New deal rekindles hopes for revival, tempered by skeptics

By Ronda Fears

Nashville, Tenn., Oct. 22 - With skeptics providing a bit of temperance, the convertibles market was heartened by General Mills Inc.'s $1.35 billion overnighter. The big news elsewhere in the market was SPX Corp.'s earnings - or declining sales - which sent the stock plunging over 17%.

General Mills' deal boosted trading somewhat and opened a new door for derivatives traders, in a market otherwise losing ground on the slide in stocks and mixed bonds.

"For a market that's starved for new paper, it's nice to see a deal of this size," said Matt Hempel, a convertible analyst at Bear Stearns & Co.

Potential buyers might have wanted cheaper terms, since it was said to be anywhere from 3% cheap to 3% rich, but sources said demand for the deal was very high and it might even be upsized.

Convertible investors were glad to see a deal that was not from a severely troubled issuer needing desperately to shore up its balance sheet, and one that had practically no new features or funky structure.

"This looks like a decent credit. It certainly doesn't look scary," said Barry Nelson, portfolio manager for Advent Capital Management.

"We'd all love to see a cash coupon. It's not exciting, but General Mills isn't going away. It's certainly been a bit of a drought. It looks like it might be ending.

"It's nice to have a big, well known name in our market. It's reassuring to the ultimate investors."

Spreads for General Mills credit overall widened a bit on news of the deal, traders said. A new market for three-year credit default swaps opened up, and traded heavily at a bit wider than the five-year credit default swaps.

The three-year credit default swap was last quoted at 115/130 basis points over Libor.

Before the convertible news, a derivatives trader at Commerzbank Securities said, there was little interest in any General Mills swaps and no market in the three-year tenor.

The new deal, a 20-year zero-coupon convert, is talked to price for a yield-to-maturity of 1.75% to 2.0% with a 25% to 28% initial conversion premium.

It traded about 0.25 point north and south of issue price, and was last seen at 0.25 bid over issue price in the gray market.

General Mills stock closed down $2.60 to $41.25, on volume of 9.6 million shares versus the average 1.27 million.

SPX also saw lots of action Tuesday, after reporting earnings before the open.

"It seems we just can't go a week without something blowing up in our face," said a dealer.

"The SPX situation seems way overblown, though. We think there could be a bounce tomorrow or later this week, depending on the broader market's tone."

The trader noted that in a market where stock prices have fallen to points where companies like Nortel Networks Corp. and Lucent Technologies Inc. are pushing for huge reverse stock splits, SPX is in the midst of a two-for-one stock split.

"This [SPX] is a very strong name. The market is just weird right now, sort of shell-shocked by the situations like Enron, Adelphia, all those," the trader said.

"It's just that investors are very nervous right now about profits and anything that takes them by surprise will trigger a bad reaction that just takes on a life of it's own, regardless of what might really be going on with a particular company, regardless of the reality they believed last week."

SPX, an industrial firm that makes products like fluid-handling equipment, power transformers, building safety systems and cooling equipment, said cost reductions helped boost operating margins in third quarter.

Earnings per share were $1.82, a 25.5% increase over third quarter 2001 earnings per share of $1.45.

Excluding special items, EPS were $2.25, a 19.7% increase over the comparable $1.88 a year prior.

Revenues totaled $1.29 billion compared to third quarter 2001 revenues of $1.22 billion. The company noted, though, that 2002 organic revenues, excluding the impact of acquisitions and divestitures, declined 0.6%.

The latter was the focus that sent SPX shares tumbling, and the converts followed suit.

SPX common closed down $19.27 to $92.08. Its 0% convertible due February 2021 fell 4.875 points to 63.25 bid, 63.75 offered while its 0% convertible due May 2021 fell 4 points to 61.25 bid, 61.75 offered.

Otherwise, the market was in general not seeing as much positive news in corporate earnings, traders said.

There were exceptions, however, like Nextel Communications Inc.

Nextel was very active ahead of its earnings, traders said, and the converts were heading north.

Its 4.75% convertible due 2007 added 0.375 point to 80.25 bid, 81.25 asked; the 5.25% convertible due 2020 gained 0.125 point to 65.125 bid, 65.875 asked; and the 6% convertible due 2011 rose 0.5 point to 77.5 bid, 78 asked. Nextel shares closed up 9c to $10.09.

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