Convertibles choppy, lower but GM deal upped to $3.25 billion

By Ronda Fears

Nashville, Tenn., Feb. 28 - With secondary activity described as very choppy and overall lower, which put pressure on several new issues, market sources said the General Motors Corp. deal was the positive focus as it was upsized to $3.25 billion amid strong demand. Gap Inc. upped its deal slightly to $1.2 billion but the issue hovered at par in the immediate aftermarket, traders said, largely due to heavy selling. Adaptec's new issue also struggled to close around par.

Selling in Abgenix's new convert intensified and sent it sharply lower, traders said, partly extending a slide that began late Wednesday but also feeling the impact of a heavy selling in the entire biotech sector. Tech issues also took a hard hit as a group, traders said, but there was some buying as investors looked for bargains and values among semiconductor and software issues.

"The market is very choppy right now. That tends to create a selling mood and we saw a good deal of that today," said a senior convertible trader at a major investment bank in New York.

"A lot of the Gap paper was flipped, but that fell off pretty quickly when it got to par because it was more than 3 points over (par) in the gray market right before it priced. It seemed a clear home run until it got out of the gate. No one's real sure what happened other than sentiment turned sour in general, especially for retail and sectors very sensitive to the economic recovery."

Gap sold the deal, upped to $1.2 billion from $1 billion, at the aggressive end of price talk that had been tightened. The seven-year notes have a 5.75% coupon and 30% initial conversion premium. It was quoted closing at 100 bid, 100.25 offered. Gap shares closed off 43c to $11.97 on heavy volume.

"I wish we had flipped more" of the new Gap convert, said a convertible trader at a hedge fun in New Jersey after the close, lamenting the issue languishing in the secondary.

Adaptec also priced a deal alongside Gap and it, too, struggled to stay at par. The $250 million of five-year subordinated notes sold at par to yield 3.0% with a 32% initial conversion premium, at the aggressive end of price talk. Adaptec's old 4.75% convertible due 2004 climbed 5.75 points to 91.75 bid, 92.75 offered but the new issue closed at 100.5 bid, 100.75 offered with the stock down 21c to $11.40.

Interest continued to mount for GM's deal as it was boosted to $3.25 billion from $3 billion and guidance remained unchanged. The deal was at bat to price after the close, at traders said both tranches of the deal were still trading right at about issue price. GM shares closed down 79c to $52.98.

AmerUs Group's new deal, with the new OCEANS structure, was also pricing after the bell and sources close to the deal said it appeared to be going fine. The $150 million of 30-year convertible senior subordinated premium redemption bonds, with an accreting premium and ratio, have a 2% coupon with a 2.6% yield-to-maturity and initial conversion premium of 0% that goes to 10% at the end of five years. Credit Suisse First Boston is sole lead manager of the Rule 144A deal.

Overall, traders said new paper struggled similarly to the broader market, which disappointed investors.

"You really hate to see a new deal flounder right after it prices. It just makes your heart sink, you know," said a convertible trader at a hedge fund in Connecticut. "Of course, if you're set up on a decent hedge you are prepared, but the outright guys just sit and watch the home run they just bought get thrown out."

Abgenix's new 3.5% convertible subordinated notes due 2007, continued to feel selling pressure on its disclosure that it will be having to writedown investments in CuraGen Corp. and ImmunoGen Inc. but also suffered from a sharp selloff in the biotech sector. The convert was quoted down 7.75 points to 92.25 bid, 93.25 offered at one dealer desk and down 9.25 points to 90.75 bid, 91.75 offered at another. Abgenix shares dropped another $2.55 to $18.05.

Other biotech names were also bleeding.

Protein Design Labs Inc. (CCC) was lower after reporting a profit for 2001 but a wider fourth-quarter loss than anticipated and warning that it expects a steep loss in 2002 as spending needs mount and interest income drops. Invitrogen Corp. also fell on a weak earnings forecast.

On the upside, traders said some positive movement in the cable sector was anticipated in response to legislation that passed Thursday that will accelerate the deployment of DSL which will also help the expansion of cable modem service. A Bear Stearns equity note also suggested that the development could ultimately be a positive for semiconductors that have exposure to cable modem and DSL broadband markets, one convertible trader noted. Potential semiconductor winners the trader mentioned were Globespan Inc., Analog Devices Inc., Conexant Systems Inc. and STMicroelectronics.

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