Quiet day ahead of three-day holiday weekend; utility issues soar; Credence reoffered at 96.5

By Ronda Fears

Nashville, May 23 - Trading indeed slowed to a crawl Friday, as expected, ahead of the Memorial Day weekend. In fact, many convertible players took the day off or left around noon, with no nagging guilt after a busy week in which 13 new deals brought total issuance for May to over $10 billion.

For the most part, buyers were more pleased with the week's slate of deals, particularly after the recent string of high premium deals with funky structures.

Until the May 19 week, underwriters had begun to have to reoffer new deals at a discount, thus forfeiting most if not all of the banking fees, in order to place the new paper.

The very last deal of the week, however, from Credence Systems Corp. was met with some resistance, according to a buyside source, and was "reoffered twice with no takers until they got it down to 96.5."

Credence sold $150 million of five-year convertible notes at par to yield 1.5% with a 45% initial conversion premium in the overnight Rule 144A market, via lead manager Citigroup.

Buyside traders said the new Credence traded below the reoffer price, while the stock fell more sharply than initially anticipated as hedge fund players jumped on it. Credence shares dropped 83c, or 10.5%, to $7.08.

"I'd agree that this week's deals looked better relative to what we've been seeing, but there was a lot of crap in the mix too," said a trader at a convertible fund based in New York.

Sirius Satellite Radio Inc.'s new 3.5% issue was the paradox among the deals in the running for the week - a "rock-bottom credit, and then the vultures come out of the woodwork bidding it up to ungodly levels," one distressed trader said.

"For a name like Sirius to come to our market, with relatively aggressive terms, is baloney," said a sellside analyst.

But it has shot up nearly 20% since it sold with one day of marketing on Tuesday. Part of the appeal was the initial conversion premium of 22%, far lower than where most recent deals have come to market.

While convert players are indeed in search of delta these days, perhaps the distressed trader's speculation more accurately described why the Sirius convert has made such a run. He speculated that holders of Sirius' old convert, who participated in the recent debt-for-equity swap, were snapping up the new one on a bet that another swap would eventually happen.

In any event, with the stock climbing at the rate it has since the deal on Tuesday (the $1.13 stock price for Sirius on Tuesday was thought to be the lowest ever for the underlying stock of a new convertible), it could be convertible by next week, a sellside trader noted.

Sirius shares closed Friday up 8c, or 6.45%, to $1.32.

The new Sirius convert climbed another 7.125 points on the day to 116.25 bid, 117.25 offered.

New paper from ChipPAC Inc. and Wilson Greatbatch Technologies Inc. also made nice gains Friday, while most of the other new paper was treading water or dipped slightly, traders said.

ChipPAC's 2.5% issue was pegged by lead manager Lehman Brothers up 3.5 points to 104 bid, 104.5 offered. The stock closed up 38c, or 7.18%, to $5.67

Wilson's 2.25% issue was closed by lead manager Morgan Stanley up 1.875 points to 107.5 bid, 108 offered. The stock gained 67c, or 2.11%, to $32.47.

For next week, there is nothing absolutely firm in the way of new deals, but the market is widely expecting American Financial Corp. to proceed with its discount cash-to-zero offering. The deal, for $!50 million in proceeds, was talked to yield 3.5% to 4.0% with a 47.5% to 52.5% initial conversion premium - before it was derailed by an adverse arbitration ruling midweek.

Otherwise, players said they don't expect much next week, at least until the end of the week perhaps. But, then, some noted, end-of-month window-dressing may preoccupy players.

A couple of convertible sources noted that AMG reported outflows of $258 million in junk bond funds this week - the first after three months of inflows as money chased the raging junk bond market - but most don't interpret that as a mass exodus nor something that could be expected in converts.

"Usually, what you see in junk bonds is, at least to some extent, happening in converts. But that's not the case this week," said a hedge fund manager in Connecticut.

"Junk bond flow is still up for the year [AMG say year-to-date through Thursday inflows amount to around $18.6 billion] and we've not seen anything to suggest that there is any measure of outflow in converts. Quite the contrary."

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