon Smith Barney, Credit Suisse First Boston and Morgan Stanley. Those five banks have managed about 80% of all the new convertible deals this year, which is about even with their take of the business in 2000.

Buy-side sources have been pleased with the initial terms on the new deals coming to market, but sources said their performance in the aftermarket has been most favorable to hedged holders because the market has tended to be negative.

Market observers continue to watch for signals from other credit markets, also.

First Data Corp. was preparing to sell $1 billion of new debt and the convertibles gained ground, one trader said, because investors took it as a positive sign that the company would have access to additional capital. The First Data 2% convertibles due 2008 (A1/A+) added 0.5 point to 106.625 bid, 106.75 offered as the underlying common gained 49c to $67.57.

Several tech names gained, as well. Traders said the boost to the Nasdaq help lift techs, but there also was several positive comments coming from the Prudential Securities technology conference in New York. Manugistics Group Inc.'s 5% convertible due 2007 gained 2 points on the day to 58.75 bid, 59.75 offered as the underlying stock rose $1.60 to $7.75. Vitesse Semiconductor Inc.'s 4% convertible due 2005 (B2/B-) edged up 0.25 point to 79.75 bid, 80 offered as the stock rose 60c to $9.44. The Texas Insturments 4.25% convertible due 2007, originally issued by Burr-Brown, added 1 point to 109.125 bid, 109.625 offered with the stock up 72c to $27.99.

Telecoms also were on the rise, which traders said was somewhat due to some heartening progress gleaned from recent earnings reports. The trader said there also was some optimism about the sector's ability to raise capital as Sprint Corp. sold $1.75 billion of paper this week and AT&T was readying a $5 billion new issue.

NTL Inc., Nextel Communications, Level 3 Communications and Verizon all headed north, but telecom equipment makers were struggling to keep up. CIENA, CommScope, RF Micro Devices were mostly lower or flat.

Still, market sources said the mega deals for Sprint and AT&T might open the door for more telecom paper in the convertible universe.

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