Heavy trading on Tyco deal; InterMune dives, techs and telecoms soar, power mixed

By Ronda Fears

Nashville, Jan. 7 - It was a busy in convertibles as $3.75 billion of new paper was unleashed by Tyco International amid a hoard of news.

"It's a heavy trading day," said Rao Aisola, head of convertible research at Bear Stearns & Co.

InterMune Inc. took a turn for the worst on some disappointing drug test data, and several other biotechs and drug names were reacting in mixed fashion to that news as well as news of their own.

Telecoms and telecom equipment makers continued to rise on the prospect that forced local access among carriers may be eliminated, with Nortel Networks Corp., Lucent Technologies Inc. and Corning Inc. at the head of the pack.

Several tech areas showed some nice gains, particularly software names like Adaptec Inc. and Manugistics Group Inc. Yet, while semiconductors were mostly higher, Advanced Micro Devices Inc. was little changed.

Independent power names like AES Corp. and Calpine Corp. gained sharply while the more traditional utility group was widely mixed.

The big news of the day, however, was the Tyco deal, which priced a day early amid very strong demand.

Tyco sold $3.75 billion of converts, up from a planned $3.25 billion, with aggressive terms as interest ran 6.5 times heavier than the deal size. (See story below)

Terms were aggressive but that was no deterrent to buyers, who were bidding the two tranches up by 3 to 4 points in the gray market.

"The environment right now is geared really well for most issuers. There is money out there that needs to be put to work and convert arbs had a relatively good year in 2002," said a convertible hedge fund manager based in Bermuda.

"As such, if you want to play in converts, you generally have only a handful of things to choose from - new deals, rich credits or credit bets. The poison to choose now appears to be new deals."

The Bermuda hedge fund manager did not participate in the deal.

There were others in the camp that wouldn't touch the Tyco deal but it was greeted on the whole with enthusiasm and salesmen said it was split into two tranches to appeal to both fundamental, outright convertible players and hedge funds.

"It's [Tyco] supposed to be an improving credit but it's [the new Tyco converts] priced as if it's already improved," said Michael Revy, who manages a convertible hedge fund for Froley Revy.

"By the sum of all parts, it's undervalued, I suppose. If I didn't know anything about the balance sheet, it looks good on a set-up basis.

"I think back to the AMD deal. That bailed them out to live another day. I think that's what they're trying to do here" with Tyco.

Revy did not participate in the deal.

Sources at the investment banks running the books on the Tyco deal said participation ran pretty evenly between outrights and hedgies.

"This gives Tyco some breathing room, it avoids a liquidity crisis," said the manager of an outright fund in New York.

"Fundamentally, I think the story is sound. I've felt all along that the rating agencies were a little heavy-handed in their dealing with Tyco. This convert is rated investment grade and we feel real comfortable with it."

While there were critics of the Tyco deal, including some tepid remarks by the rating agencies, it was chiefly hailed as a blockbuster jumbo that would hopefully set a better tone for issuance in 2003.

"I look for big issuers in the first three months to come in and take advantage of the demand in the convertibles market," said Bear Stearns' Aisola.

In general, convertible traders were very busy Tuesday but not just because the Tyco deal pricing was advanced.

President Bush's economic stimulus plan provided some of the impetus for players to act, but it was mostly just a matter of "people getting back to business in a big way now that the new year is fully under way," as one dealer put it.

Stocks were mixed with the Dow Jones Industrial Average edging higher while the Nasdaq slipped, but for the most part traders said convertibles seemed to be moving independently from stocks and bonds.

"We were seeing people making their choices that you could tell they'd put the work into, and they were not paying a lot of attention to what was going on elsewhere, the stocks," said the head convertible trader at a major investment bank.

"That's not to say that anyone was ignoring the blowups like InterMune. But, like with the energy names there wasn't really any news and the converts were seeing bids that obviously had little to do with what the stock was doing."

InterMune sank after the biotech company released data late Monday that showed disappointing results for expanding the use of its drug Actimmune, currently approved for bone and tissue disorders, to treat idiopathic pulmonary fibrosis.

InterMune's 5.75% convertible due 2006 fell 10.5 points on the day to 93.625 bid, 94.125 asked. The stock closed down $5.409 to $22.211.

"You gotta buy a company, not a cure," the source said, who noted he fortunately unloaded his InterMune position in December.

Several other biotechs were active, in a mixed fashion.

Cell Therapeutics Inc.'s new 5.75% convertible due 2008 was quoted down 2.125 points to 97.5 bid, 98.5 asked while the old 5.75% convertible due 2008 was off 1.25 points to 58.75 bid, 59.75 asked. The stock ended off 20c to $7.31.

Alkermes Inc.'s recently exchanged 6.52% convertible due 2009, however, gained 5 points to 114.5 bid, 115 asked. The stock closed up 46c to $6.98.

Phone equipment suppliers Lucent and Nortel gained nicely on speculation they would benefit if regulators change the wholesale access pricing policy for carriers.

Nortel's 4.5% convertible due 2008 was quoted up 2.625 points to 61 bid, 61.5 asked as the stock edged up 6c to close at $2.08.

Energy and power names were widely mixed, however, as several utility stocks were downgraded while some analysts were speculating that utilities could benefit from the elimination of stock dividend taxation.

Calpine announced a new power agreement with bankrupt Pacific Gas & Electric Co. saying the contract would generate annual revenue of about $40 million. The company also said it is currently in talks with potential customers to sign other long-term deals.

Calpine's 4% convertible due 2006 were quoted up 3.375 points to 56.5 bid, 57.65 asked. The stock closed up 21c to $3.98. Calpine's 8.5% junk bonds 2011 were seen up 4.5 points to 50 bid.

AES was also sharply higher with the 4.5% convertible due 2005 up 9.75 points to 54.875 bid, 56.875 asked while the stock ended off 8c to $3.37. The AES 9.375% junk bonds due 2010 were seen up 3.5 points to 65 bid.

Mirant also gained ahead of its analyst call at 10 a.m. ET on Friday. The 5.75% convertible due 2007 were quoted up 2.25 points to 45.25 bid, 46.25 asked as the stock closed up 17c to $2.11.

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