Convertible market drops as stocks plummet, but buyers emerge late

By Ronda Fears

Nashville, Tenn., Oct.30 - Convertibles dropped as stocks plunged the second day in a row, traders said, but there also were some buyers that emerged late in the session. There was no lack of buyers for new paper as Anthem Inc. saw raving interest in its mandatory convertible that priced alongside the insurance company's initial public offering. Anthem gained sharply in the aftermarket, and was seen as a harbinger of new deals to come.

Dealers said the secondary market fell as stocks dropped on news that U.S. consumer confidence is at a seven-year low. The Dow Jones Industrial Average fell 147.52, or 1.59%, to 9121.78 and the Nasdaq dropped 32.11, or 1.89%, to 1667.41.

"There was some selling early on but that turned around later in the day with buying on weakness," said a convertible trader at one of the major investment banks in New York.

Activity in the secondary market overall remained fairly quiet, traders said, as investors waited for stocks to settle down.

There was nothing holding back the popularity of Anthem's new deal, however.

"This was a huge success," said a syndicate source at one of the major investment banks. "They could have upsized the convert by a long way and not have met all the demand. It wasn't upsized, though, and as a result saw a big spike out of the gate."

Anthem sold $200 million of five-year mandatory convertible preferreds at par of 50 to yield 6.0% with a 22% initial conversion premium. The registered deal sold at the rich end of price talk. Indianapolis-based Anthem sold an upsized IPO at $36 per share, fetching $1.73 billion with the stock pricing at the upper end of guidance of $33 to $37 per share.

Anthem's deal was nearly identical to the MetLife deal in April 2000 when its IPO debuted, as well as Prudential's upcoming IPO that will price with an estimated $500 million of mandatory convertibles.

The Anthem converts gained 5.5 points from issue price to 55.5 bid, 55.75 offered as the common soared $4.90 to $40.90.

MetLife's convertible has climbed from issue price of 50 to about 86.5 on Tuesday, when it lost 0.25 point as the common stock closed off 7c to $27.15.

Fitch believes that many insurance companies that suffered losses from the events of Sept. 11 are planning to replace lost capital with new equity and hybrid equity offerings. Given industry loss estimates due to the events of Sept. 11 that range from $30 billion to $70 billion, as much as $20 billion of capital raised by the industry could be via hybrid equity offerings, Fitch said in a report Tuesday.

Despite the record losses terrorism has wreaked on the insurance industry since the Sept. 11 attacks on the World Trade Center, the global insurance business not only remains on solid footing, but is even proving a magnet for new investment, said Standard & Poor's in a report released Tuesday.

"With capital-raising initiatives underway, we are confident the industry will not only survive, it will prosper going into 2002," cited Don Watson, director of Standard & Poor's insurance analytics team in New York, in the report. "Depending on new loss activity, we should see a very profitable year in 2002, and 2003 will be well positioned for a profitable performance based on expected rate increases."

Mark Puccia, a managing director in S&P's financial services ratings group, said the agency believes most rating actions related to insurance firms will be limited to one to two notches, if any.

"Firms are starting to raise substantial amounts of capital in the capital markets, which is going to mitigate many rating issues we have with these companies," Puccia said.

Healthcare is another hot area as investors search for shelter and after Wednesday's close, the market expects a deal from King Pharmaceuticals Inc.

King Pharmaceuticals is selling $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 alongside a stock offering. King Pharmaceuticals shares closed down 55c to $36.45.

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