Convertibles mixed but preoccupied with hot new deals

By Ronda Fears

Nashville, Tenn., Dec. 19 - Convertible traders said the market was mixed as tech issues dipped on a warning by Motorola while investment-grade issues bounced with the Dow. The spotlight was in the primary market, however, where Calpine Corp. was selling a new convertible, its fourth, to pay the put on its zero convert next April. The Calpine deal was more than doubled in size, from $400 million to $1 billion, and sold at the aggressive end of guidance.

"The new deals just keep coming and we're wondering now if we're going to see something on Christmas Eve," said a convertible trader at a major investment bank in New York. "We've never seen anything like that, but then we've never seen anything like what's going on right now. It's just wild. I mean, it seems like convertibles are some unending source of capital right now. There is a lot of money flowing into our market."

New deals spurred a lot of activity in the secondary market, traders said, along with the usual year-end window dressing maneuvers by fund managers. Convertibles were described as mixed with the Nasdaq closing down 21.87, or 1.09%, to 1982.89 while the Dow Jones Industrial Average advanced 72.10, or 0.72%, to 10,070.49.

"There was a lot of trading going on today, but most of the attention was on the new deals," said a convertible trader at a hedge fund in Chicago. "The gray market was very active, with most of the new deals trading north of issue price. Calpine was about 2 points over (issue price) from the minute the deal was launched. It was a very hot deal."

Calpine launched the deal as a $400 million senior unsecured piece of five-year paper, non-callable with a par put in year three and talk of a 4.0% to 4.5% coupon with the initial conversion premium between 20% and 24%. The deal was way over-subscribed even by noon and ended up pricing at the tight end of guidance, plus getting upsized to $1 billion. The new paper sold at par to yield 4.0% with a 23% initial conversion premium.

Calpine's other convertibles continued to firm up on the news, and the stock even got a lift. Calpine shares gained 69c to $14.69 and the zeros climbed 2 points on the day to 96.25 bid, 96.75 offered. The 5.75% convertible preferred rose 1.5 points to 54.375 bid, 54.875 offered and the 5.5% convertible preferred soared 4.5 points to 39.5 bid, 40.5 offered. Calpine is using the proceeds from the new convert to pay the put on the zeroes, estimated at about $878 million, in April or buy up the notes in the interim.

Market sources were not concerned about a glut of new paper, given that $525 million of new paper has already been sold this week and Solectron Corp.'s $1 billion mandatory convertible yet to come.

"We are not getting any indication that supply is outstripping demand," said a syndicate source at one of the leading convertible underwriters. "There have been a lot of hedge funds created this year and while they've had a rough go of it in the past six weeks, they have had a very good year. There's a boatload of money needing to be put somewhere before year-end."

Hedge funds began to see returns curtail sharply in November, but have had a tremendous year. The CSFB/Tremont hedge fund index showed a 0.54% gain in November, with a year-to-date gain of 3.19% through Nov. 30. Convertible arbitrage was up just 0.71% with a year-to-date gain of 14.22%. Comparatively, the Nasdaq was up 14.22% in the month with a year-to-date decline of 21.86%, while the Dow was up 8.56% for the month with a year-to-date drop of 8.67% and the S&P 500 was up 7.52% for November with a year-to-date drop of 13.7%.

Indeed, interest in Solectron's new deal, also its fourth convert, was heating up as market sources said, "The mandatory market is officially on fire right now."

Solectron shares were down another $1.29 to $10.81 but the converts were flat to slightly lower. The zeros due 2019 were unchanged at 50.625 bid, the zeros of May 2020 off 0.75 to 52.75 bid and the zeros of November 2020 were off 0.5 to 43 bid. The new deal, talked to yield 6.75% to 7.25% with an 18% to 20% initial conversion premium, via book-running lead manager Goldman Sachs & Co., is set to price after the close Thursday.

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