Activity heavier on Micron, but slower deal flow than expected frustrates players

By Ronda Fears

Nashville, Jan. 29 - While Micron Technology Inc.'s announcement of a new deal sparked some activity Wednesday, convertible players still lamented the lack of deal flow that they had been anticipating, since without new supply the market just keeps getting richer.

"I think we're still waiting for some new deals," said Uri Garbuzov, portfolio manager for Pimco Convertible Fund, emphasizing "still" while implying he was not comfortable with Micron's credit story.

"The market started the year off surprisingly strong, volatility was rising and credit spreads were tightening," Garbuzov added, but earnings, corporate outlooks and the war have kept issuers in the shadows.

Along with Micron, other chip and tech names like Celestica Inc. and Cymer Semiconductor Corp. were also active as they reported widening losses amid weak sales.

Micron's proposed $500 million deal was seen after the close at 2.75 points bid, 3.0 points offered over par but there was considerable contention about its valuation. Micron shares closed up 48c to $8.42.

Discussion over the valuation didn't deter interest, however, and the deal was widely expected to be upsized.

"We like it even though there's a debate whether it models cheap or not," said a convertible trader at a hedge fund in New York.

Micron's $500 million convert was talked to yield 2.75% to 3.25% with a 35% to 40% initial conversion premium. The seven-year subordinated notes will be non-callable for three years.

Sellside analysts put it anywhere from 1.7% to 7.29% cheap, illustrating the disparity in views on the credit.

"I think it's symptomatic of our market that a company of this caliber can bring a deal like this so richly priced," said Jeremy Howard, head of U.S. convertible research at Deutsche Bank Securities Inc.

The lack of new paper also will probably ensure that the deal gets priced at the aggressive end of guidance, and there were some players anticipating that price talk would be tightened before terms were finalized.

"The market's hunger for new paper is propping up another marginally attractive deal based on the model valuation," said Bear Stearns convertible analyst Matt Hempel.

"This supply/demand dynamic, combined with the positive credit event that this much needed cash provides should lead to a successful offering" and pricing at the aggressive end of talk.

In addition to Micron's deal, Crown Cork & Seal Co. Inc. announced a $200 million convertible bond for pricing the week of Feb. 10.

Crown Cork's proposed convert is part of a $3.125 billion refinancing plan that includes a junk bond, estimated as a $1.75 billion two-part deal, a new $550 million bank revolver, $500 million term loan and $125 million of debt-for-equity swaps (See stories on the junk bond and bank debt elsewhere in this issue).

Indicative terms were not available on the convert, which will be marketed and sold alongside the junk bond, and the convertible market was preoccupied with the Micron deal anyway.

Philadelphia-based Crown Cork, which manufactures metal and plastic containers, said the plan will push its debt maturities out to 2006 and beyond.

Crown Cork shares closed off 16c to $7.37. Crown Cork's 8.375% junk bonds due 2005 were seen up 2.25 points to 98.5 bid.

Micron's deal stirred up some activity and tech and telecom names were predominately mentioned by traders.

A few preferreds were also active.

But most of the issues moving saw no large-scale trades.

"I'm trading around a little bit, but I'm not getting caught on anything," what with such economic and geopolitical uncertainty, said John Siebel, head convertible trader at Silverado Capital Management. "I'm not being a hero."

In a market that appears to be ripe for selling, sources said there is not a great deal of selling going on.

"They're resisting selling because, one, they're afraid to get a better bid later, and, two, there's nothing to replace it with," said Jonathan Cunningham, director of U.S. convertible securities at Jefferies & Co.

"Our market is as efficiently priced as I've ever seen it. It's almost a built-in road block. A robust calendar would help break it free."

That may come, some assert, regardless of the economic and geopolitical pressures.

"If these companies begin to get nervous about raising capital, they will come no matter what's going on - war or no war, profits or losses," said a dealer.

The Federal Reserve held pat on interest rates Wednesday, which pundits interpreted as a move to await the economic impact of a war with Iraq, proposed tax cuts and to see if the lowest rates in 40 years could revive the sluggish economy if given more time.

The tech and telecom sectors, the dealer said, are ripe for new issues to refinance debt or restructure debt.

"Tech has performed well so far this year, up something like 10.4%, so on one hand the mood is a little better in this group," the dealer said.

"But some of these companies may have to move fast. They could face some pressure going forward, especially telecoms, because of the lower capex spending by major telecom operators."

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