Dynegy seen launching smaller convert early Tuesday; seven other deals launched Monday

By Ronda Fears

Nashville, July 28 - Convertible players were putting on wading gear Monday as if they were on a summer fishing jaunt in Canada. It wasn't an icy stream flowing with salmon they were wading through, however, but a flood of new deals.

Seven transactions were thrown into seemingly relentless flow of new convertible deals on Monday, and six of those weren't cast into the pile until after the closing bell. At least three were overnighters pricing in addition to the small Wabash National Corp. deal that has been roadshowing for almost a week.

Early Tuesday, Dynegy Inc. is expected to toss another into the mix. It has been expected, but buzz in the market on Monday put it at $175 million, down from plans of $300 million announced by the company two weeks ago.

"I don't think we're going to tip the scales this week, but you can see the pendulum swinging a little closer to it being a buyers' market," said a convert manager in Connecticut.

"We've been hearing that something like $11 billion of junk bonds is on the calendar to price before third quarter is over, before rates start going up. So you have to figure that converts will be seeing at least half that, if we don't match it."

Demand is still healthy, the fund manager surmised.

Even with hedge funds feeling some pain, many still are ahead for the year. Besides, as one hedge fund manager in New Jersey put it, they want to add on any new deals that could boost performance as terms appear to be a bit less aggressive as far as buyers are concerned.

"Not everything coming right now is cheap, by any means, but there are some things that have piqued our interest more than what we had been getting served up to us," the manager said.

By Lehman Brothers' calculations, new convertible issues year-to-date have been 0.69% cheap, and the deals launched Monday were anywhere from fair value to around 5% cheap by sellside estimates, so it would seem that terms have begun to swing toward buyers.

Dynegy on Friday said it received more than 99% approval from its credit facility lenders to proceed with a series of long-term restructuring and refinancing transactions. On July 15, the company announced the plans, including a $300 million convertible note.

The plan also includes a cash tender offer for all outstanding Dynegy 2005 and 2006 public senior notes and a $1.2 billion senior second-priority notes offering. It also involves the exchange of $1.5 billion of series B mandatory convertibles held by a ChevronTexaco Corp. unit for $225 million in cash, $225 million of new junior unsecured subordinated notes due 2016 and $400 million of new series C convertible preferreds.

But convertible market sources said Monday that the convert is now seen at $175 million. Meanwhile the junk bond market is expecting a $1.315 billion deal in two tranches, up from the original $1.2 billion.

Market sources said Credit Suisse First Boston was leading the senior second-priority note offering and would likely lead the convert offering as well. CSFB sources in the convertible origination area were not available to comment.

Also Friday, Dynegy reported a second-quarter net loss of $372 million, or $1.00 per diluted share, for the second quarter 2003. At July 21, Dynegy stated liquidity at $1.7 billion.

Dynegy also said the refinancing plan will result in a lower guidances estimate for 2003 and has scheduled an analyst call for Aug. 13 at 10 a.m. ET.

Not a lot of attention was given to Dynegy, however, due to the influx of firm deals.

Announced Monday were deals from Veritas Software Corp., Priceline.com Inc. and Invitrogen Inc. for pricing after the close. Also launched Monday were deals from American Tower Corp., Bausch & Lomb and ExpressJet Holdings Inc., all set to price after Tuesday's close. And, Town & Country Trust is making a small offering.

Wabash was already on the calendar with a small $100 million deal to price after Monday's close.

Wabash sold the five-year convertible notes at par to yield 3.25% with a 25% initial conversion premium - at the cheap end of yield talk and cheaper than premium guidance. Price talk had put the yield between 2.75% and 3.25%, with the premium at 27.5% to 32.5%.

Veritas and Invitrogen were additions to the refinancing bandwagon that has been driving through convertland.

Veritas was returning to the convertible market with an overnight $500 million deal talked to yield 0.25% with a 50% to 55% initial conversion premium, and called its existing 5.25% and 1.856% convertible notes. (See full stories on the offering and redemptions elsewhere in this issue.)

