Traders note more summer-like flow; some profit taking seen as new deal party rocks on

By Ronda Fears

Nashville, July 8 - Traders were saying it felt more like summer in the convertibles market, at least in terms of the flow on trading desks. Capital markets desks, though were staying busy with a steady, albeit slower, stream of new deals.

In secondary dealings, traders noted some selling in the face of the market run-up, possibly due to there being several new deals in the mix this week.

Still, flow was described as moderate during the morning before trailing off to a trickle in the afternoon. Even gray market activity on new deals virtually vanished late in the day, buyside traders said.

Sellers were seen in Inco Ltd., some Liberty Media Group issues and Tyco International Ltd. but dealers said the market overall "probably ended on a flat note." Sellers also were noted in Lucent Technologies Inc.'s 2.75s due 2023 with buyers for the 2.75s due 2025.

At bat with Protein Design Labs Inc. after the closing bell were Sohu.com Inc., which launched a tiny deal before the open, and Fairfax Financial Holdings Ltd. with an overnighter.

Also after the close, TXU Corp. launched a $475 million convertible floater.

"There was no gray for TXU since it prices tomorrow," said a buyside source on the West Coast.

"PDLI was about +1 bid for a while before the grey on that disappeared."

Protein Design Labs shares closed Tuesday down 61c, or 3.87%, to $15.14.

Lehman Brothers put the PDLI deal, talked to yield 2.75% to 3.25% with a 30% to 35% initial conversion premium, 4.47% cheap at the midpoint of guidance, using a credit spread of 700 basis points over Treasuries and a 50% stock volatility.

Deutsche Bank Securities put it 6.88% cheap using a spread of 650 bps over Libor and 55% volatility, and Merrill Lynch put it 1.87% cheap using a credit spread of 1,200 bps over Treasuries and 60% volatility.

Late in the day, Protein Design Labs said it priced the deal to yield 2.75% with a 33% initial conversion premium, putting the yield at the rich end of guidance and the premium towards the middle.

Meanwhile, Sohu spent the day marketing its small $65 million deal with guidance for 0% yield and a 19% to 28% initial conversion premium. The Beijing-based internet company said proceeds would be used for general corporate purposes, including possible acquisitions, and also reported Tuesday that second quarter earnings would be better than its previous guidance.

Sohu shares closed up $1.62, or 4.66%, to $36.36.

The Sohu deal was similar in several ways to the Netease.com Inc. overnighter, which buyside sources said got a tepid response, and Sina Corp.'s recent deal.

Netease.com, another Beijing internet concern, sold $75 million of 20-year convertible notes at par to yield 0% with a 23% initial conversion premium - at the cheapest end of price talk. The convert was said to be weaker, with the stock ending off 40c, or 1%, to $38.75.

"I'm asking myself why," said a convertible trader at a hedge fund in New Jersey in reference to the Sohu and Netease deals, noting a tough borrow on the stocks.

"It's a hot area," he added, referring to China and the Pacific Rim areas as the Nikkei has been up sharply this week.

"They are hitting while the fire is hot. But I think it's amazing that these companies can dictate those kinds of terms. I'm thinking why not just buy the stock?"

Lehman put the Sohu deal 1.69% rich at the midpoint of guidance, also comparing it to the Sina deal, which priced 1.65% cheap. Lehman used a credit spread of 1,200 bps over Treasuries, benchmarking it against the Sina convert that is trading at 1,300 bps over, with a 55% stock volatility.

Sina's 0% convert was pegged about 2 points higher at 113 bid, in reaction to the stock moving higher. Sina shares closed up 0.781c, or 2.19%, to $25.281.

After the close, Fairfax launched $150 million of 20-year convertible senior subordinated debentures talked to yield 4.5% to 5.0% with a 45% to 50% initial conversion premium in the overnight Rule 144A market.

The deal is being sold on swap, as Fairfax said it would use up to $20 million of proceeds to pay for subordinate voting shares purchased contemporaneously with the offering.

Fairfax shares closed off 75c, or 0.5%, to $148.82.

TXU also pitched a new floater into the mix, for Wednesday's business.

The $475 million of 30-year floating rate convertible notes were talked to yield the three-month Libor plus 1.0% to 1.5% with a 65% to 70%% initial conversion premium.

TXU said it will use proceeds as collateral for a five-year revolving credit facility. Under this facility, loans may be made to repay other debt and letters of credit may be issued for the benefit of TXU and its subsidiaries.

TXU shares closed off 5c, or 0.23%, to $21.51.

Generally, convertible traders said players were selling in reaction to the weakness in the Dow Jones Industrial Average early Tuesday, on the heels of the big gains a day before, but then pulled back to reassess such moves as the Dow joined the Nasdaq in a positive swing.

With the bond rally fading in conjunction with the recent rise in stocks, buyside sources said they are forced to consider shedding some issues.

"I was a seller in the [Inco] 3.5s," said a convert trader at a hedge fund.

"I didn't want to but I just had to lighten my position there, and in the Liberty/Viacom converts."

Another trader expounded: "You pick a point where you get in and you pick places where you're either going to exit because it no longer makes sense or you are taking advantage of a profit zone, pulling money from one issue to go somewhere else."

The Inco 3.5% due 2052 closed down about 2 points to 102.875 bid, 103.875 offered. A dealer also noted that some of the selling pressure was the result of the month-long strike at Inco's primary nickel operation, which she said appeared to have hit an impasse.

Inco shares closed off 18c, or 0.85%, to $20.98.

The Liberty/Viacom 3.25% due 2031 dipped 0.25 point to 102.125 bid, 102.375 bid as the underlying Viacom shares ended off 27c, or 0.61%, to $44.02.

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