Convertibles snap back with stocks, market awash with new deals

By Ronda Fears

Nashville, Tenn., Jan. 23 - Convertibles rebounded with stocks Wednesday in a very busy session highlighted by the Ford Motor Co. deal getting upsized to a record $4.5 billion. Players were disappointed, however, with more aggressive price talk. Two overnighters were also pricing from Emulex and Advanced Micro Devices, with mixed results, following an overnight deal from Health Management Associates.

"It was a fantastic, wild day. We were swamped. There was a lot of trading, some on the stocks but mostly due to the new issue calendar that came to life this week," said a convertible trader at a major investment bank in New York. "It was a very mixed bag, though, and the market overall probably was not that much higher on the day."

JPMorgan upgraded semiconductor equipment stocks, countering Merrill Lynch's chief U.S. strategist Richard Bernstein warning about technology valuations being still at pricey levels the day before, and the Nasdaq recouped 39.85, or 2.12%, to 1922.38 while the Dow Jones Industrial Average added back 17.16, or 0.18%, to 9730.96.

The big news of the day was Ford upping its deal to the nearly $5 billion that had been speculated. With the greenshoe, the deal could get to $5 billion or more - smashing the record $3.45 billion set by the Tyco zero-coupon convert in November 2000. "We need some records in this market. It's good news," said one market observer.

Players, however, were not happy with the new terms and the convertible trust preferred came in sharply in the gray market to about 0.5 over par from 1.375 over par. "A lot of people are unhappy about this, but a lot of us have to play it because it's Ford. You have to get in on this one," said a convertible fund manager in New York.

The primary market was back in full swing, with an overnighter from Health Management Associates, returning to the Rule 144A market to sell $277.2 million in proceeds of 20-year convertible subordinated notes at 83.978 for a yield-to-maturity of 0.875% with a 35% initial conversion premium. The issue slipped about 0.5 in the immediate after-market to 83.5 bid, 83.75 offered with the underlying stock down 64c to $18.70.

Two more overnighters were in the line-up after Wednesday's close, but with very mixed reactions.

Emulex's deal was a home run, gaining 1.5 points in the gray market. The computer data storage equipment maker was pitching $300 million of five-year notes at a 1.75% to 2.25% yield and 18% to 22% initial conversion premium, after reporting on Tuesday a net loss that beat Wall Street's expectations and raising its outlook for the rest of the year.

"I think it blows out the door. People are giving up a lot of yield on this one, playing the volatility," said a sell-side analyst. The Emulex deal is calculated to be about 2% cheap with an implied volatility of about 47.72% at the middle of price talk, assuming a credit spread of 800 basis points over Treasuries and 50% volatility in the stock.

Emulex shares closed up $5.53 to $44.13.

Advanced Micro Devices, however, was getting a cool reception to guidance of 4.25% to 4.75% yield and a 40% to 45% initial conversion premium. The issue was bid down 1.625 points from par in the gray market.

"This looks really rich, you struggle to get to par with this one," said another sell-side analyst. The Advanced Micro deal is calculated to be about 1.6% rich with an implied volatility of about 54.5% at the middle of guidance, assuming a credit spread of about 750 basis points over Treasuries and 50% volatility in the stock.

Advanced Micro shares closed up 41c to $16.70.

Ford is at bat after Thursday's close, along with Sunrise Assisted Living's $100 million note deal, bringing the week's tally to about $5.68 billion.

Outside of the primary market activity and the trading it generated, traders said earnings news and conference calls kept the market hopping. Tech issues were mixed in the rebound, traders said, with Brocade, Teradyne, Anadigics and ATMI leading the pack going north. There were some sharp decliners in the market, as well. American Greetings was again lower. And, Foster Wheeler and Peregrine Systems were down significantly.

Tyco's convertibles gave back nearly all the gains seen a day before on the conglomerate's breakup news as naysayers spread pessimistic observations about the viability of the plan. While traders said there still was not a lot of flow in the Tyco converts (Baa1/A), the 0% due 2020 were off 1 point on the day to 72.375 bid and the 0% due 2021 slipped 0.875 point to 72.5 bid. Tyco stock closed down $2.45 to $45.10.

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