Convertible market gains on new deals activity, higher stocks

By Ronda Fears

Nashville, Tenn., Nov. 13 - Convertibles gained speed quickly Tuesday as stocks rallied on the fall of the Taliban leadership in Afghanistan. Traders said there was a considerable uptick in retail issues and telecoms on glimmers of hope. Primary market activity got a another boost with a $1 billion deal from Swiss Re and buzz grew louder on the upcoming Rite Aid Corp. deal, which was seen 1.75 points over par in the gray market.

"It picked up today, with people trying to get ahead of or catch up with the stock movements," said a convertible trader at one of the major investment banks in New York. "There are a lot of hopes that the war on terrorism might be ending. Telecoms were hot on some positive things that came out of a UBS conference. Retailers gained nicely because there is way more optimism now about this Christmas, people are thinking maybe they've seen a bottom in that sector."

The retreat of the Taliban regime from the Afghanistan capital, Kabul, was a positive factor that fueled a rally in stocks. The Dow Jones Industrial Average advanced 196.58, or 2.06%, to 9750.95 and the Nasdaq gained 51.98, or 2.82%, to 1892.11.

The unexpected change of events in the war on terrorism by the Taliban collapse and resultant stock bounce caught some hedge funds unaware, however, because of the widespread upward momentum in stocks. Some were scurrying to cover short positions, in order to stem losses.

"It was very frustrating today because we still believe that fundamentally there was no reason for some of this stuff to get any lift from anything to do with the war on terrorism or what's going on in Afghanistan," said a convertible hedge fund trader in New Jersey. "So, we still would be betting on some downward pressure. But we had to begin covering ourselves today."

Retail got a big bounce from speculation that the group may have bottomed out and with the war on terrorism seemingly closer to an end, consumers may spend more this Christmas than they would have a month ago, said one trader at a convertible fund in New York. Best Buy, Costco Wholesale and J.C. Penney were higher, traders said, although deeper discount retailers like TJX Cos. did not see as big a bounce.

That didn't particularly hurt Rite Aid's new deal, either, although the stock suffered as a result of pressure from the new deal. Rite Aid is pitching $125 million of five-year convertible senior notes talked to price to yield 4.0% to 4.5% with a 20% to 25% initial conversion premium. "There was a lot of chatter about the Rite Aid deal," said Jonathan Cohen, convertible analyst at Deutsche Banc Alex. Brown.

Rite Aid's comeback over the past year, and the favorable terms of the new deal, has garnered quite a bit of interest. It has given a bounce to the existing Rite Aid converts, as well.

"They have done quite a bit to clean up their act over the last year," said a trader at a convertible hedge fund in Connecticut. The 5.25% convertibles due 2002, which were trading in the mid-20s a year ago, added 2.75 points on the day Tuesday to 96.75 bid, 97.25 offered as the common stock dropped 35c to $5.23. But one trader saw the old Rite Aid convert with a 101 offer earlier in the day.

The new Rite Aid convert was seen up 1.5 points to 2 points over issue price, according to one trader, who said the only confirmed trade seen in the gray market was at 1.75 points over par.

Sierra Pacific Resources' new deal gained ground out of the gate. The Nevada utility holding company's $300 million of 9% convertible premium income equity securities (PIES) due 2005, which sold with a 20% initial conversion premium, gained 0.625 point to 50.625 bid, 50.85 offered as the underlying stock added 21c to $14.06.

Another deal was added to the week's primary market agenda, as well, brining the week's new deal tally to nearly $2 billion. Swiss Re is selling $1 billion of 20-year bonds that are 10-year convertibles that will become 10-year floating rate notes in 2011.

The Swiss Re deal is structured as a convertible in the first 10 years, non-callable for the first five years and with a 120% trigger for the next five year. In 2011, the bond switches to a floating rate note with a 100 basis point step-up over Swiss Re's current credit spread to Libor. Price talk puts the initial fixed coupon at 3.25% to 3.50% and the initial conversion premium at 20% to 25%. S&P rates the junior subordinated debt at AA.

The bonds are guaranteed by the Switzerland-based parent, Swiss Reinsurance Co., and are being issued in tandem with a 1-for-10 rights issue to shareholders in a public offering in Switzerland and to institutional Rule 144A investors elsewhere.

Elsewhere in secondary activity, telecoms and telecom equipment makers popped.

"There was some very positive comments we saw out of a UBS teleconference, names like Verizon, Corning, Williams, Nextel," said a convertible trader at a hedge fund in Chicago. "It's one of those situations where if there's going to be a real turnaround, you need to be in position now."

Corning Inc.'s new 3.5% convertible gained 3.25 points on the day to 103.25 bid, 103.5 offered with the underlying common up 29c to $7.99. The old Corning zero-coupon convertible due 2015 added just 0.5 point to 51 bid, 52 offered. Nextel's 4.75% convertible due 2007 rose 7 points on the day to 75 bid, 75.5 offered and the 5.25% convertible due 2011 added 5.25 points to 73.25 bid, 74.25 offered as the underlying stock closed up $1.13 to $10.69.

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