Convertible market roars higher as stocks rally, new deals surge

By Ronda Fears

Nashville, Tenn., Dec. 5 - Convertible traders said the market soared higher on the tech stock rally Wednesday, and new deals were benefiting from the surge. Issuers were flocking to tap the market amid the positive tone and buyers were abundant, although some were beginning to balk at richer terms. Over $1 billion of new paper was put into circulation Wednesday, and at least another $425 million will come to market before the week's end, and possibly a further $150 million from a Photronics, Inc. deal announced late Wednesday.

"It was extremely busy today, I mean wild," said a convertible trader at a major investment bank in New York. "With the tech rally and the new deals, it was very, very busy. Demand is very healthy right now. It was a very good thing to see the Nasdaq back over 2,000 and the Dow above 10,000. Those thresholds are important for market psychology."

The convertible market participated rather strongly with the surge in stocks, traders said, as the Nasdaq climbed a remarkable 83.77, or 4.27%, to 2046.87 and the Dow Jones Industrial Average rose 220.45, or 2.23%, to 10114.29.

"What a ride today," said a convertible trader at a hedge fund in New York. "The tide seems to have definitely turned, and everyone was scrambling either to cover shorts or buy before valuations get out of hand again. I'm not so sure that some of this won't be given back in a day or two, though. There's still a lot of conflicting data, particularly with regard to chips and telecom."

Ciena Corp., one of the fiber optics darlings in the convertible market, was gaining on market buzz that the company would announce an undefined relationship with AT&T as early as tomorrow, traders said. "It was unclear exactly what this so-called relationship with AT&T would be, but Ciena got a nice bounce from it," one trader said. The Ciena 3.75% convertible due 2008 to 66 bid, 67 offered as the stock rose $1.64 to $20.37.

While media and cable issues rallied alongside tech and telecoms, there were some obvious concerns about the AOL Time Warner situation as the company announced a surprising management shakeup early in the day, traders said.

AOL Time Warner announced that chief executive Gerald Levin was retiring at the company's annual meeting in May and Richard Parsons, co-chief operating officer, would step up to the top post, leaving his co-chief operating officer Robert Pittman as sole chief operating officer. The AOL zero-coupon convertible due 2019 (Baa2/BBB), which sold at 44.13 in December 1999, was quoted flat at 54.24 bid, 54.375 offered, but the Reliant 2% exchangeable due 2029 (Baa2/BBB), which converts into AOL stock, lost 10.25 points on the day to 53 bid, 53.5 offered. AOL shares gained $1.08 to $35.83.

Still, the big news of the day was the influx of new issues. Wind River Systems Inc. and Tech Data Corp. priced new deals in the overnight Rule 144A market and Invitrogen Corp. was planning an intraday deal, but terms on the deal were sketchy. United Microelectronics Corp., a Taiwan chipmaker, also tapped the U.S. market.

"There is some resistant to the richer terms the deals are getting price at," said a convertible trader at a hedge fund in Connecticut. "The Invitrogen terms were pretty decent, somewhere around probably between 2% and 5% cheap, but the Cephalon deal is getting close to fair value. There's real strong demand, but the terms still have to be right."

That said, syndicate sources said new deals were highly oversubscribed and traders said new paper was up nicely in the immediate aftermarket.

Tech Data's $250 million of 2% converts due 2021, which priced at par with a 25% initial conversion premium in the mid-range of guidance, was the weakest in the aftermarket. A trader said the Rule 144A issue gained 1.75 to 2 points out of the gate, but it closed up just 0.875 point from par to 100.875 bid, 101.125 offered as the common stock fell $2.42 to $45.21. It is not uncommon for the stock to decline after an overnight deal, one trader pointed out, whereas usually a convertible issuer's stock will bounce after a new deal that has been in a road show or there's been advanced marketing of the deal.

Similarly, Wind River's new 3.75% convertible due 2006, which priced at par with a 30% initial conversion premium gained just 2.5 points in the immediate aftermarket to 102.5 bid as the common stock lost 40c to $18.17. The Rule 144A deal, which priced at the rich end of yield talk and cheap end of guidance, was seen as high as 103.125 during the session, one trader said. The Wind River 5% convertible notes (B-) due August 2002, a $140 million issue that sold at par in July 1997, were quoted up 2 at 97 bid.

Invitrogen was in the market doing an intraday Rule 144A deal, via Credit Suisse First Boston, but final terms were not available. The $400 million deal was expected to price with a 2.25% to 2.75% coupon and 30% to 35% initial conversion premium. A market source said that at the middle of the guidance, the issue would be about 3.5% cheap, assuming a credit spread of 500 basis points and 50% volatility in the stock.

"It is getting richer and I don't know how long the market will bear that. Our biggest problem with the new deals is the contingent conversion features, which are becoming the norm," said one convertible fund trader. "Of course, sometimes the hedge fund guys don't really care about it if they can get a good borrow on the stock and hedge themselves right, particularly if it is something in a hot area and they want it bad enough."

In another intraday deal, the United Microelectronics convert was one of the hottest. The $302 million issue, a zero-coupon convert that priced at par with a yield-to-maturity of 0.75% and 40% initial conversion premium, was more than 17 times oversubscribed in just five hours of marketing. In the aftermarket, it soared nearly 7 points to 105.875 bid, 107.375 offered as the underlying common stock gained 89c to $9.26 in the U.S. markets.

As terms continued to come in at the tight end of guidance, Cephalon revised price talk on its deal just before pricing after a short marketing period. The Cephalon $300 million convertible, a five-year issue is now expected to price with a coupon of 2.5% to 2.75%, versus original guidance of 2.75% to 3.25%. The initial conversion premium is expected at 17%, with original guidance but at the rich end. Cephalon's 5.25% convertible due 2006 slipped another 0.5 point on the day to 114.25 bid 115.25 offered as the stock lost 38c to $69.24.

The new Cephalon issue would be about 2% cheap at the middle of the revised guidance, versus nearly 2.5% cheap in the middle of original guidance, one market source said, assuming a credit spread of 950 basis points and 50% volatility in the stock.

Nothing was heard changing on the Cambrex Corp. deal, which is for Thursday's business. Cambrex, a biotech name, is pitching $125 million of five-year convertible subordinated notes with price talk of a 3.5% to 4.0% yield and a 30% to 34% initial conversion premium. Cambrex shares closed Wednesday up 35c to $37.85.

End

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.