Six new deals totaling $690 million on tap for this week; Charter levels off, Tyco up

By Ronda Fears

Nashville, July 14 - Six new convertible deals emerged Monday for this week's business, totaling $690 million. Actually, four were pricing overnight and players speculated there could be another one or two pop up during the week.

"We're thinking there will be at least one more [new deal] this week, one good-sized one," said a convert trader at a hedge fund in New York.

Meanwhile, in secondary action, Charter Communications Inc.'s convertibles were leveling off, and traders were talking about a nice upward move in Tyco International Ltd. while Level 3 Communications Inc.'s new convert dropped nearly 2 points.

New issues continue to be the focal point of the market, however.

Two deals were launched early in the day, which dealers said gave some lift to the typical lackluster flow in trading activity for Mondays. While the other four didn't fully emerge until after the close, there was plenty of chatter about more deals coming, so traders said that also helped trading volume.

Buyside sources noted terms on new deals continue to look a little more enticing, with a bit more in the way of yield and a lot more reasonable premiums than many deals issued during the first half of the year.

"We can swallow a 3 handle if the premium is somewhere within reach, you know," said a fund manager based in Connecticut.

"We're not overly excited about a 30% premium but it's a hell of a lot better than 100%. So, yes, I'd agree that the terms are getting better. It's just a tough market right now, all the way around."

Powerwave Technologies Inc. sold $130 million of five-year convertible notes at par to yield 1.25% with a 32% initial conversion premium.

According to market sources, lead manager Deutsche Bank Securities was reoffering the Powerwave convert at 98.

Powerwave shares ended up 35c, or 4.61%, to $7.95.

Merrill Lynch analysts put the Powerwave deal 2.4% cheap at the reoffer price of 98 with the stock at $8.95, using a credit spread of 1,000 basis points over Treasuries and a 55% stock volatility.

Also in the mix after Monday's close were Commonwealth Telephone Enterprise Inc., School Specialty Inc. and Griffon Corp.

Commonwealth launched $200 million of 20-year convertible notes with guidance for a 3.0% to 3.5% coupon and 30% to 35% initial conversion premium. The underlying stock closed down $2.98, or 6.6%, to $42.20.

Deutsche Bank Securities analysts put the Commonwealth issue 2% rich to 1.69% cheap, using a credit spread of 450 bps over Libor and a 35% stock volatility. The Deutsche analysts noted a tough borrow on the stock, and added a cost of 150 bps to the valuation.

School Specialty was selling $100 million of 20-year cash-to-zero convertible notes talked to yield 3.25% to 3.75% with a 36% to 40% initial conversion premium, paying a cash coupon for seven years.

School Specialty said it would use proceeds to refinance bank debt and general corporate purposes. Standard & Poor's rated the new issue B+.

School Specialty shares closed down $1.22, or 4%, to $29.37.

Deutsche put the new School Specialty convert about 3% cheap, using a credit spread of 300 bps over Libor and a 23% stock volatility.

Griffon launched $125 million of 20-year convertible notes talked to yield 3.5% to 4.0% coupon with a 48% to 52% initial conversion premium. The stock closed up 19c, or 1.18%, to $16.30.

And, Pegasus Solutions Inc. and Alloy Inc. launched small deals for later this week.

Pegasus Solutions was pitching $75 million of 20-year convertible notes talked to yield 3.375% to 3.875% coupon with a 35% to 40% initial conversion premium, with pricing is slated after the close Tuesday.

Pegasus shares closed up 77c, or 4.78%, at $16.87.

Deutsche put the Pegasus deal about 4.25% cheap, using a credit spread of 750 bps over Libor and a 45% stock volatility.

Alloy is marketing $60 million of 20-year convertible notes talked to yield 4.875% to 5.375% coupon with a 25% to 30% initial conversion premium, with pricing set for after the close Thursday.

Alloy shares closed up 23c, or 3%, to $7.95.

Deutsche put the Alloy deal about 9% cheap, using a credit spread of 1,000 bps over Libor and a 55% stock volatility.

At least Powerwave, Griffon and Alloy offer dividend protection to holders - a matter that has become increasingly important to potential holders.

In secondary activity, traders said the Charter converts were quieting down in the wake of the excitement last week created first by rumors of a new convert and then the company's tender offer for both issues.

Charter's 4.75s were pegged at 82.25 bid, 83.25 offered; the tender offer for that issue is 80. The 5.75s were off about 0.5 point to 84 bid, 85 offered; the tender offer for that issue is 82.5.

Charter shares closed up another 33c, or 6.73%, to $5.23.

A distressed trader said Charter's junk bonds were mixed ahead of the $1.7 billion straight note offering that is anticipated next week.

"All that paper [Charter bonds] was all over the map," the trader said.

Elsewhere in the secondary market, traders noted a nice uptick in Tyco, with the 2.75% due 2018 adding 1.5 points to 107 bid, 107.5 offered and the 3.125% due 2023 gaining 2.5 points to 110 bid, 110.5 offered. The stock closed up 63c, or 3.34%, to $19.50.

Level 3's new issue, however, lost some ground on selling. The 2.875% due 2010 dropped 1.75 points to 101.75 bid, 102.25 offered while the stock closed off 16c, or 2.67%, to $5.83.

Elsewhere, traders mentioned that Crown Castle International Ltd.'s new issue is still moving up.

Virtually the entire slate of semiconductor issues followed the stock higher, along with most of the tech crowd. LSI Logic Corp., DoubleClick Inc. and E*Trade Group were both talked about.

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