Boston Private advances deal; Chiron spreads widen, AMD tighter; Sirius firms on Stern deal

By Ronda Fears

Nashville, Oct. 6 - Boston Private Financial Holdings advanced its deal by a full session, setting final terms at the wide end of guidance and upsizing the greenshoe. It gained in the immediate aftermarket by about 0.125 point, buyside sources said, who also noted that it was chiefly an outright play.

The original plans for the deal size were left intact, and Boston Private sold $75 million of 30-year convertible trust preferreds at par of 25 to yield 4.875% with a 36.5% initial conversion premium. The issue priced at the wider end of guidance for a yield of 4.5% to 5.0% and 35% to 40% premium. The deal was advanced to price before the market opened from plans to price after the closing bell.

Traders said it was a busy session, which one speculated may have been a diversion tactic designed to steer away from watching oil creep past $52 a barrel, but some buyside sources said interest in convertibles outside the United States is building.

Advanced Medical Devices Inc. warned about third quarter business, but it was no surprise, and traders said the credit tightened somewhat as the stock also richened on the news. The chipmaker is due to report results after the market closes Thursday and despite the warning, moved higher.

Also sharply higher was Sirius Satellite Radio Inc. stock on its signing shock jock Howard Stern, who announced Wednesday he was leaving Viacom to hit the thus far unregulated satellite airwaves. The convertibles traded briskly and moved up "slightly" on the news, but traders said most holders were busy trying to cover short positions in the stock.

Chiron Corp. was recovering, as well, after a big tumble on its flu vaccine shipments getting barred for shipment at least for three months, snuffing it out of the current flu season. Henry Schein Inc., its major flu shot distributor, also was on the mend.

AMD 4.75% adds 0.5 points

AMD's warning about third quarter results, citing weak flash memory chip numbers, was no surprise and a trader said some analysts were blaming the shortfall on a process change, which would mean that production likely will be improved and thus lead to better profit margins in the future.

"They [AMD] are a major player and they aren't going anywhere, so there's still a lot of interest in this name," the buyside trader said.

A sellside desk analyst agreed, noting, "The converts have tightened actually, but I still like them here." He did not quantify the tightening.

AMD's 4.75% convertible gained about a half-point on the day to 98 bid, 98.625 offered, a sellside trader said.

Another sellside analyst noted that AMD is profitable despite the sales decline.

Chiron buying on cheapening

The cheapening in Chiron on the lowered guidance related to being out of the flu vaccine season this year sparked some buying, and it recovered "nicely" as one sellside trader put it. Moody's on Wednesday said it may cut Chiron's Baa1 ratings on the development, which was another weakening point for the bonds.

After dropping 3 to 4.5 points on Tuesday, which widened the credit spread on the bonds, buyers showed up Wednesday and pushed the two convertibles up by about 1 point each.

"Chiron bonds widened and the vol [volatility] picked up, too," a sellside trader said, estimating the bonds widened about 15 to 20 basis points.

"On an absolute basis that doesn't seem like so much [the spread widening], but on a relative basis, it's big."

Chiron shares recouped slightly, as well, adding back 34 cents, or 0.9%, to $38.32.

Henry Schein up, but warns

Henry Schein recovered, too, but the Melville, N.Y., medical distributor said the Chiron situation would lower its fiscal 2004 earnings forecast to $3.01 to $3.07 a share from about $3.55 to $3.61 a share issued on Aug. 27. Earnings are estimated at 69 cents to 71 cents a share for the third quarter and 83 cents to 87 cents for the fourth quarter.

Traders had said Tuesday that Chiron's situation was not as bad for Henry Schein, as it also has a distribution contract for other flu shot vaccines as well as for MedImmune's FluMist.

Meanwhile, U.S. Health and Human Services secretary Tommy Thompson said the agency has negotiated an additional 1 million doses of flu vaccine a day after warning of a drastic shortfall in the nation's supply, for a total number of expected available doses this year to 55.4 million.

