Alkermes returns to convertibles market; InVision reslated deal sweetened once, then again

By Ronda Fears

Nashville, Aug. 18 - Lots of convertibles were marked up in tandem with their underlying stocks Monday but dealers traded more stories from last week's blackout than convertible securities.

A few new issues were still changing hands, moving upward, too, and a spattering of names were noted - Cypress Semiconductor Corp., Lowe's Cos. Inc., Newell Rubermaid Inc. and a couple of others.

The big Tyco International Ltd. sell-off last week was attributed to a large fund based in Chicago by one dealer, but he did not actually cover the trade. A $100 million sale of the new Tyco As (2.75s) and Bs (3.215s) took place in the early part of last week. Fund officials did not respond to a Prospect News request to comment on the market chatter.

The dive in hedge fund returns from convertible arbitrage has been cited as a cause to think these players will begin taking money out of converts. The CSFB/Tremont report out Monday showed the convert arb strategy was down 0.35% for July but still up 7.78% for the year.

Several big sales - like the Tyco trade - have fueled convertible market buzz, but some sellside onlookers don't think there are any big liquidations under way.

"Generally the market is for sale. The stuff that is for sale is what you typically think would be - the stuff that is overvalued," said Jeremy Howard, head of U.S. convertibles research at Deutsche Bank Securities.

"If people were selling stuff they made money in then there might be cause for concern. We're not seeing that."

New issues are the biggest source of support for valuations in the market, he added.

There was a lot of talk Monday about price talk, too, as InVision Technologies Inc.'s new deal - reslated to Monday because of the blackout - saw its price talk sweetened twice during the session.

Also, Alkermes Inc. returned to tap convertible funds with a small deal that some analysts believe will have to be sweetened or reoffered below par.

Both are small deals, though.

InVision is pitching $100 million of 20-year convertible senior notes in the Rule 144A market via lead manager Merrill Lynch. It was set to price Thursday after the close but was delayed by the blackout in the Northeast, although power was mostly restored by Friday.

Originally, the InVision deal was talked to yield 2.25% to 2.75% with a 27.5% to 32.5% initial conversion premium. At the midpoint of original talk, Lehman Brothers analysts put it 1.88% rich, using a credit spread of 650 basis points over Treasuries and a 35% stock volatility. Another sellside shop put it 1% rich, using a credit spread of 550 bps over Libor and a 35% stock volatility.

By midday, the yield talk on the InVision deal was boosted by 15 basis points from the wide end of guidance before finally landing with a 3 handle, according to market sources.

The premium was sweetened too. The deal was pricing with a conversion price set at $30, market sources said, which would put it at about 23.7% (using the closing stock price) versus the talk for 27.5% to 32.5%.

InVision shares closed off 3c at $24.25.

InVision provides explosives detection systems used at airports for screening checked passenger baggage. Buyside sources said it was difficult to get a grasp on the credit, as there were no good comparable convertible issuers. A sellside source said spreads used to model the deal ranged from 400 bps to 700 bps.

But mostly, at least by one potential buyer's opinion, the InVision deal had to be sweetened because it was a matter of "push coming to shove" as issuers lose their pricing power.

Hence, some onlookers expect Alkermes will have to sweeten its terms or the underwriter will have to reoffer it below par.

Alkermes is pitching an overnighter, aiming to raise $100 million. The 20-year convertible notes were talked to yield 2.0% to 2.5% with a 10% to 15% initial conversion premium over the closing stock bid of $12.59.

Alkermes shares closed up 50c, or 4.12%, to $12.64.

Merrill Lynch analysts put the issue 0.4% cheap, at the middle of talk, using a credit spread of 1,000 basis points over the five-year Treasury and a 45% stock volatility. That valuation, Merrill convert analyst Tatyana Hube said, suggests it will have to issue on the wide side of talk, sweetened or reoffered below par.

Deutsche Bank Securities put the new Alkermes convert 5.74% cheap, using a credit spread of 1,100 bps over Libor and a 60% stock volatility. Deutsche analysts noted high cash burn by the biotech firm and that the company has earmarked proceeds for operations, working capital and the like.

New paper recently injected into the convertible market by Serologicals Corp., DST Systems Inc. and Andrew Corp. was active Monday and higher.

Serologicals' 4.75% due 2033 moved up to 109.875 bid, 110.625 offered with the stock closing up $1.34, or 11.35%, to $13.15

DST's 4.125s gained 0.875 point to 106.625 bid, 107.125 offered and the 3.625s added 0.75 point to 103.75 bid, 104.25 offered. The stock closed up 35c, or 0.94%, to $37.51.

Andrew's 3.25s of 2013 gained 5.75 points to 109.375 bid, 110.125 offered while the stock ended up $1.08, or 10.2%, to $11.67.

Tech names were generally higher, following stocks, but some trades were noted in Hutchinson Technology and Advanced Micro Devices Inc. The Hutchinson Technology 2.25s gained 1.875 points to around the 117 area and the new AMD 4.5s soared 11.75 points to 140.25 bid, 140.75 offered as the stock rose $1.11, or 14.23%, to $8.91.

Lowe's also gained ground on its earnings report, but that didn't transfer to any other retail names.

There were a few issues that went south Monday, too. Newell Rubbermaid's 5.25% convertible preferred lost 1 point to 42 while the stock closed up 39c, or 1.74%, to 22.83.

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