McData, U.S. Steel new deals emerge in market willing to consume tight, tighter terms

By Ronda Fears

Nashville, Feb. 3 - Traders said flow in convertibles picked up nicely with the new deals circulating, including a quick-sale deal from McData Corp., on Monday, although the market as a whole moved sideways.

"It was an okay day. It's nice to see some new deals out there, [even though] terms have been very aggressive lately," said Stuart Novick, convertible analyst at Salomon Smith Barney.

Although the McData deal was rather small, $150 million, it was stimulating some secondary market trading.

The McData deal itself, said to be oversubscribed by as much as 12 times, traded as high as 4.75 points over par, according to one dealer - despite the terms getting tightened twice during the session.

Obviously, not everyone was agog about the McData deal, though.

"All those people who bought these bonds at 104 are going to get killed," said a hedge fund trader in New Jersey.

"We used a 600 basis point spread [over Treasuries] and at 2.25%, up 37%, it was 1% cheap. It's more of the same and we'll pass. We need 20 or 30 deals like this to sop up the demand so we can get a real deal."

McData's deal is expected to price with a 2.25% coupon and initial conversion premium of 37% to 42%. That put it 2.8% rich to 4.1% cheap, according to sellside analysts who were using spreads of 650 basis points over Libor and 800 bps over Treasuries. Original talk of a 2.25% to 2.75% yield and 27.5% to 32.5% premium put it 8.2% to 9.7% cheap.

One convertible trader at a hedge fund in New York said that while all the juice was squeezed out of the McData deal, he was putting an order in for lack of anything else to buy.

Several buyside sources who were planning to participate in the deal mentioned the high volatility in the McData stock as an enticement, although the borrow is expected to be a little tough.

When asked if he was concerned about the McData deal following the path of recent deals from Micron Technology Inc. and Advanced Micro Devices Inc., the trader said he expected the new deal would also head south out of the gate, but it's a much smaller deal.

"Actually Tyco would be a better example to have fears about," the trader said.

Micron and AMD both fell from around 4 points over par in the gray market to par or lower shortly after freeing to trade.

Micron's new 2.5% convertible due 2010 gained some ground Monday, however, after languishing last week right after pricing. The paper added 1.875 points to 100.875 bid, 101.375 asked. The stock closed up 19c to $8.40.

AMD's convert lost ground, however, as the company announced a delay in the launch of its next-generation Hammer PC chip until September instead of an expected launch in April or thereabouts.

AMD's new 4.5% convertible due 2007 fell 2.875 points to 96.875 bid, 97.375 asked while the stock closed down 19c to $5.05.

Tyco's new converts also are still pretty active, said Novick, although nothing exciting has happened with the stock recently. Both tranches gained about 0.25 points, with the 2.75s at 100.25 bid and the 3.125s at 100.5 bid.

Tyco shares ended up 4c to $16.05.

Later this week, United States Steel Corp. brings a $200 million mandatory talked to price with a dividend of 7.25% to 7.75% and an initial conversion premium of 18% to 22%.

Next week, Crown Cork & Seal Co. Inc. is pitching a $250 million convertible bond, so the month is getting off to a modest start.

It could be until the beginning of second quarter, or April, before pricing power swings towards the buyside, said Rao Aisola, head of convertible research at Bear Stearns & Co.

"The first 20 to 30 deals will go through without a hitch, on the aggressive side," Aisola said.

He expects issuance to be strong up until before midyear, when the typical summer market would signal a slowdown - volatility trails off and the market takes a break.

Demand seems to be holding up, though, despite the lack of a robust calendar and a picked-over secondary market.

"Convert arb fund of funds overall did okay last year, so money is not being taken off the table," he said.

The lack of selection in the secondary market has forced some convert players to participate with the new deals despite the aggressive terms, he said. Still, those don't look so bad when compared with the broader market.

"When you're looking at 5s, up 100% versus 2.5s up 40%, the latter doesn't seem so bad," Aisola said.

Airborne Inc. continued to see some action Monday, Novick said, on its earnings report from last week.

Other active names included Toys R Us Inc., Navistar International Corp. and Lamar Advertising Co., he said.

Traders also noted that El Paso Corp. was getting sold off on the huge loss reported by Dynegy Inc. Monday.

El Paso's 0% due 2021 dropped 1.25 points to 34.5 bid, 36.5 asked and the 9% mandatory lost 0.5 point to 29.625 bid, 29.875 asked.

El Paso shares closed down 42c to $8.02.

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