Interrnet issues rocket higher; overall market rebounds slightly; call threats keep a lid on gains

By Ronda Fears

Nashville, July 18 - Overall, the convertible market rebounded slightly Friday but volume was thin and traders said the ongoing threat of issues getting called is keeping a lid on any significant gains.

That said, several internet issues were skyrocketing - namely the three new ones from Chinese firms Netease.com Inc., Sohu.com Inc. and Sina Corp. - on astronomical gains in the underlying stock. Those converts, all small with 0% coupons, shot up Friday anywhere from 6 points to over 15 points as the shares gained 11% to 18.5%.

AOL Time Warner Inc. also gained ground, on a $1 billion asset sale and an upgrade by Merrill Lynch & Co. analysts. But Yahoo! Inc. was lower on some pressure following its mostly stock $1.6 billion acquisition of Overture Services Inc. announced earlier this week.

In general, however, trading was described as slow, although the sharp gain in the Dow Jones Industrial Average provided a small boost.

"The call threat issue is holding back the market, more so I think than the dividend threat," said the head convertible trader at one of the major investment banks.

"Every week, well nearly every day, there's another issue, or two, or three, that are called," he noted, and most of the calls are very aggressive.

Exchanges - as an alternative to a redemption that may be years away - also have been as big a dilemma with regard to convertible valuations, he added.

"With some of these [exchanges] you don't readily see the motivation" for holders to participate, he said, such as the Medicis Pharmaceutical Corp. exchange filed earlier this week.

"Typically, though, there is a trade-off on both sides and it comes down to a matter that the current holders don't really have anything else to do with that capital so they'd rather make the exchange and keep holding a convert."

Medicis acknowledged it was making the exchange offer for its $400 million of 2.5% convertibles due 2032 to take advantage of the prevailing favorable trends for issuers in the convertible market. The company is offering to boost the principal amount of new convertibles, but with a lower coupon, slightly longer maturity and higher conversion price that the existing converts.

For each $1,000 principal amount of existing notes, Medicis is offering $1,230 principal amount of new 1.5% contingent convertible senior notes due June 2033. Among other things, the company also is offering contingent interest payments, an extra year of call protection and full dividend protection.

The Medicis exchange offer follows a string of similar transactions that have been dominated by pharmaceutical issuers that have tapped into the convert market.

In fact, some market participants have been somewhat surprised that there have not been more exchange offers made, particularly, as one source noted Friday, since banker fees are so much less than for a new issue. Often times, the issuer will have to raise capital - sometimes with a new convert - to take out an old issue, but the rationale is that a better interest rate and other terms prevail currently.

Drug issues were broadly mixed Friday, and the Medicis 2.5s were pretty much unchanged after a 4.25 point gain on Thursday following the exchange filing.

Internet issues were about the only source of sizable gains, although the new issues that were moving are very small.

E*Trade Group's newest convert also firmed, with the 6.75s adding 1.25 points to 111.875 bid, 112.375 offered. But the older 6% convert was off 0.25 to 98.5 bid, 99 offered. A buyside trader said the E*Trade 6% issue is considered at risk of being called or refinanced, so it has steadily lost ground.

E*Trade shares rose 35c, or 3.8%, to $9.57.

After a slower week of new issues, market participants are a bit unsure about what next week might hold in store for the primary market. One fund manager said it appears that there is a bit more balance between supply and demand, so that may cool off the rush for capital.

"It is summer, too," the manager added.

"There are people on break, on both the buyside and sellside, and that will slow things down, too."

So far, nothing but rumors are circulating about the possible Allegheny Energy Inc. mandatory and Dynegy Inc. convertible bond offerings.

On Friday, Dynegy said second quarter operating results for its core businesses will be substantially in line with its expectations for the quarter, but the company is expecting a net loss. The company said it intends to update its 2003 guidance estimate as soon as practicable following the expected completion of the proposed refinancing plan, which includes the convert.

The company also said that the refinancing plan would increase interest expense due to higher cash interest expense and the acceleration of the amortization of previously capitalized financing costs. The company is scheduled to report second quarter results before the market open July 25, next Friday.

© 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.