Four deals to price after the close Tuesday; Mentor adds $125 million overnighter

By Ronda Fears

Nashville, Dec. 16 - With a heavy slate of new deals pricing after Tuesday’s close, convertible market participants who are without personal shoppers may wish they had one. Despite it being the holiday party season, the market was abuzz with activity ahead of the new paper coming into the market.

“It’s really stressful right now, because you haven’t gotten any shopping done and you’re leaving to go home for the holidays in a week, but you can’t get away from the desk, and there’s a party to go to right after work,” said a convertible dealer.

“We are the last-minute shoppers that they put the bite on, because we don’t have time to shop for bargains, or even something really cool.”

Buying in convertibles was limited to new paper being shopped at the last minute before the holidays and impending year-end. And traders said there was a surge of convertibles for sale as stocks took off on more positive signs in the economy.

Extreme Networks Inc. stood out as a decliner, falling sharply on a warning about the current quarter. The news dragged Avaya Inc. lower as well since the two have a new agreement to market communications gear to businesses.

Several biotech names also were under pressure, traders said, from concern about overvaluations. Among those were Chiron Corp., Wyeth and MedImmune Inc., despite a U.S. government order for flu vaccines and FluMist.

El Paso Corp., however, continued to gain ground on the heels of detailing its restructuring plan. The company’s 0% convertibles moved up another 0.5 point to 46 bid, 46.5 offered. The stock added 24 cents, or 3.28%, to $7.56.

But the market’s focus was on new deals.

“There’s this last dash for cash this week and then it’s over,” said a convertible salesman.

“Really, it feels like it’s slowing down already. We figured by the middle of the week, everything that was going to be put on the table would be out there.”

Four deals totaling $680 million were at bat to price after the close, and Mentor Corp. added an overnighter that will price before Wednesday’s open.

Mentor was marketing $125 million of 20-year convertible notes that are non-callable for five years. The notes are talked to yield 2.75% to 3.25% with an initial conversion premium between 25% and 30%.

Mentor shares ended off 14 cents, or 0.62%, to $22.53.

Before the market open, Adaptec began marketing $150 million of collateralized 20-year convertible notes to price after the close along with deals from Interpublic Group of Cos. Inc., Agco Corp. and Fleetwood Enterprises Inc.

Adaptec’s new convertible, with five years of call protection, was talked to yield 0.5% to 1.0% with a 37.5% to 42.5% initial conversion premium.

A buyside trader said the new Adaptec convertible was bid at par in the gray market.

Some of the proceeds were earmarked to buy back some of Adaptec’s 3% convertible notes due 2007, which were quoted flat at 98 bid, 99 offered.

Adaptec shares closed off 33 cents, or 4.13%, to $8.36.

Interpublic’s $325 million mandatory convertible continued to be the hot item, traders said, by the looks of activity in the gray market.

The deal is talked to yield 5.5% to 6.0% with an 18% to 22% initial conversion premium.

It was pegged around the close Tuesday at 2 points over issue price on the bid side with an offer of 2.5 points over. The stock ended down 12 cents, or 0.86%, to $13.77.

Merrill Lynch analysts put Interpublic’s new convertible 4.43% cheap, at the midpoint of guidance, using a credit spread of 365 basis points over Treasuries and a 33% stock volatility.

Deutsche Bank Securities analysts put it 4.5% cheap, at the midpoint of the guidance, using a credit spread of 325 basis points over Libor and a 35% stock volatility. Deutsche analysts noted they discounted the credit spread for the cash flow associated with the mandatory.

Agco was also in the mix, pitching $150 million of 30-year convertible notes talked to yield 1.75% with a 23% to 31% initial conversion premium. But traders did not see it in the gray market.

Lehman Brothers analysts put the Agco convertible 1.84% rich, at the midpoint of the guidance, using a credit spread of 450 basis points over Treasuries and a 35% stock volatility.

Deutsche Bank Securities analysts put it 2.94% rich to 0.97% cheap, at the midpoint of the guidance, using a credit spread of 500 basis points over Libor and a 35% stock volatility.

Merrill analysts put the Agco convert 0.47% cheap, at the midpoint of the guidance, using a credit spread of 500 basis points over Treasuries and a 33% stock volatility.

Fleetwood Enterprises Inc.’s deal was widely expected to price a day early, after Tuesday’s close, as well.

Fleetwood is selling $80 million of 20-year convertible notes talked to yield 5.0% to 5.5% with a 20% to 24% initial conversion premium. Proceeds are earmarked to buy back portions of its 9.5% and 6% convertible preferreds.

Deutsche analysts put the Fleetwood convertible 8.615% cheap, at the midpoint of the guidance, using a credit spread of 800 basis points over Libor and a 40% stock volatility.

Otherwise, the market also is looking for Roper Industries Inc.’s $150 million in proceeds of discount cash-to-zero convertible notes, which are talked to yield of 4.0% to 4.5% with a 27.5% to 32.5% initial conversion premium.

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