CV Therapeutics, Pixelworks both trade below par out of gate; Tower Auto deal piques interest

By Ronda Fears

Nashville, May 13 - Convertible players got a respite from widespread price cuts Thursday, with stocks and bonds closing rather flat. But the market is eager to see how Friday's consumer price inflation data may impact the Federal Reserve's decision in June regarding an interest rate hike.

In the trading trenches, dealers said Navistar International Corp. saw some traffic, heading up, on the reshuffling of the convertible paper to the parent. Service Corp. International converts were "in limbo," holding at about 107, as one trader put it, on confusion about the last coupon payment on the 6.75% convertibles as a result of the cemetery operator calling the issue Thursday.

Most of the market stabilized, dealers said, but metals saw a sharp drop on strength in the dollar, with Coeur d'Alene Mines Corp. and Inco Ltd. marking the deepest declines.

It also was quiet on the new deal front with nothing emerging from the shadows, but Tower Automotive Inc. interest was gaining steam as it began to finalize its new bank financings.

Yet, convertible bankers say that in light of the growing sentiment that the Fed may raise rates in June, they are urging issuers to act quickly.

After such a long run of record low rates, it may not be an easy transition, but one convertible origination official said, "They'll have to [come to grips with the new reality of higher interest rates] very quickly, because June is just around the corner."

Demand a smokescreen

Unrelenting demand in the convertible market makes it a bit more complicated, though. At the least, healthy demand for new paper causes convertible investors to appear fickle, in light of most new issues softening in the immediate aftermarket and the secondary market in general growing weaker recently.

"One account I spoke with said they had money to put to work but were a little sour on a lot of new issues due to tight pricing," a sellside market source said.

In high-yield bonds, issuance has begun to suffer, he added.

"From the issuer standpoint, converts seem to be a more appealing market to raise funds than high yield," the sellside source continued.

"High yield feels rather squishy and soft, with a dose of pushback from par buyers."

In convertibles, syndicate sources say orders to get in on new deals at-issue are still very good, but they acknowledge many deals sink even as they break for trading. Some at the smaller shops argue that demand has been camouflaged by the bought deals in the second half of 2003 now that re-pricing deals below par by the underwriter - a practice most used by the bigger desks - has virtually come to a halt.

The new CV Therapeutics Inc. and Pixelworks Inc. deals, for example, got strong orders according to sources close to those deals. Both priced within guidance, even at the aggressive end of yield talk amid an upsizing with respect to CV Therapeutics, but then went south right out of the chute.

CV Therapeutics at 99.875 bid

CV Therapeutics sold an upsized $125 million of eight-year convertibles, upped from $100 million, at a 2.75% coupon and a 27.5% initial conversion premium - at the aggressive end of yield talk for 2.75% to 3.25% and at the middle of premium guidance of 25% to 30%.

Sellside analysts had put the new CV Therapeutics convertible about 1% to 2% cheap at the midpoint of indicative terms.

Bookrunner Merrill Lynch & Co. took the new CV Therapeutics convertible out at 99.875 bid, 100.125 offered. The issue was bid 0.375 point over par in the gray market with no offer, according to buyside sources.

CV Therapeutics stock dropped 30 cents, or 2.16%, to close at $13.57.

Collateralizing interest payments for three years was a big draw to the issue, said buyside sources who got involved. The Palo Alto, Calif.-based biotech concern was putting $10.3 million of proceeds into escrow for that purpose.

With remaining proceeds, the company will repurchase $71.6 million of its 4.75% convertible subordinated notes due 2007 and may use additional proceeds to repurchase some of its 2% convertible due 2023. The 4.5% converts were quoted at 97.625 bid and the 2% convert at 74.5 bid.

Pixelworks ends at 99.875 bid

Pixelworks sold $125 million of eight-year convertibles to yield 1.75% with a 42% initial conversion premium - smack in the middle of guidance for a 1.5% to 2.0% coupon and a 40% to 44% premium.

Sellside analysts had put the Pixelworks convertible about 0.5% rich to 1.34% cheap at the midpoint of guidance.

The Pixelworks convertible was not seen at all in the gray market before pricing. It closed Thursday at 99.875 bid, 100.375 offered, according to a buyside trader. Pixelworks shares dropped a quarter, or 1.45%, to close Thursday at $16.96.

Market eyes Tower bank deal

As Tower Automotive closed the books on a blowout new $565 million bank facility on Thursday afternoon, convertible players were eyeing those terms and beginning to anticipate its convertible deal soon, with some enthusiasm.

