New issues lower with broader market; Alltel launches $1.25 billion

By Ronda Fears

Nashville, Tenn., April 26 - As convertibles fell in tandem with stocks, most of the new issues were dragged along except for a couple of the new mandatories. Mandatory converts have continued to gain steam as a favorite type of issue, appealing to issuers as balance-sheet friendly debt and to buyers due to higher yield.

Alltel Corp. joined the string of mandatory issuers, launching a $1.25 billion deal for next week's slate and traders said it was bid up 0.25 in the gray market.

Kimberlee Brody, convertible analyst at Wachovia Securities, said mandatory converts accounted for 43% of proceeds raised in the convertible market so far this month. Year-to-date, 15% of proceeds in the market were raised via mandatories, versus a mere 4.7% in the same period last year.

Thus, Alltel's deal is expected to be a home-run, buyside traders said.

"The structure is real popular right now because of the yield, but Alltel is sort of outside the loop of the telecom problems that have slaughtered names like Lucent, Corning or even, more appropriately, Qwest and WorldCom," said a convertible trader at a hedge fund in New York.

"Alltel is an investment-grade credit, too, and this type of deal to fund an acquisition is regarded very highly by the ratings agencies."

Alltel shares closed down $2.77 to $50.32 on pressure from the convertible offering. Moody's rated the proposed deal at A2 while S&P and Fitch rated it at A.

Deutsche Bank Securities convertible analysts put the Alltel deal at about 2.14% cheap at the midpoint of price talk, using a credit spread of 150 basis points over Libor and 24% volatility in the stock.

CenturyTel, which hinted at a convertible deal in its earnings report Thursday, would also likely get a warm reception, the hedge fund trader said.

Mandatories are faring well in the secondary market, too, particularly Friday as nearly everything went south.

Temple-Inland's new 7.5% mandatory added 0.5 point from issue price to 50.5 bid, 50.625 offered as the stock slipped 37c to $52.15. Sempra's mandatory gained 0.375 from issue price to 25.8125 bid, 25.9375 offered as the stock gained 55c to $25.96.

Isis Pharmaceuticals' new 5.5% notes dropped 0.25 from par and 1.75 points from where they were in the gray market before pricing. The issue closed at 99.75 bid, 100.25 offered as the stock ended down $1.16 to $12.14.

IDEC Pharmaceuticals' new 0% was unchanged at 58 bid, 58.25 offered as the stock fell $2.08 to $54.65.

The Waste Connections floater, the first floater other than those from investment banks, dropped 0.875 point from par to 99.25 bid, 99.625 offered while the stock fell $2.345 to $24.40.

Other recent new deals were lower as well.

Greater Bay Bancorp's new 0% was down 0.875 point to 62.875 bid, 63.375 offered with the stock down 95c to the $32.85 and Duane Reade's new 0% closed off 0.75 point to 58.75 bid, 59 offered as the stock dropped 92c to $32.25.

Investment banks were higher for the most part, however, although Merrill Lynch and the like continue to feel some heat from investigations by the New York Attorney General and the SEC into possible abuses of the research process vis-à-vis investment banking.

Moody's said Friday it is keeping Merrill on negative watch, noting that if Merrill Lynch were criminally indicted, it would prompt a one-notch downgrade of the long-term debt ratings.

The Merrill Lynch floater added 0.5 point on the day to 97.25 bid, 97.5 offered and the Merrill 0% convert due 2031 was flat at 50.125 bid, 50.375 offered. Merrill shares gained 88c to $43.38.

The Lehman Brothers floater edged up 0.375 point to 100.625 bid, 100.875 offered with the stock up $1.04 to $58.95. The Jardine Matheson 4.75% exchangeable due 2007, which converts into JPMorgan Chase shares, was flat at 96.5 bid, 97 offered. JPMorgan stock closed off 4c to $34.99.

But the lion's share of the convertibles market was sharply lower as the Nasdaq lost 2.9% and the Dow ended 1.24% lower.

Tyco continued to feel pressure from its decision to drop the four-part breakup plan, although traders continue to expect to see some buyers emerge for the converts as the news is positive for bondholders. Tyco shares closed down 85c to $19.90. The 0% due 2020 issue ended off 0.875 point to 62.75 bid, 63.75 offered and 0% due 2021 was unchanged at 69 bid, 69.5 offered.

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