Rising volatility, new issues help market tone; Tyco trades up; Cendant adds put

By Peter Heap

New York, May 1 - Convertibles ended Wednesday with a better feel after the roller-coaster ride in stocks ended on a generally up note - and the positive tone was reinforced by continued new issuance, with two deals pricing after the close Tuesday and another offering announced for pricing after Wednesday's close.

The increase in volatility has also assisted the market.

Much attention continued to focus on Tyco International, Ltd.'s fate, which looked rosier Wednesday.

And Cendant Corp.'s announcement of a sweetener to discourage holders from exercising the upcoming put option lifted its convertibles a little.

"Convertibles have continued to do better because volatility has picked up recently," said a portfolio manager with a hedge fund in New York.

But this manager was also focused on the health of the new-issue market, which is looking much brighter after a prolonged lull.

After Tuesday's close, two deals priced, both three-year mandatories.

Alltel Corp. brought $1.25 billion via bookrunners Merrill Lynch & Co., Banc of America Securities and Salomon Smith Barney, pricing them at the tight end of talk to yield 7.75% and with a 22% initial conversion premium.

"It was extremely successful, we didn't get enough" bonds, the hedge fund manager said.

After a pop to $50.38 in early activity, the new Alltel convertible fell back subsequently and closed at $49.73 in New York Stock Exchange trading. It was priced at par of $50. Meanwhile, the underlying stock lost $0.44 to close at $49.06.

The other offering was $400 million from KeySpan Corp. which priced at a yield of 8.75% - the high end of talk - and an initial conversion premium of 20%, right in the middle of talk.

This issue also rose early in the day and then fell back but still closed at $50.25, up from its issue price of $50. The stock added $0.19 to $35.49.

Adding to the calendar, early in the session Sonic Automotive, Inc. announced an offering of $130 million convertible senior subordinated notes due 2009 via Merrill Lynch & Co.

Pricing was scheduled for after the close Wednesday with talk putting the yield at 5% to 5½% and the initial conversion premium at 30% to 35%.

Both this deal and the other offering on the calendar for the week, $110 million of seven-year convertible subordinated notes for Lennox International Inc., were seen trading above par in the gray market.

The Lennox deal, which is scheduled to price after Thursday's close, is talked at 6.25% to 6.75%, up 20% to 25%.

In the secondary, Tyco was yet again grabbing much of the attention - but this time favorable.

The company's convertibles were seen about ¾ point better on the day, with the 0s due 2021 quoted at 69¾ bid, 70 offer, up from 69 bid at Tuesday's close, and the 0s due 2020 at 63 5/8 bid, 63 7/8 offer, up from 62¾ bid. The underlying stock pushed up $1.59 to $20.04.

A conference call Tuesday allayed "a lot of investors' fears," said a hedge fund manager.

But, the manager added: "I personally think Tyco has near-term funding issues that they still need to address."

In particular, the manager cited the sale of its financing operation CIT, now to be done through an initial public offering, and to raise finance for maturing debt and upcoming puts of convertibles.

However both this investor and Jeremy Howard, analyst at Deutsche Bank Securities Inc., said that to some extent Tyco's securities have become bellwethers for the general level of worry in the market, regardless of the company's own concerns.

Howard was more positive on Tyco itself.

"People are starting to reason that the company will be able to do the CIT spin-off and get over the liquidity hump," he said.

"We don't believe the situation is without risk. But we have always felt Tyco did have a lot of options."

Also helping the company, Howard added, was news that Tyco chief financial officer Mark Swartz bought substantial amounts of stock recently.

Elsewhere Wednesday, Cendant's 0% convertibles due 2021 rose slightly to 100½ from 100¼ at Tuesday's close after the company announced an additional put option in a year's time and a year of cash interest on the securities as an incentive not to exercise the upcoming put on May 4. Its stock declined $0.13 to $17.86.

"We think they probably have just about done enough" to encourage investors to hold on to the convertibles, Deutsche's Howard said, although he noted that if the rally in equities proves fleeting the sweetener might not be enough.

"They haven't been overly generous," he added.

Cendant was not the only company to take this kind of action Wednesday; Neuberger Berman Inc. announced a similar step, although in its case the incentive takes the form of a one-time cash payment and an extra put in six months.

Although a number of companies have taken similar steps in recent days and months to discourage exercise of the put option, Howard said he did not think it would discourage convertible deals with similar options in the future.

"They basically had money at no cost for a year," he commented. "Now they have to pay it back.

"At the beginning of the year, a lot of people were calling me trying to make a case these puts were going to cause companies big problems.

"Every company has so far either sweetened their bonds or they have accepted the put."

In a sense, Howard added, issuers are just marking the convertibles to market.

They sold the bonds originally at "very favorable" terms when they were available and now investors are requiring something more, he said.

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