Henry Schein shares on Wednesday added back 3.5% after falling about 7% in an abbreviated session Tuesday, as its stock was halted along with Chiron's. The convertibles were pegged about 2 points higher.

Sirius spikes on inking Stern

Sirius inked a deal to air scandalous deejay Howard Stern, as investors speculated that Stern's large listening body will follow him and boost its business.

The Sirius 2.5% convertible due 2009, which usually is a sleeper on the trading desks, was very active on the news Wednesday, a sellside trader said.

He pegged the issue at 116.5 bid, 117.5 offered. The issue had closed Tuesday at about 106, but the trader also noted that the hedge on those bonds also came in - to around 80% from about 100% - as the stock rose sharply Wednesday.

As Sirius shares shot up, too, many hedged holders were busy covering short positions. The stock rose 52 cents, or 15.5%, to $3.87.

Another sellside trader said there were as many holders unhappy with the news as those who were heartened.

Sirius-Stern deal "puffed up"

"There are as many people who hate Howard Stern as those who supposedly love him. Besides, this was a big commitment for a company the size of Sirius, and he [Stern] doesn't start for another year," he said. "That made for a good two-way market in the bonds, even though I think the reaction was sort of puffed up."

According to Sirius, production costs including cast, staff and construction of a studio are expected to be about $100 million per year for the Stern show, Sirius said. He begins with Sirius on Jan. 1, 2006, after his current contract expires. Stern's on-air antics have drawn the wrath of fines from the FCC in the past.

A holder said, though, the revenue stream from Stern could be significant for Sirius. He said Stern listeners have been estimated at 6 million. At the $12.95 per month subscription rate for Sirius, he said, "that would be something like $932 million in annual revenues - staggering for Sirius." Besides, he said, growth in satellite radio subscriptions are growing anyway, in part due to new model cars equipped with Sirius receivers.

"The reason people will slowly start going satellite is if that radio stations are trying to cap more profits by slowly adding more commercials between content," he said. "I mean if you can afford to pay for higher gas prices to drive your car, you should be able to afford commercial free music and radio, especially when the people who can afford such products are rising."

PMA Capital at selling trigger

PMA Capital Inc. extended its exchange offer to Nov. 2, but the enthusiasm is still waning among holders, one of which described the offer as "lame," and some now see a window to take profits.

The exchange offer "is not going to work as offered," said a trader involved in the situation. "Bondholders are rejecting it offhand."

He said the 4.25% convertibles were at 99 bid, 100 offered Wednesday, which he said signaled "time to sell into the strength." The bonds have moved up nearly 10 points on the exchange, which had been speculated in the market for weeks.

"Management is missing the point," the holder said. "They need to equitize this debt, not pay a 10% yield and then, because they are currently callable, take them out with an equity offer. That' just more fees for the banker, I guess, and dilution later. The stock won't go higher because of it."

Global pullback piques interest

With the shrinking U.S. market and its overall richness, fund managers have been talking since early summer about looking abroad for convertible opportunities. Earlier this week, a Merrill Lynch report described the European convertible market as having just been through a "savage September," but a buyside source in London said that now may pique interest on the downdraft.

Interest also is returning for Japanese convertibles, also on weakness, the buyside source said.

Merrill convertible analysts noted average European convertible implied volatility fell 2.2 percentage points in September to finish at 23.3%, but the analysts said they "remain cautious under current conditions."

"September was another unpleasant month for Japanese convertible valuations," the Merrill analysts said. "Having said that, we are beginning to pay more attention to convertibles in the commodity sector (such as steel), which in our belief will provide attractive valuations should the decline continue."

The Merrill analysts confirmed that valuations remain rich in the U.S., as redemptions out of the convertible market continued to outpace new issuance year to date and volatility in the market stayed low.

"We are just getting ready to buy a little Japan/Asia" convertibles, said the manager of two big convertible funds. "We are already committing some to Europe."

Credit analysts at Moody's are upbeat about the European credits, though. (See full story elsewhere in this edition.)

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