Williams bonds gain 2.25 points, mandatory up slightly but more sellers seen; LSI loses 4-5 points

By Ronda Fears

Nashville, Sept. 30 - It was a busy morning in convertland Tuesday. Then, when the Yankees game started in the early afternoon activity dried up entirely. Marking books for the month end as well as the end of third quarter, and for the fiscal year for some buyside shops, also took a lot of players out of the market late-day.

"It was really busy this morning but as soon as the Yankee game started, it got very slow," said one trader.

"The market flow, news, everything just disappeared."

Some of the busiest names included Williams Cos. Inc., LSI Logic Corp. and Tyco International Ltd.

Williams got a lot of mileage from a Merrill Lynch & Co. research report spanning the stock, bonds and convertibles, traders said. The 5.5% convertible added 2.25 points to 61.25 bid, 61.75 offered and the 9% mandatory edged up 0.375 point to 13.25 bid, 13.375 offered. Williams stock gained 45c, or 5%, to $9.42.

But there were more sellers in the Williams mandatory, as the Merrill report said it was rich.

"We sold out of the Williams preferreds as the common rallied on the Merrill report," one buyside trader at a hedge fund said.

LSI Logic's newest convertible, the 4% due 2010, saw selling on a Banc of America equity report that lowered the target for the stock, a dealer said. The stock also sold off, plunging 87c on the day, or 8.82%, to $8.99. The LSI converts lost another 4 to 5 points, the dealer said, to 108 bid, 108.5 offered.

Tyco converts also slipped by about 1 point, with traders noting buyers for the 3.125s while there seemed to be more sellers in the 2.75s. One dealer noted that not only do the 3.125s offer more yield but they also have more equity exposure. He pegged the 3.125s at 113 and the 2.75s at 110.25. Tyco shares lost 57c, or 2.71%, to $20.43.

The end of September and third quarter not only stalled trading, but market sources said it will also push out the primary market calendar for a couple of weeks.

"We have a pretty healthy backlog of deals but it's been backed up into the last half of October" due to earnings for third quarter, said the head of a convertible origination desk.

He expects another $10 billion to $15 billion of convertible issuance through the end of 2003, and several other market sources put fourth quarter issuance in that neighborhood, or possible reaching another $20 billion.

In September, convertible issuance dropped to its lowest monthly total so far in 2003, although year-to-date volume remains only slightly behind the same point in the record year of 2001.

So far this year, Prospect News data shows $79.58 billion raised in a record 317 deals. In 2001, when $114.8 billion of convertibles were issued, there were only 280 deals. In September, the pace slowed markedly to $3.17 billion, the lowest of any month this year.

But 2003 is only running $2.53 billion behind the record pace of 2001 when $82.11 billion of new convertibles came to market through the end of September.

The pace certainly has been calming down since the $5 billion a week seen in late spring and early summer. Some bankers attribute it largely to terms turning against them during the so-called buyers strike that began in late summer.

"Certainly, there's still plenty of demand," one said.

"Issuers who were considering something are sitting back, waiting for terms to come their way. It looks like that is what's happening, just from the lack of supply of new paper. They've also had to reset their expectations."

In May and June there were very aggressive pricing terms that would fly in the market because volatility and credit spreads were accommodating to buyers, he said. Then, volatility collapsed and the bond market backed up, which made it more difficult to sell tightly priced deals. Meanwhile, as terms loosened up for buyers, issuers were experiencing something akin to sticker shock.

"That's the rub we got when Bristol-Myers Squibb hit the tape last week," another banker said.

Last Thursday, Bristol-Myers sold $1 billion of 20-year convertible floaters to yield 3-month Libor minus 0.50 basis points with a 60% conversion premium - at the cheap end of price talk to yield the three-month Libor minus 50-75 basis points, up 60-65%.

"People we've been pitching business to now want to get those terms, or something better than what we've been talking to them about," the banker continued.

"And that deal [Bristol-Myers] looks like it was done for purposes of league table placement."

JPMorgan, a joint bookrunner on the Bristol-Myers deal, was the second most active convertible underwriter in September, bested only by Citigroup. Goldman Sachs, the other bookrunner on the deal, ranked fourth. (See full league table data elsewhere in this issue.)

A few buyers for the Bristol-Myers deal were located, particularly a huge hedge fund in New York, but more buyside sources panned it.

"This is Sallie Mae #2," one manager said.

In mid-May, SLM Corp., better known as student lender Sallie Mae, sold $2 billion of 32-year cash-to-zero floater convertibles to yield 3-month Libor minus 5 basis points with a 75% initial conversion premium - at the cheap end of price talk - via JPMorgan, Merrill Lynch and Morgan Stanley.

"This [Bristol-Myers] is a pointless deal," the manager continued.

"Sure, they took out all the risk but they also took out all the return."

Buyers said they liked the high bond floor and low volatility in Bristol-Myers, but would not elaborate on how to set it up to make money. A salesman working on the deal offered another point: "At least you don't lose money on it."

Still, most of these deals, including also the Wells Fargo & Co. deal in April, have languished in the aftermarket. Even though they are jumbo deals, traders also note that they are not liquid at all.

Bristol-Myers was closed Tuesday by Goldman unchanged at 99.955 bid, 100.08 offered. The stock ended up 10c, or 0.39%, to $25.66.

"Hedge funds are not in the business to invest money in order to not lose it," one manager said. "Hedge funds are in business to manage risk and make money."

Returns for hedge funds have been steadily turning around so many are happier these days, too. The Merrill Lynch convertible hedge fund index for the week ending Thursday showed the fourth consecutive week of gains, returning 0.49% gross of fees for a month-to-date gain of 2.64% before fees.

Increasing volatility in the equity market, with the VIX rising to 22.23 from 19.08, did not translate into increased valuations in the convertible market as implied volatility for the universe remained relatively unchanged at 37.5%.

Rather, the gain for hedge funds came from improving Treasury yields and the positive effects of high premiums as stocks linked to convertibles dropped 5.3% over the week.

"The weakening of the dollar may not necessarily be signaling higher rates," said Yaw Debrah, head of U.S. convertible research at Merrill.

"Research performed by our economists shows that there is no significant relationship between dollar movements and the direction of interest rates.

"In fact, whatever statistical link there was ran in the opposite direction - a weaker dollar has in the past been more typically associated with falling inflation and bond yields because generally, when the greenback is soft, it is symptomatic of a subdued economy."

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