New deals, tightening spreads drive trading, sentiment higher

By Ronda Fears

Nashville, Tenn., Aug. 21 - Narrowing credit spreads and new deals from CenturyTel Inc. and Harris Corp. combined to improve sentiment overall in the convertibles market and trading was described as surprisingly snappy for August.

"Clearly people are feeling a lot better about the market. We had a fair amount of activity, especially given the time of year," said the head convertible trader at a major investment bank.

"The two new deals, one an overnighter, had a very good affect. It'd been a long time since we saw anything from the primary market. It shows there is money on the sidelines. They were small deals, but we also saw some of the big deals, Advanced Micro Devices, AOL, Tyco move."

There had not been a new convertible come to market for three weeks, following a slow July as well.

The trader said the Harris deal was up 2 points out of the gate and CenturyTel up 5.

Harris sold $125 million of 20-year convertible senior notes at par to yield 3.5% with a 28.37% initial conversion premium.

The deal (Baa2/BBB) closed out the day up 3.5 points from par to 103.5 bid, 104.5 asked. Harris shares ended down $1.15 to $34.10, which was not unexpected since the deal was an overnighter.

CenturyTel sold $150 million of 30-year convertible senior notes at par to yield 4.75% with a 45% initial conversion premium, at the aggressive end of revised, tighter guidance.

The new CenturyTel convert (Baa2/BBB+) closed up 5.5 points from par at 105.5 bid, 106 asked. CenturyTel shares ended off 11c to $27.79. The company's 6.875% mandatory, which sold in April at par of 25, was virtually unchanged at 24.3.

CenturyTel also sold $500 million of 10-year straight 7.875% senior notes, upped from $250 million. That Rule 144A deal, also via the same lead managers, sold at 99.379 to yield 7.967%, or 380 basis points over Treasuries.

A corporate bond dealer said the new CenturyTel bonds tightened about 25 basis points on the day, quoted at 350 to 345 basis points over Treasuries. The trader said CenturyTel paper was trading around 400 basis points over Treasuries before the new deal.

Overall tightening spreads helped ease tensions a bit and elevate moods, convertible traders said.

"The convertible market is really a credit market right now, with most of the options out of the money," said a head convertible trader.

"We have been tracking the credit markets and they were doing a lot better. That just carried over into other credit spectrums.

"People are starting to feel better. It doesn't mean we're out of the woods yet but it's a good thing."

A healthier corporate calendar is seen as bolstering prospects for convertible issuance and market watchers are hopeful that a steady stream of new deals, even at a slower pace, could help secondary prices, particularly for beaten-down sectors like telecom.

"We are at the point right now where some new deals have to come to avoid a mass exodus of capital from our market," said a convertible hedge fund manager in Connecticut.

"We have been seeing money leave the table already. Everyone is eager to see or hear about what kinds of redemptions the hedge fund community will show for August."

The enthusiasm generated by the new deals spilled over into the secondary market, drumming up some trading activity for some of the larger, more liquid names, traders said.

"AMD expanded, AOL opened up and Tyco was up significantly," said the head convertible trader at a major investment bank.

Advanced Micro Devices' 4.75% due 2022 was quoted up 2 points to 77 bid, 77.5 asked with the stock closing up 51c to $10.70.

AOL Time Warner was higher on plans to dissolve its cable TV and entertainment partnership with AT&T Corp. in an estimated $9 billion deal.

S&P put AOL on negative watch due to the added $2.1 billion of debt associated with the Time Warner Entertainment Co. restructuring plan, plus uncertainty surrounding the federal investigations of America Online Inc.

Downside potential is expected to be one notch from the current BBB+ senior rating.

Fitch Ratings confirmed AOL Time Warner Inc. senior ratings at BBB+ but is keeping the outlook at negative.

The trader said investors are not overly concerned about the credit ratings, although there is some trepidation about the federal investigations. Still, he said, lots of AOL paper changed hands Wednesday.

The AOL 0% due 2019 gained 0.75 point to 50.25 bid, 50.75 asked. The stock ended up 97c to $14.33.

AT&T Corp. and Comcast Corp. issues were also higher on the day.

Verizon Communciations Inc. and Viacom Inc. linked paper gained ground, too. Both priced corporate deals Wednesday.

Verizon (A1/A-) sold $1 billion of global bonds at 325 basis points over Treasuries.

The Verizon 0% convertible due 2021 was quoted up 0.375 points to 53.25 bid, 53.5 asked with the common shares closing up 55c to $32.35.

Viacom (A3/A-) sold an upsized $600 million of bonds, up from $500 million, at 145 basis points over Treasuries.

The Liberty Media/Viacom 3.25% exchangeable due 2031 was quoted up 0.25 point to 93.375 bid, 93.875 asked. Viacom shares ended up 21c to $42.48.

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