Another big block of Tyco sold, stirring concern about liquidations among hedgies

By Ronda Fears

Nashville, Aug. 14 - Before the lights went out, it was a fairly lackluster day in convertibles. The blackout itself caused a stir throughout the Northeast - from Cleveland to Ottawa - and the financial community was no less amuk than the average citizens scrambling to get home.

The loudest rumbling in the convertible market, which has stirred concern, however, really stems from the market cheapening and widespread speculations that one of the chief reasons for the cheapening is the exodus of funds in the convertible arbitrage strategy.

"This is what is on our radar screen right now," said a convertible hedge fund manager in New Jersey.

"If there are some hedge funds winding down positions or scaling back exposure to convertibles right now, okay, that makes sense. Returns have not been good for a couple of months, going into the third month. We're down now about 100 basis points.

"We are concerned, especially if something like fraud is going on where someone has been cooking their books or what have you. But if nothing like that is going on, then there could be some opportunity created for us who are really committed to the strategy."

Another big block sale of Tyco International Ltd. convertibles on Wednesday, following one on Aug. 1, was something many market watchers say could be part of a broader, sizeable redemption if not liquidation that is under way. Also, a big sale in the Micron Technology Inc. converts on Thursday was noted by a dealer.

Just as the day was winding down, though, the blackout was the primary focus.

"Do you have power," was the opening line of nearly every phone conversation following the outage that struck right around the 5 o'clock (Eastern) chime.

New York - the hub of financial activity - was without power along with the entire Northeast, including New Jersey and Connecticutt where several big convertible outfits are based.

It was speculated among the national media that an overload at a Niagara Mohawk distribution grid intersection that dispersed electricity from Cleveland to Toronto was the main culprit. That was a relief to many people, as some first thought it might be a terrorist action in light of U.S. officials announcing the capture of a key al Qaeda figure.

However, Niagara Mohawk and other electricity officials throughout the Northeast said the cause of the outage had not been determined.

Still, Friday's business was uncertain, depending on the length of the outage, although officials at key financial market hubs like the New York Stock Exchange were preparing for business as usual.

If everything proceeds, the convertible market will be looking for final terms on the Apria Healthcare Group Inc. deal - which was sweetened at least once during the intraday marketing period. Also, final terms are expected on the small Serologicals Corp. and InVision Technologies Inc. deals.

Apria spent the day marketing a $200 million convertible note set to price after the close, during the process widening the coupon by 25-75 basis points and adding 3-5% of premium.

The issue was first talked to yiled 2.75% to 3.25% with a 35% to 40% initial conversion premium. By around noon, guidance was revised to a 3.0% to 3.5% coupon, up 32% to 35% and sellside analysts were still not overly impressed with the deal.

At the midpoint of revised talk, one shop put it about 0.5% rich, using a credit spread of 350 bps over Libor and a 22% stock volatility. At the midpoint of original guidance, another shop put it 1.5% cheap, using a credit spread of 375 bps over Treasuries and a 22% stock volatility.

Cheapening in the market is the catch phrase lately - both in the primary and secondary circles. Thus, liquidating positions through big block sales is a red flag as it could be a major factor in valuations dropping.

On Wednesday, market sources - at least two on the buyside and two on the sellside - said that a hedge fund unloaded $100 million of both Tyco converts, the 2.75s and 3.125s. The 2.75s were pegged closing Thursday at 104.5 and the 3.125s at 106.75.

That takes on greater weight as it followed a big block sale in the 3.125s that was not quantified on Aug. 1.

Also, on Thursday, one dealer noted $25 million of the Micron Tech converts were unloaded, but he declined to say anything more about the seller's affiliation. The 2.5s dropped 3.25 points on the day. "Right now, this is all just conjecture, but we know that a lot of names keep coming in and that makes you wonder if some big money is being taken off the table," said a hedge fund manager in New York.

"We won't really know what is going on until later and at that point, hindsight is 20:20. To some extent, the degree to which the market is cheaping causes some trepidation about being a buyer."

Apparently Charter Communications Inc. had considerable trouble with buyers for its junk bond deal, which would have funded the tender for its 5.75% and 4.75% converts. The tenders were scrapped, though, on Thursday when the company threw in the towel on the junk bond deal.

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