Convertibles slide with stocks, but new issues divert attention

By Ronda Fears

Nashville, Tenn., Oct.17 - Convertible traders said the market overall weakened Wednesday as stocks retreated, but new issues again became a welcome diversion. ASML Holdings NV launched a quick-sale deal that priced during the session on high demand, AT&T Corp. was set to price an exchangeable deal that converts into Cablevision Systems Inc. shares and a deal was launched by Symantec Corp to price after Thursday's close.

"New issues came to the rescue of a lot of people watching the stock market take a dive," said a convertible trader at one of the major investment banks in New York. "It's a good thing for our market to be busy on the primary side, it's always good for the secondary."

The market was mostly lower as the Dow Jones Industrial Average lost 151.26, or 1.61%, to 9232.97 and the Nasdaq slid 75.73, or 4.4%, to 1646.34.

Most of the new issues tapping the convertible market recently are names with convertibles in play or have had convertible issues in the past, which market players said helps them get deals done faster and easier. A lot of the deals are pricing very cheap to fair value, as well, even though the final terms are at the aggressive end of pricing guidance.

The ASML deal, $500 million of five-year convertible subordinated notes, priced at par to yield 5.75% with a 30% initial conversion premium. The yield came in at the aggressive end of price talk, and the premium beyond guidance. Price talk, which emerged just after the market open, had put the yield between 5.75% and 6.25% yield and the premium at 23% to 27%. The offering was also upsized from a planned $350 million.

Sellside analysts said the ASML deal was about 10% to 15% cheap to fair value with an implied volatility range of about 25% to 33%, using a credit spread of 1000 basis points and 60% volatility in the stock. The price talk had moved the proposed issue up "sharply" in the gray market before noon, one dealer said, and final terms were set shortly after noon.

In the immediate aftermarket, the new ASML closed just 0.125 point over par, at 100.125 bid, 100.625 offered with the underlying common dropping $1.58 to $13.06. The Dutch semiconductor equipment maker has two other convertibles outstanding, one euro denominated, but neither of those are traded much in the U.S. Deutsche Banc Alex. Brown convertible analysts said the ASML 2.5% euro convertible due 2005, offered at 93.75, is in reasonably balanced territory with a premium of 78% and a yield-to-maturity of 4.8% but the issue suffers from very poor liquidity. The ASML 4.25% convertible due 2004, offered at 78.375, has a premium of 110% with a yield-to-maturity of 12.9%.

Analysts said there is clearly room for significant weakening in the ASML credit if the underlying shares continue to fall. However, the bonds represent an excellent opportunity for high yield-based investors that believe the credit concerns have been overdone and agree with a bullish stance on the underlying stock. The Deutsche analysts noted that ASML recently announced, on Tuesday, that it would cut about 1,400 employees, or around 17% of its workforce, in addition to some 600 job cuts announced earlier this year. The company also said it would take an estimated $390 million in charges due to the slump in the semiconductor industry.

There was plenty of buyers for the deal, however, as the issue's upward movement in the gray market enticed investors.

"We played it," said a convertible hedge fund analyst. "But I didn't even bother to model it since it was trading up so much in the gray market."

Convertible players were also preparing for AT&T Corp.'s $750 million of mandatory exchangeables, which convert into Cablevision stock, after the close. The deal is expected to price to yield 6.5% to 7.0% yield with an 18% to 20% initial conversion premium. Bear Stearns & Co. is lead manager of the registered deal. The exchangeables, together with a secondary stock offering by AT&T, will essentially liquidate AT&T's stake in Cablevision.

Cablevision common shares closed down $1.63 to $36.05.

Another short-marketed deal launched right after the closing bell, also. Symantec Corp. launched $425 million of five-year convertible subordinated notes with pricing guidance of a 3.25% to 3.75% yield and 25% to 30% initial conversion premium. Credit Suisse First Boston is lead manager of the Rule144A deal, which is scheduled to price after the market close Thursday.

Traders said the new Lowe's 0.82% convertible (A), which sold at 86.103 earlier this week, slipped 1 point on the day to 88.5 bid, 89 offered. The Lowe's zero-coupon convert due 2021 (A3/A), which was issued at 60.841 in February, lost 1.5 points to 69.5 bid, 70 offered. Lowe's common stock dropped $1.13 to $33.55.

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