Xcel's new deal screams higher while others edge up, languish

By Ronda Fears

Nashville, Nov. 20 - Xcel Energy Inc.'s new deal was perhaps the biggest bet among the new deals in circulation, but it also paid off the biggest in its first day of trading.

Xcel's new 7.5% bond gained 13.25 points from par and nearly 10 points from the gray market levels.

The other four new deals from this week gained modestly, or were unchanged, although traders noted good flow on all the new paper.

Advanced Micro Devices Inc.'s new deal, while perhaps the most sensational of the group, gained 1.75 points from par but was off nearly 2 points from the gray market levels.

PacifiCare Health Systems Inc.'s deal was up 0.375 point and Scottish Annuity & Life Holdings Ltd. was unchanged.

Ligand Pharmaceuticals Inc. did not price its deal Tuesday, but sources said it was not cancelled.

"It looks like it will go, but the company hasn't given the final nod," one source said.

"The stock is down considerably since the deal was announced last week."

Ligand is pitching $135 million of five-year convertible subordinated notes talked to yield 5.75% to 6.25% with a 15% to 20% initial conversion premium; coupons are collateralized for the first two years.

"It's all very encouraging, but we're going to want to see a larger fish in the market before we concede the worst is behind us," said Jeremy Howard, head of U.S. convertible research at Deutsche Bank Securities Inc.

All together, the five deals pricing this week total just over $900 million, which despite very strong demand hasn't impressed most players.

"These deals appear very desperate and even a $200 million, especially from an energy name, just isn't anything to get excited about," said a convertible trader at a hedge fund in New York.

"There's still a lot of demand out there. These dinky deals haven't scratched the surface."

Money has been flowing into convertible funds, particularly hedge funds, instead of the reverse that had been feared heading into autumn.

CSFB/Tremont reported this week that convertible arbitrage hedge funds saw returns gain 1.03% in October for a year-to-date return of 0.41%. That compares to an overall return decline of 0.04% for hedge funds and a year-to-date gain of 0.85%.

Traders said the small deal amounts also have done little to help trading desk flows.

The market was generally described as higher Wednesday as tech stocks rose sharply.

Several chip convertibles firmed nicely, trader said, but AMD only marginally participated in the party.

AMD's new issue was quoted at 101.75 bid, 102.25 asked as the stock slipped 3c to $5.55. The old 4.75% convert added 0.5 point to 59.5 bid, 60.5 asked.

Upgrades on several chip stocks, along with some convertible recommendations in the group, helped boost prices, traders said (see related story on a Wachovia recommendation elsewhere in this issue).

Xcel was by far the home run of the new issues group.

But, as one dealer put it, "It's the biggest bet. The NRG wildcard could be an ace in the hole, or you could end up holding a dead man's hand."

Xcel's new convert was quoted at 113.25 bid, 113.75 asked at one shop at and 113.75 bid, 114.75 at another. The common gained 64c to $10.50.

Nearly all of the energy converts were firmer, traders said, with some new buying interest in a few names, like Duke Energy Corp., El Paso Corp. and Calpine Corp.

With the new deals not providing a great deal of added liquidity to the overall market and thus not a lot of cheapening in the secondary market, concern about valuations are heightened.

"There is a lot of nervousness, particularly in hedge funds, about valuations," Howard said.

"We're starting to see the Chinese strategy of being short the convert and long the stock to appear, so that suggests that people think valuations are stretched."

Players have complained for more than a year about the richness of the convertible market - outside of the busted or distressed group, which makes up a good portion of the convertible universe.

The last few weeks of the year will be interesting, he said. With returns improving, the typical December sell-off in anticipation of the January slump may not materialize.

Also next year, Howard is looking for more exchange offers like the one by Cell Therapeutics Inc.

"I think we'll see a lot of companies look to restrike the conversion prices, particularly biotechs, next year," Howard said.

It's a "disguised debt-for-equity swap," he said, but one that could benefit holders of the convertibles as well as the issuers.

The Cell Therapeutics 5.75% convertible due 2008 was quoted flat at 59 bid, 60 asked while the stock gained 67c to $5.999.

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