Positive events improve tone, Computer Associates deal trades down

By Ronda Fears

Nashville, Dec. 6 - Bits of good news improved the convertible market tone overall, but it was a thin trading day with the market generally moving sideways.

Meanwhile, Computer Associates International Inc.'s new deal traded lower out of the gate, closing 4 points under par and 5.5 points lower than where it was in the gray market before pricing.

IBM Corp.'s purchase of Rational Software Corp. for $2.1 billion was a boon to the market's mood, but analysts said it could spark mixed results for software names like BEA Systems Inc. and Mercury Interactive Corp.

Credit spreads continued to tighten, and that was a positive note as well.

"Overall, the market is more positive," said Jeff Seidel, head of U.S. convertible research at Credit Suisse First Boston.

"The Rational news was good. The Computer Associates deal was positive. Predominantly, our November index returns were strong. Things are trading better. A good number of the credit situations are being resolved."

Computer Associates was very well received according to salesmen, and priced aggressively with a 1.625% coupon and 38% premium, but it sank in the immediate aftermarket. The new issue (Baa2/BBB+) closed at 96 bid, 97 asked.

The Computer Associates' 5% convertible due 2007 (Baa2/BBB+), which was issued in March, lost 2.125 points to 101.875 bid, 102.875 asked. The common stock ended off 86c to $13.66.

"The strategy of flipping this for a huge gain sort of backfired," said a dealer.

"But with an investment-grade rating most of the people who got in initially can hold it for a while to see what happens. They don't have to be in a hurry to get out."

There were some nervous buyers, however, according to a buyside trader.

Some analysts were saying stay away from Computer Associates, mainly due to the unresolved investigations into its previous accounting practices. The U.S. Department of Justice and Securities and Exchange Commission both have been scrutinizing Computer Associates' past accounting policies for several months.

"We believe the DOJ and SEC investigations only scratch the surface of the accounting issues surrounding Computer Associates and would avoid this name," said Wachovia Securities, Inc. convertible analysts Henry Voskoboynik and Brian Park in a report Friday.

Beyond the Computer Associates deal, the market is not expecting a lot more for the rest of the year.

The market seems to have resolved that Tyco International Ltd.'s new deal that has been widely rumored will in fact pan out but most think it won't price until next year.

"First they've got to have the audit complete, and in some people's hands or the results available at least. They also have to get the bank revolver ironed out," said a fund manager in New York.

"It just doesn't seem likely that they will do a $4 billion convertible next week. Of course, it's possible, I suppose, but doesn't seem likely."

After next week, there are the Christmas and New Year's holidays to contend with. Both fall in the middle of the week, making it difficult to market a new deal.

Sources of Prospect News said Thursday that Tyco is expected to hit the bank loan market with a $1.5 billion 364-day revolver in the near term, but perhaps not placing it until after the first of the new year.

Bank of America and Morgan Stanley are the leads for the bank deal, so they presumably would be involved in the convertible.

JPMorgan is also widely expected in the convertible market to be a lead underwriter.

But as one buyside trader put it: "The list of co-managers will be the laundry list" of banks, especially if the deal winds up at the high end of the rumored $2.5 billion to $4 billion mark.

Advanced Micro Devices Inc. sank as profit taking prevailed following the run-up on the company's boosted target for fourth quarter sales, a dealer said.

The AMD 4.5% convertible due 2007 dropped 2.25 points to 134.375 bid, 135.375 asked. The stock closed off 14c to $8.11.

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