Avnet, Bell Micro gain; Amdocs slips; in gray, PSS bid plus 1 point, First Horizon at plus 0.25 point

By Ronda Fears

Nashville, March 2 - Convertible players pretty much stepped back from the action Tuesday as stocks turned south, roiling the convertible market. The only activity came from those seeking to get in position and get involved with a fairly steady flow of new deals.

A dealer said that bargain-hunters were looking for cheapening issues to possibly get involved in, but the pickings remain slim. On the flipside, Sepracor Inc. extended gains from Monday, with the convertibles adding another 4 to 4.5 points outright.

"It got quiet today," said Jeff Seidel, head of U.S. convertible research at Credit Suisse First Boston.

"In a low-volatility environment and a bias toward higher interest rates, vol will pick up but spreads will widen, too, so it gets tough to make money."

Certainly, while there have been some external forces - spreads, volatility and the like - that have moved the convertible market off its rich highs lately, market pros said the windows of opportunity have been small as richening resumes in short order.

Such has been the case particularly in situations where earnings disappointments sparked a selloff, because buyers swoop in on any cheapening and, thus, bring the downdraft to a swift halt. Selling ahead of the event has been difficult, too, as the convertible market is fairly expensive still.

New issues have not been the performers they once were, either, with 10-point spikes on the first day of trading in the aftermarket, but that has delighted some folks.

"It's a seller's market, right now, and they can dictate terms. It's pretty pathetic, really," said John Siebel, head of trading at Silverado Capital Management. Thus, he added, new issues have flagged out of the gate.

"In a perverted way, I kind of like it now that the new issues are moving. When interest rates start to go up, then I can compete."

PSS, First Horizon at bat

Joining PSS World Medical Inc. after the close was First Horizon Pharmaceutical Corp., launching a deal before Tuesday's open with a one-day marketing effort.

While there was some activity in both issues before pricing, buyside traders said it was not heavy by any means. To some degree, the smaller size of those deals - $125 million each - was a factor, traders said.

PSS World Medical is pitching $125 million of 20-year convertible notes that are non-callable for five years and talked to yield 2.25% to 2.75% with a 40% to 45% initial conversion premium, being sold on swap.

At the midpoint of guidance, Deutsche analysts put the PSS World Medical convertible 1.82% cheap, using a credit spread of 400 basis points over Libor and 38% volatility.

In the gray market, the PSS World Medical convertible was bid 1 point over issue price, according to a buyside trader. The stock lost 21 cents, or 1.75%, to $11.79.

First Horizon Pharmaceutical was marketing $125 million of 20-year convertible notes that are non-callable for three years. The notes are talked to yield 1.75% to 2.25% with a 27% to 31% initial conversion premium.

The First Horizon Pharmaceutical convert was seen bid at 0.25 point over issue price in the when-issued market, with the stock losing $1.78, or 9.74%, to close at $16.50.

Avnet, Bell Micro higher

For the first time in a long while, new issues saw a fairly nice pop right out of the gate - at least the Avnet Inc. and Bell Microproducts Inc. converts, which each gained better than 1 point north of par.

"It was nothing to jump and shout about, most of the new issues lately are trading up only a quarter to a half point, but these [Avnet and Bell Micro] were a little cheaper, relatively speaking," said a buyside trader at a hedge fund in Connecticut.

In the gray market before the opening bell, Avnet's new convertible was bid at 100.125 with a 101 offer and Bell Micro's was bid at 101.5, according to buyside traders.

Bell Micro was the smallest deal breaking this week, even after getting upsized, but it was the most popular as investors considered the terms cheaper. The size was its biggest downfall, buyside traders said.

Bell Micro upsized its $75 million offering to $90 million and advanced it to price a day ahead of schedule. The 20-year convertible notes, with five years of hard call protection plus two more with a 130% hurdle, were printed with a 3.75% coupon and 32.5% initial conversion premium. The notes priced at the middle of yield guidance for a 3.5% to 4.0% coupon but at the aggressive end of premium guidance for a 27.5% to 32.5% initial conversion premium.

