ExpressJet soars in gray market, as do most of new issues in play; Nextel Partners, Dynegy emerge

By Ronda Fears

Nashville, July 29 - A heavy slate of new deals, with more in the hopper, kept convertible traders hopping Tuesday. New paper was mostly higher - both in the aftermarket and in the gray - while the secondary market weakened on selling in advance of deals, along with the dip in stocks.

"It doesn't look like there will be any Dog Days of Summer," said one dealer, alluding to the near standstill that typically takes place in the markets near the end of the season.

"We were super busy today."

As expected, Dynegy Inc.'s smaller deal emerged with talk and a call but it won't be pricing until after Thursday's close so it was on the back burner at most buyside shops.

Nextel Partners Inc. also put an end to the market chatter of yet another offering, even though it just tapped the convert market in early May. The wireless service provider has a bought deal pricing early Thursday with a 1.5% handle - the same as the existing convert - but with a sweeter 31% premium.

Four other deals were pricing after Tuesday's close - American Tower Corp., Bausch & Lomb Inc., ExpressJet Holdings Inc. and Town & Country Trust.

During the day, STMicroelectronics NV returned to the convertible market with a $1.2 billion deal with a negative yield, and Finmeccanica SpA marketed a euro exchangeable that converts into STM shares.

Those come on the heels of new paper put into play Monday by Wabash National Corp., Veritas Software Corp., Priceline.com Inc. and Invitrogen Inc.

Most of the new deals of late are less aggressive to buyers, excluding the STM decreting 0%, and have stirred players "out of the woodwork," as one salesman put it.

Several fund managers who are considered to be rather conservative were putting orders in for the ExpressJet deal, the salesman said, after they had been sitting out the bulk of the new deal fare recently.

"I think there are some people who have sat on their hands long enough and now feel like they are just going to have to get involved" in some of these new deals, the salesman said. "The terms are looking a little better to them too."

ExpressJet was the star in the gray market, ending the day with a bid of 1.5 points over issue price and an offer at 2.5 points over. The stock closed down $1.59, or 10.23%, to $13.95.

The ExpressJet $125 million notes are talked to yield 4.25% to 4.75% with a 26% to 30% initial conversion premium, with proceeds going to repurchase some of its stock held by Continental Airlines Inc.

Some buyside sources expressed concern about Continental selling out on ExpressJet as well as the agreement between the two airlines running only through 2007 but most shrugged off those matters. Continental is selling 5 million shares of the Houston-based regional airline, cutting its stake to under 40%.

"We're not too concerned," about the ExpressJet relationship with Continental, said John Siebel, head of trading at Silverado Capital Management.

"On a standalone basis, the [ExpressJet] credit seems okay."

Lehman Brothers analysts put the ExpressJet deal 5.52% cheap at the middle of price talk, using a credit spread of 1,200 basis points over Treasuries and a 50% stock volatility. Deutsche Bank Securities Inc. analysts put it 4.285% cheap, using a credit spread of 1,200 bps over Libor and a 50% stock volatility.

Bausch & Lomb was not far behind the airline deal in the when-issued market, with a closing bid of 1.25 points over issue price. The stock gained $1.09, or 2.73%, to 40.96.

Final terms on the Bausch & Lomb deal - $140 million of 20-year cash-to-zero convertible floaters - put the yield at six-month Libor plus 50 basis points with a 50% initial conversion premium. The initial yield is about 1.64%.

Bausch & Lomb's deal, with a structure that the market is just now becoming somewhat comfortable with, sold at the cheaper end of yield talk and the middle of premium guidance.

American Tower was pricing its fourth convert after the close, marketing a $175 million deal of seven-year senior notes talked to yield 2.75% to 3.25% with a 37.5% to 42.5% initial conversion premium. Proceeds are going to retire debt, including its 2.25%, 6.25% and 5% converts. The communications tower owner and operator also is selling 12.4 million shares of stock expected to fetch another $114.4 million.

Merrill Lynch & CO. analysts put the new American Tower convert 2.32% cheap, at the middle of price talk, using a credit spread of 635 bps over Treasuries and a 50% stock volatility. Lehman put it 0.88% rich, using a spread of 750 bps over Treasuries and a 50% volatility. Deutsche put it about 5% cheap, using a spread of 550 bps over Libor and a 50% volatility. Another sellside shop put it 1.5% cheap, using a spread of 550 bps over Treasuries and a 40% volatility.

All the existing American Tower converts were weaker, traders said, by anywhere from about 1.25 to 2.5 points. The stock closed down 96c, or 9.75%, to $8.89.

Town & Country Trust also was in the Rule 144A market after the close Tuesday selling $75 million of 20-year convertible senior notes talked to price with a coupon of 4.875% to 5.375% and 15% to 20% initial conversion premium.

Lehman put the Town & Country convert 4.33% cheap, at the middle of guidance, using a credit spread of 1,200 bps over Treasuries and a 20% stock volatility. But Lehman analysts noted that with the REIT's high 7.14% common dividend, there is a negative financing trade.

Of the four new issues freed to trade Tuesday, Priceline's was the home run, traders said.

Priceline.com sold $100 million of seven-year convertible notes at par to yield 1.0% with a 15% initial conversion premium, at the cheap end of yield talk and in the middle of premium guidance. At the midpoint of talk, sellside analysts had put it from around 2.25% to 5.5% cheap.

Goldman Sachs, sole bookrunner, closed the new Priceline convert at 102 bid, 102.5 offered. The stock fell $2.53, or 7.28%, to $32.23.

Invitrogen's new issue also gained ground in the immediate aftermarket, with lead manager UBS Investment Bank closing out the new 2%, up 32.5% convert at 101.25 bid, 101.75 offered. The stock added 34c, or 0.66%, to $51.83.

The new Invitrogen convert sold at the middle of talk, putting it around fair value to as much as 3.3% cheap by sellside analysts' estimations. The proceeds are earmarked for potential acquisitions and general corporate purposes, including redemption of debt such as its 5.5% due 2007 and 2.25% due 2006 converts. Those issues were just slightly firmer, trader said.

Veritas' return to the convertible market with a big refi issue was not as warmly met, as it slipped about 0.75 point out of the gate even though final terms were set at the cheapest end of guidance.

The software company sold $500 million of 10-year convertible notes at par to yield 0.25% with a 55% initial conversion premium. Sole bookrunner Goldman Sachs closed it at 99.25 bid, 99.5 offered while the stock ended up 37c, or 1.2%, to $31.12.

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