Convertible market ends on quiet note while absorbing $2.7 billion of new paper

By Ronda Fears

Nashville, Tenn., Nov. 9 - Convertibles were described as flat overall in a quiet session Friday outside of three new deals that capped off a week that saw $2.7 billion of new paper get put into circulation. Adelphia Communications Corp. and Corning Inc. brought pop-up deals, both repeat issuers, but there was a mixed reaction to the new converts. IndyMac Bancorp also brought an upsized deal, but it slipped in the aftermarket. Sell-side analysts talked up the new deals, but buy-side sources were not as keen and said terms continue to be richening.

More of the same - in terms of new deals - is expected for next week, since the convertible market will not be taking off for Veteran's Day. There are two deals slated to price, but market watchers anticipate at least a couple of other new deals to pop-up. Primary market activity is expected to quiet down the week of Thanksgiving, but with another full week after the holiday, November is expected to be another gangbuster month for new issues.

"This is a hot area right now," said Deutsche Banc Alex. Brown convertible analyst Jonathan Cohen. "With all the credit downgrades and equities becoming very dubious, convertibles are a great place to be."

Traders said the secondary market was rather quiet Friday, and described as flat. Stocks closed on a flat note, as well, with the Dow Jones Industrial Average up 20.48, or 1.21%, to 9608 and the Nasdaq edging up 0.72, or 0.04%, to 1828.49.

"It was quiet today after a busy weak as far as new deals," said a convertible trader at a hedge fund in New Jersey. "We were buying in some names where we think the selling has been overdone, like Barnes & Noble. But the market overall was pretty quiet."

Market watchers expect there to be considerable activity in the Tyco International converts next week, as the deadline to notify the company to exercise the put on Tyco's zero-coupon due 2020 is Monday. The put is not anticipated to be exercised, since the convert and underlying stock have continued to steadily gain over the past couple of weeks. Deutsche Banc Alex. Brown convertible analysts said that with the bonds near the 75.282 put price, bondholders will hang on to the converts. The Tyco zero-coupon converts due 2020 closed Friday up 0.125 point to 77 bid, 77.25 offered, with the stock up 45c to $54.50.

"I think we're going to have a lot of Tyco debt trade," said Deutsche's Cohen. "I think it will richen up quite a bit," he said, adding that credit swap activity will pick up in the name again because some of the paper that had been split for credit swaps was rejoined and now will likely be swapped again. The Tyco zero-coupon convertibles due 2021 are expected to richen alongside the 2020 issue. The 2021 converts on Friday were flat at 74.75 bid, 75 offered. The 2020 issue is now 3 points higher than two weeks ago and the 2021 issue is 1 point higher.

Much of Friday's business revolved around new issues, particularly the Adelphia and Corning deals. Sell-side analysts tended to like both, but the buy-side reaction was mixed, although syndicate officials said both were well-placed. The Adelphia deal was even upsized, by more than 50%, from $125 million to $300 million.

"We actually played the Adelphia deal, although it was hurt a little by being doubled," said a convertible hedge fund manager in New Jersey. "With them spinning off a money-losing subsidiary, the credit looked much better."

Adelphia posted improved overall earnings Friday, and announced it was spinning off its Adelphia Business Solutions Inc. unit to stockholders. The company also sold 30 million shares of stock, which with the convert fetched $907.5 million. And, Adelphia chairman John Rigas and family injected another $202.6 million into the company. The new Adelphia convertible preferred closed a bit higher than issue price, and the two existing Adelphia convertible bonds got a nice pop from the spinoff news.

But not all investors were confident about Adelphia's future. "We didn't get into Adelphia," said a convertible trader at another hedge fund in New Jersey. "We just didn't believe in the value."

The new Adelphia 5.75% convert preferred added 0.375 point to close at 25.375 bid, 25.625 offered as Adelphia's common shares fell $2.35 to $20.98. The Adelphia 6% convertible notes due 2006 gained 2.25 points on the day to 74.25 bid, 75.75 offered and the 3.25% convertible notes due 2021 added 1.375 points to 90.125 bid, 91.125 offered. Both the existing notes pulled back during the session, however, as both were seen up as much as 5 points earlier in the day.

Corning's new deal wasn't as widely liked, however. The new Corning 3.5% convertible lost 1 point from par to close at 99 bid, 99.5 offered as the common declined 16c to $7.58. The Corning zero-coupon convertible due 2015 was flat at 51.5 bid, 52.5 offered.

"It was priced right," said a convertible trader at a hedge fund in Connecticut. "It smacked of the Nortel and Lucent deals that were not priced so favorably. It just wasn't priced low enough."

A convertible hedge fund manager in New Jersey said the new Corning did not provide enough protection. The initial conversion premium was set at 25% and the seven-year notes are non-callable for three years.

IndyMac's new deal also slipped in the immediate aftermarket. The 6% 30-year convertible trust preferred was priced at 50 par, and closed at 49.8 with the common stock off 67c to $23.98.

While buy-side sources note that terms are richening for new convertibles, sell-side sources assert the terms are still very reasonable.

"It's just that terms have swung from being really very cheap to get deals done to a place that's more fair," said a syndicate source. "Investors get very fickle and demanding."

Next week, the market looks to a new deal from defense giant Northrrop Grumman Corp. and Nevada utility holding company Sierra Pacific Resources.

Price talk is anticipated on the upcoming Northrop Grumman deal early Monday, as well as more details about how the $1.2 billion capital-raising effort will be split between the proposed convertible and stock offerings, just before the road show gets underway. The deal is scheduled to price after the close Thursday. Northrop shares closed off 35c to $97.60.

After the close Monday, the Sierra Pacific deal gets priced. Sierra Pacific is pitching $300 million of four-year convertible premium income equity securities (PIES) with pricing guidance of an 8.75% to 9.25% yield and an 18% to 22% initial conversion premium. Sierra Pacific shares closed off 33c to $14.19.

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