At the final terms, Deutsche Bank Securities analysts put the Bell Micro convertible 2.0% cheap, using a credit spread of 900 basis points over Libor and 50% volatility.

Lead manager Merrill Lynch & Co. closed the Bell Micro deal at 103.25 bid, 103.75 offered. The stock ended off 15 cents, or 1.81%, to $8.12.

Avnet sold $270 million of 30-year convertible notes that are non-callable for five years. The notes priced with a 2% handle and a 51% initial conversion premium - at the cheaper end of guidance for a coupon of 1.625% and 2.125% and 50% to 55% initial conversion premium.

At the final terms, Deutsche analysts put the Avnet convertible 1.18% cheap, using a credit spread of 195 basis points over Libor and 34% volatility.

Credit Suisse First Boston, a joint lead manager of the split-rated Avnet convert, closed it at 102 bid, 102.25 offered. The underlying stock ended the day up 57 cents, or 2.54%, to $22.98.

Amdocs slips on merger buzz

Amdocs Ltd. had the biggest deal on the plate, a $450 million overnighter, but it slipped under par in the immediate aftermarket. A buyside trader said some chatter about the company looking at an acquisition caused anxiety.

"The speculation is that Amdocs is looking to buy this company that is a lot smaller company [CSG Systems International Inc.] that makes billing products for the cable industry, but there's some concern about what the cost might be," said a convertible trader at a hedge fund in New Jersey.

"Amdocs has something like $1 billion in cash, but they also probably are going to have the 2% converts put back to them in June. That's almost $400 million, and they are only netting something shy of $280 million on this new convert, so if they do an acquisition then it will mean using a lot of cash."

The trader noted that CSG Systems has a market capitalization of $77.24 million versus Amdocs' $6.1 billion market cap.

Amdocs sold $450 million of 20-year convertible notes, which are non-callable for five years, to yield 0.5% with a 54% initial conversion premium. The notes priced at the cheap end of guidance for a 54% to 58% initial conversion premium. The deal sold on swap with $180 million of proceeds earmarked to buy stock sold short by note buyers, but the company also said some proceeds may be used to repurchase some of its 2% convertibles due 2008 that are putable June 1 at par.

At the final terms, Deutsche analysts put the new Amdocs convertible right at fair value, using a credit spread of 100 basis points over Libor and 40% volatility.

Bookrunner Morgan Stanley Inc. took out the new Amdocs issue at 99.5 bid, 100 offered. Amdocs shares gained 81 cents on the day, or 2.89%, to close at $28.81.

Healthcare issues nurse wounds

On the heels of a schizophrenic session for biotechs Monday - with Sepracor Inc. at the upper end of the spectrum and Universal Health Services Inc. at the lower - it was another manic-depressive session as several biotech issues reversed course.

Sepracor was a steady gainer, with its two new convertibles moving up another 4 to 4.5 points and the stock adding $1.41, or 3.18%, to $45.71.

Universal Health Services Inc. sparked a big selloff in healthcare paper Monday on a warning about first-quarter results, but its converts bounced back along with many of its peers like Health Management Associates Inc., which said it continues to expect first-quarter earnings of 36 cents a share.

Biogen Idec closed slightly higher ahead of reporting results, with the 0% convertible due 2032 up about 0.5 point to 64.625 bid, 65.125 offered and the 0% convertible due 2019 up 5.75 points to 232.375 bid, 233.375 offered. The stock ended higher by $1.53, or 2.73%, to $57.64. The stock erased nearly all of that, however, in after-hours trading, where it was down $1.14.

After the close, Biogen Idec reported a nearly $1 billion net loss, largely as a result of the Biogen merger with Idec. The company posted a fourth-quarter net loss of $991 million, or $4.03 per share, but excluding charges Biogen Idec said the adjusted profit was 24 cents per share.

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