Possible Tyco mega-deal sets market abuzz, seen placing easily; AMD, Xcel deals gain sharply

By Ronda Fears

Nashville, Nov. 21 - The convertibles market was abuzz with the prospects of a $2.5 billion to $4 billion new deal from Tyco International Ltd. While nothing clearly materialized, many in the market expected any offering to use a mandatory structure - and saw little problem with placing such a large issue.

Meanwhile, new paper in circulation from Advanced Micro Devices Inc. and Xcel Energy Inc. rose sharply, both aided by the strength in stocks as well as a rally in corporate bonds that continued to rein in credit spreads.

Bunge Ltd. Finance Corp. also brought a quick-sale deal to market, pricing an upsized $200 million with very aggressive terms. Bids in the gray market were last seen at 0.375 below par with an offer at par. Ligand Pharmaceuticals Inc. also priced its deal.

Virtually the entire convertible market was firmer, particularly the tech and telecom sectors.

Tyco was mum on the CNBC report early Thursday that sparked the buzz that it was prepping a new deal, but the convertible market was not entirely shocked at the report.

"It makes sense. You could argue that Tyco is in a much better position right now ... and also that the market is starved for new paper," said Adrian Miller, convertible analyst at Salomon Smith Barney.

"Reportedly, a new deal would not take place until after a forensic audit, which could end now or early December."

Anticipated response to a Tyco was gauged by the sellside as receptive, but some players were a bit overwhelmed with the prospect of a $4 billion deal coming to market right now.

"Whether they do a preferred or a mandatory structure, if they price it appropriately, and I'm sure they would, it should go fine," said Jonathan Cohen, convertible analyst at Deutsche Bank Securities, Inc.

Cohen said a mandatory would make the most sense, as it would be favorable from a rating standpoint and would appease Tyco's banks that would want a new issue to be deeply subordinated.

"Tyco will probably be a preferred. It will get done and at a cheap price, and at the expense of all equity holders," said Michael Revy, manager of a convertible hedge fund for Froley Revy.

"I will probably have to play. Getting involved in a conglomerate-type industrial with a weaker dollar and a seemingly improving economy and new management is risky and the price will have to be right.

"The [convertible] universe will have to get a bit cheaper if we get the onslaught. But it is the best time to do converts - low coupons and who wants to sell equity down here?"

Other buyside sources, particularly in the hedge fund community, also were skeptical the market could digest a $4 billion deal right now.

"It will take a lot of non-hedged buyers to fill a $4 billion bucket," said a convertible trader at a hedge fund in New Jersey.

A source at one of the syndicate desks rumored to be leading a Tyco deal said, however, there are no qualms about the deal size.

"There will be no problem placing $4 billion from Tyco, I assure you," the source said.

"This would be something that will cater as much to the outrights as the hedgies. So there won't be any problem in that area."

Salomon Smith Barney, Goldman Sachs & Co., JPMorgan, Merrill Lynch & Co. and Deutsche Bank Securities Inc. were all mentioned as possible underwriters in various reports and conversations about the deal. Syndicate desks at three out of five of the firms were contacted by Prospect News and all declined to comment on whether they were underwriters or even confirm that a deal existed. Calls to the other two were not returned.

Meanwhile, the Bunge deal was real and on the table, talked to price to yield 3.25% to 2.75% with a 35% to 38% initial conversion premium. Sellside analysts estimated it at fair value to 1% rich, which traders said accounted for the weak gray market levels.

While several new deals of late have been expensive, players were cheering Thursday as AMD and Xcel firmed nicely.

AMD's new 4.5% convertible was quoted up 7.625 points to 109.375 bid, 109.875 asked by one dealer. Another shop quoted it at 113.75 bid, 114.75 asked. AMD shares closed up 59c to $6.14. The AMD 4.75s were also firmer, gaining 2.25 points to 62.25 bid, 62.75 asked.

Xcel's new 7.5% convertible added 2.1875 points to 115.4375 bid, 116.0625 asked as the stock ended up 10c to $10.60.

Some players are hopeful those deals will emulate the Skyworks Solutions Inc. deal from a couple of weeks ago, which ended Thursday up 14 points to 153.5 bid, 154.5 asked as the stock gained $1.21 to close at $11.55. The deal priced at par Nov. 6.

Sharp gains for the Dow Jones Industrial Average and Nasdaq helped stimulate trading, and certainly contributed to the higher levels in converts. Credit spreads also improved.

"It's been a busy day all around," said Tom Sugiura, convertible analyst at Bear Stearns & Co.

"The mood of the market is better right now. Spreads in general have tightened over the last week too."

Onlookers say it appears the market is coming to believe that the worst of times for corporate profits are over, although there could be some negative overhang looming about the upcoming holiday shopping season as well as the potential for a U.S. war in the Middle East somewhere.

In particular, improved sentiment and especially tighter credit spreads helped telecom-related names like Nextel Communications Inc., Nortel Networks Corp. and Lucent Technologies Inc.

Lucent got a boost, too, dealers said, from rumors about a merger with General Dynamics, although it was never confirmed.

Ligand's new deal shot up to 108 out of the gate, traders said, then sold off to par at one point in the afternoon. The new 6.5%, up 22% convert was quoted closing at 103 bid, 103.5 asked as the stock ended off 5c to $5.04.

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