Convertibles market slow as Fed cuts rates, new deals emerge

By Ronda Fears

Nashville, Tenn., Oct.2 - Convertible traders said the market was extremely slow as everyone watched the Federal Reserve follow-through on the widely anticipated 50 basis point interest rate cut, and new deal activity got a lot of attention. The market was marked higher, but traders said it was thin.

Traders said converts moved slightly higher as stocks gained on the Fed news, although Treasuries slipped, but some were not confident that the gains would stand up in another trading session. Several traders said they expected selling to prevail again Wednesday as investors hope to cash in profits before more bad news hits the tape. Indeed, several earnings revisions, layoffs, and the like were in the news again from some high profile convertible names like Nortel Networks.

After the Fed move, stocks rebounded, with the Dow Jones Industrial Average closing up 113.76, or 1.29%, to 8950.59, and the Nasdaq gaining 11.87, or 0.80%, to 1492.33.

"We are getting calls. People are looking for something to do in the secondary market, but it's a very difficult thing to get a grasp of right now," said the head convertible trader at a major investment bank in New York. "People are a little antsy about making any bids or offers because its hard to know where the bond really should be, in a lot of cases, with the credit spreads all over the place and the stocks in the crapper."

Buy-side sources said they would rather see some new issues come to the table. Convertible hedge funds particularly are looking for avenues in which to put new money.

"We would like to be focused on new issues, rather than trying to pick through the rubble in the secondary right now," said a convertible fund manager in New York.

Convertible issuers are slowly coming around to dip into the waters again, but it's been slow going. On Tuesday, Province Healthcare Co. announced it will return to the market with a Rule 144A deal set to price after the close Thursday. That will pre-empt two deals on next week's business. None of the four other deals on the forward calendar have been officially pulled, but market sources are getting suspicious that those deals are in danger of getting pulled altogether.

And, late Tuesday there began to stir buzz about a new going-public deal related to Anthem Inc.'s initial public offering of common stock in its effort to demutualize. The insurance company is planning a 28.6 million share stock offering, aiming to raise some $1.15 billion, and $200 million in mandatory convertibles. The deal was described by one market sources as similar to the MetLife deal in April 2000.

"We are getting anxious for something with some meat," said a convertible hedge fund manager in Connecticut. "We need something that we can sink our teeth into."

The Province Healthcare deal is for $150 million. For next week, Performance Food has a $125 million deal and Community Health Systems has a $250 million deal.

A convertible hedge fund trader in New Jersey agreed that there's not much to get overly excited about yet in terms of convertible issuance.

"We aren't going to spend much time looking at these," at least in terms of spending a lot of research time on the price talk, credit spreads, and other factors, the hedge fund trader said. "You can't build a large position in a deal so small, so we won't spend a lot of time on it."

Part of the attraction to Province Healthcare, sell-side market sources said, will be that it's a return issuer to the convertible market. And, the existing Province Healthcare convert has done well. The Province Healthcare 4.5% convertible notes due 2005 were sold last November at par with a 23% initial conversion premium. The converts were quoted at 113.5 on Tuesday, with the common shares down $1.40 to $34.95.

But the new Province deal is not as cheap as the two for next week, sources said.

Deutsche Banc Alex. Brown convertible analysts put the new Province Healthcare convert at about 4% to 8% cheap to fair value, assuming a credit spread of 550 basis points over Libor and 40% volatility in the underlying stock, and analysts note that the stock borrow may be difficult in this name. Another sell-side analyst said the deal was close to fair value and a buy-side analysts said it looked to be just a little cheaper than fair value, but the assumptions on the credit spread and stock volatility were not outlined.

As many market watchers were also keeping tabs on the Calpine Corp. junk bond deal, the company got upgraded by Moody's Investor Service to high-grade territory, so the pending debt offering will be split rated in addition to having four currency denominations. That pretty much ended any preoccupation with the deal, sources said, because as one analyst put it, "it's too difficult to get a grasp on it now for purposes of using it as a benchmark." End

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