Open Solutions higher in gray market; Rambus quiet, last seen at 98.5 offer; Rite Aid edges up

By Ronda Fears

Nashville, Jan. 27 - As convertibles trailed stocks lower, traders were somewhat relieved by a thin market. "We were just trying to keep our heads above water and out of the fire," as one dealer put it.

"Everybody's a little down on the market. It's been a lousy January," said a sellside desk analyst. "What they forget is that every four or five months we hit a down patch and people sit back, scratch their heads and we don't see any bids. Then, it passes."

New issues from Rite Aid Corp. and Rambus Inc., meanwhile, remained underwater but there was little to no activity in either issue on Thursday. Open Solutions Inc. was at bat after Thursday's close, and little gray market action, if any, was seen by buyside traders, but they pointed out that there was a two-sided market for the issue.

Rite Aid's new 7% mandatory gained about 0.75 point to 48.625 bid, 48.875 offered on Thursday but was still short of the 50 par where it priced earlier in the week. Rite Aid shares closed Thursday up 2 cents at $3.51.

Rambus' $300 million overnighter priced at par to yield 0%, up 45% - at the cheap end of guidance for 45% to 52% initial conversion premium. Buyside traders speculated it would be reoffered below par by underwriter Credit Suisse First Boston, but there was no firm sign of that and the bank did not comment on the matter. Before the market open, buyside traders said there was a bid for the issue at 97, but they saw no trades in it all day.

Secondary dealings were mostly of a southerly nature, with Schering-Plough Corp. falling on downgrades to the stock and converts and El Paso Corp. slipping on concerns about credit spreads. XM Satellite Radio Holdings Inc. also was off, in the wake of competitor Sirius Satellite Radio Inc.'s big pullback on Wednesday, but traders noted outright guys stepping up to buy XM Satellite's 1.75% convertible at 96.

Among the few issues mentioned moving up in the secondary were "a flurry of Flir bonds," pushing the 3% converts up about a point in advance of Flir Systems Inc.'s earnings next Wednesday.

Open Solutions seen 2% cheap

Open Solutions was at bat Thursday with its $125 million in proceeds of 30-year discount cash-to-zero convertible notes after the market close Wednesday with guidance for a yield to maturity of 3.25% to 3.75% with a 30% to 35% initial conversion premium.

In the gray market, the issue was seen 1 point over par on the bid side and 3 points over on the offer side, but there were not any trades seen. The stock dropped $1.40, or 6%, to close Thursday at $21.90 on volume of about 10 times the normal flow in the stock.

At the middle of the guidance, a sellside analyst put the Open Solutions convertible a little better than 2% cheap, using a credit spread of 500 basis points over Libor and 38% volatility. But, he said he expected the issue to price wide of talk, based on strong market enthusiasm.

At an estimated issue price of 45.021, the issue would pay a cash coupon of 1.5757 for seven years for a 3.5% yield to maturity - smack in the middle of yield talk.

Schering-Plough issue plunges

Schering-Plough Corp. plunged Thursday as analysts provided more support to investors who have been shying away from Big Pharma because of trouble with large revenue stream drugs and ongoing stiffening of new drug approval procedures.

The Schering-Plough 6% mandatory due 2007 (Baa3/BBB) on Thursday fell 1.64 points to 52.4, tracking the underlying stock. Schering-Plough shares lost 77 cents, or 3.89% to $19 on a Merrill Lynch downgrade to neutral from buy.

On the reduced stock outlook, Merrill Lynch convertible analysts removed the mandatory from their recommended portfolio, too. (See full story elsewhere in this edition.)

Indevus worth a look: analyst

In the search for yield among older drug issues, a sellside analyst suggested looking at Indevus Pharmaceuticals Inc.

"Check these out," the analyst said. Earlier this week, the Indevus 6.25% convertible due 2008 was at 101.50 bid, 102 offered with the stock at $4.62, which he noted showed terms of 6.13%, up 46% on the offer. On Thursday, a trader pegged the issue at around 105, with Indevus shares up 19 cents, or 3.98%, to $4.96.

The analysts added that Indevus has a lot of cash, reporting $157 million as of Sept. 30, versus the $72 million in convertible debt.

Glenn L. Cooper, chief executive of Indevus, has said fiscal 2004 was a transformational year for Indevus, when the company received FDA approval of its Sanctura for overactive bladder and signed a major agreement that resulted in cash payments to Indevus of $150 million. He said the company also established a sales force and supporting infrastructure, and successfully transited into an integrated development and commercial organization.

Indevus estimates Sanctura represents a pharmaceutical market expected to reach about $1.4 billion in 2004, with anticipated near-term double-digit growth.

Allianz issue seen 1.5% cheap

The new JPMorgan exchangeable into Allianz shares shot up Thursday from par of 100 to 101 bid, 101.75 offered - about where convertible analysts in Europe put the issue's theoretical value. The €1.6 billion of three-year mandatory exchangeable bonds were issued Wednesday with a 4.5% yield with a lower exchange premium at 100% and upper exchange premium of 120%.

Allianz also sold €1.2 billion of three-year Bites, or Basket Index Tracking Equity-linked Securities, linked to the performance of the DAX, which can be redeemed with shares of BMW, Munich Re or Siemens at the option of Allianz. In addition, Allianz was marketing €1 billion of perpetual senior bonds plus warrants for 11.2 million shares of Allianz stock via JPMorgan.

The mandatory exchangeable due February 2008 offers a 4.5% coupon, minimum and maximum exchange prices of 100% and 120%, respectively, of the reference stock price and a cash dividend pass-through equal to 90% of the maximum exchange ratio, according to the term sheet. This deal follows last week's UBS-DCX mandatory exchangeable, which had a longer maturity of five years, a wider exchange price range of 90-145%, an enhanced exchange ratio on the upside and a similar dividend pass-through (85%).

Barclays Capital Markets convertible analysts put the new Allianz-linked issue worth 101.5, with a 72% delta, based on a credit spread of 20 basis points over Libor for JPMorgan and a stock volatility skew of 23% to 20% for Allianz shares. A 1.6% dividend yield for Allianz shares also was factored in.

"We find this attractive on a valuation basis relative to the par issue price (implied skew of c. 6.5 points)," said Barclays convertible analysts Luke Olsen and Haidje Rustau. "Key risks include Allianz volatility skew (note, holders are short skew risk) and dividends (when delta is below 90%, holders are effectively long a proportion of the dividends)."

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