Lehman Brothers put the new Veritas convert 2.35% cheap at the middle of price talk, using a credit spread of 200 basis points over Treasuries and a 45% stock volatility. Deutsche put it 0.75% rich, using a credit spread of 200 bps over Libor and a 40% stock volatility.

But Venu Krishna, head of U.S. convertible research at Lehman, said taking into account the impact of hedging related activity in the stock, which he estimated at 0.49 million shares, the cheapness on the new Veritas convert declines to 2.0%. The positive, he noted, was the short three-year put on the new issue.

Invitrogen was pitching a quick-sale $300 million of 20-year convertible notes talked to yield 1.75% to 2.25% with a 30% to 35% initial conversion premium, with proceeds earmarked for potential acquisitions and general corporate purposes, including redemption of debt - which the market figures would be its 5.5% convertible due 2007 and the 2.25% convertible due 2006.

The Invitrogen deal was marketed throughout the day.

Merrill Lynch & Co. analysts put the new Invitrogen convert 3.25% cheap at the middle of price talk, using a credit spread of 375 bps over Treasuries and a 35% stock volatility. Lehman put it 2.4% cheap, using a credit spread of 450 bps over Treasuries and a 40% stock volatility. Deutsche Bank Securities put it 3.315% cheap, using a credit spread of 325 bps over Libor and a 38% stock volatility. Another sellside shop put it right at fair value, using a credit spread of 325 bps over Treasuries and a 35% stock volatility.

Priceline's overnight $100 million convertible notes were talked to yield 0.5% to 1.0% with a 13% to 18% initial conversion premium.

While that premium range has not been seen in convertibles much in many months, analysts said it was a bit deceiving.

Lehman Brothers put the Priceline convert 5.53% cheap, at the midpoint of talk, using a credit spread of 800 bps over Treasuries and a 50% stock volatility. Deutsche put it 0.73% rich to 4.49% cheap, using a credit spread of 900 bps over Libor and a 60% stock volatility.

Krishna noted, however, that at the after-hours level for Priceline shares of around $32.75, the deal cheapness declines to 1.84%. Priceline shares closed Monday up $2.91, or 9.14%, to $34.76.

American Tower is another refi story.

The satellite tower owner and operator returned with its fourth convert - marketing $175 million deal of seven-year senior notes talked to yield 2.75% to 3.25% with a 37.5% to 42.5% initial conversion premium, with proceeds going for debt retirement.

American Tower has been buying back its 2.25% discount converts due 2009, which are putable on Oct. 22, for some time and market sources expected that issue to be the targeted use of new deal proceeds, along with its 6.25% converts and possibly some of the 5% convertible issue. (See full story elsewhere in this edition.)

Also, American Tower is selling 12.4 million shares of Class A common stock expected to fetch another $114.4 million in proceeds, with proceeds earmarked for debt repurchases or to make equity contributions to borrower subsidiaries under its credit facilities, where the proceeds may be used for general corporate purposes.

Deutsche puts the new American Tower convert about 5% cheap, using a credit spread of 550 bps over Libor and a 50% stock volatility.

Eyecare products maker Bausch & Lomb launched $140 million of 20-year cash-to-zero convertible floaters talked to yield the six-month Libor plus 15 to 65 basis points with a 48% to 52% initial conversion premium, and also is selling $50 million of five-year fixed rate notes.

The convert is expected to be rated Ba1 by Moody's Investors Service and BBB- by Standard & Poor's Corp.

Bausch & Lomb said proceeds will be used to refinance existing debt and to repurchase 1 million shares of its common stock.

Deutsche puts the Bausch & Lomb convert 1.785% cheap, using a credit spread of 250 bps over Libor and a 27% stock volatility.

ExpressJet is selling $125 million of 20-year convertible notes talked to yield 4.25% to 4.75% with a 26% to 30% initial conversion premium to repurchase a portion of its stock held by Continental Airlines Inc.

Continental is selling 5 million shares of ExpressJet common stock, which represents some 8% of the outstanding shares of ExpressJet.

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