"Despite recent market volatility, there are few attractive credit stories where astute analysis can pay off, but this is such a situation," said a convertible portfolio manager in New York.

"Tower is a survivor. And remember, lack of oxygen to the brain is the sole cause of human death - and lack of liquidity is the sole cause of corporate death. Refinancing restores liquidity. The market is scared. We're not. We're bullish."

There was no indication, however, of timing or price talk on the Novi, Mich.-based automotive component maker's plans to sell $110 million of convertible notes to refinance its existing 5% convertibles before maturity in August. In fact, the lead underwriters are not yet known.

Of the new bank facility, the $140 million 5.5-year second lien synthetic letter-of-credit facility was tightened to Libor plus 700 basis points from Libor plus 750 basis points, the $375 million five-year first lien term loan B was priced at Libor plus 425 basis points and the $50 million five-year revolver at Libor plus 425 basis points.

Morgan Stanley and JPMorgan are leads on the bank deal.

Earlier this month, Tower Automotive again said it planned to refinance its $200 million 5% convertible before it matures Aug. 1. No further details were available in the convertible market.

A refinancing of the 5% issue has been in discussions by the company for almost a year.

"A finalized credit facility is obviously good for the existing convert holders," said a sellside source. "It's interesting that Moody's cut their ratings on Tower debt today. I think the existing converts are trading right at par, so I'm not sure there's too much of a trade anyway."

Credit analysts pan Tower

Aside from the Moody's downgrade, credit analysts expressed concern about demand for vehicles winding down as interest rates tick up, in addition to automakers easing off promotions while steel prices remain high.

Moody's cut the Tower Automotive $258.75 million of 6.75% convertible trust preferreds to Caa3 from B3, as well as the 5% convertibles, and straight debt of its subsidiary R.J. Tower Corp. to B3 from B1. Moody's boosted the outlook to stable from negative afterward.

Moody's said the downgrade reflects very weak credit protection measures over the next two years.

While liquidity will improve somewhat as a result of the transactions, Moody's said the company still has potential liquidity concerns as it proceeds with the roll-out of several very significant new business launches. Also, Moody's said Tower expects to incur the cost of drawing down the full amount of the revolving credit commitment on an ongoing basis and will be subject to unusually high fees for open letters of credit.

Moody's also notes that $90 million of previously structurally and contractually subordinated debt at Tower is proposed to be refinanced with senior secured debt at RJ Tower.

Earlier this week, Standard & Poor's affirmed Tower Automotive's ratings with a negative outlook. In February, S&P cut Tower Automotive's subordinated debt to B- from B.

Bigger market, deeper wounds

The bigger they are, the harder they fall. So goes the old axiom often used as a metaphor in training boxers. Likewise, a market source pointed out the parallel of 2004's rising interest rate environment to what happened in 1994.

With 1994 in mind, some market participants fear a severe market cheapening while credit analysts say a round of rising rates should be less dramatic.

"Standard & Poor's analysts said in a report Wednesday that despite many similarities in the two periods, significant differences remain, making a repeat of the bloodbath in 1994 unlikely. For one thing, the S&P analysts said the rate hikes in 1994 were sharp and sudden, plus with little warning, whereas the Fed began referring to rising rates early this year.

But, a buyside market source noted that the convertible market was much different a decade ago.

"Who was around 10 years ago for the correction then?" the source said.

"The convert hedge fund market is probably 20 times the capital it had then. Pricing is record stupid, with short-term interest rates at a 40-year low. I think there is much more blood to hemorrhage this time around, even if the interest rate swing is not as severe."

Low premium trades spied

Over the past week's worth of sessions, convertibles have been slashed sharply but have yet to reach levels that have caused a rush of buyers to the market. Buyside sources said there are a few opportunities emerging, but caution is still the overriding tone.

"There are some emerging pockets of cheapness in the U.S. convertibles market," said a fund manager in New York.

"However, applying a relative value, security selection, approach in this market remains difficult, with much uncertainty over the level of both our short-term funding rate in the coming months and the overall shape of the yield curve. This uncertainty is concentrated just ahead of us, i.e. the period until we next hear from the Fed."

Some players are scouring for volatility plays. This manager, however, is looking for low premium convertibles, which would suggest a bullish stance on stocks long term.

"We see choppy markets ahead near term," he said.

"Some very low premium trades have reached attractive levels, and we have made selective bids. Beyond that, we'll leave the 'bargains' for smarter guys."

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