Issuers unwrap $1.73 billion of new paper and more set to come this week, this month

By Ronda Fears

Nashville, Dec. 8 - Retailers in the Northeast may have felt a pinch as the first wintry storm struck threatened to cut into holiday sales, but there was no ill effect on the Christmas shopping season for convertible players as seven issuers began shopping $1.725 billion of new paper on Monday.

"I just wish convertible issuers were as eager to mark some bargains as the retailers are. We are not seeing any basement bargains, here," said one buyside source, who helps manage a huge hedge fund in New York.

"These deals are not that cheap, but a lot of these are names people want, already have, or they just have some new money that is burning a hole in their pockets."

Sepracor Inc., Emulex Corp. and Akamai Technologies Inc. were in the market overnight with the bulk of the new deals - $1.225 billion - and Affymetrix Inc. likely joined them with another $100 million.

Of those, market sources said Emulex and Akamai were being reoffered under par by the underwriter, Credit Suisse First Boston in both cases. One source said the Emulex issue was being reoffered at 98.75 immediately as it was launched.

Hanover Compressor Co. launched a deal for Tuesday's business.

Serena Software Inc. began pitching a deal for Wednesday.

And Roper Industries Inc. launched one for next week.

More is coming this week, capital market sources said, confirming market buzz that began last week indicating that December will produce a heavy new issue calendar amid very healthy demand.

The busy pace in the primary market Monday was matched in the secondary market, too, though.

"It was the best Monday we've had in a long, long time, volume-wise," said a convert dealer at one of the biggest shops that trade convertibles.

Another commented, however, that it was a matter of "out with the old, in with the new," referring to the biggest deals - Sepracor's and Emulex's - which have proceeds earmarked to take out their old convertible issues.

Affymetrix also plans to take out its old converts with proceeds from the new deal, plus cash on hand.

Akamai, too, is likely to begin repurchases of its existing convertibles with proceeds from the new deal, going by recent filings at the Securities and Exchange Commission.

Only the Sepracor issues saw any play on deal buzz, however, according to traders, moving up 1.125 points to 2.375 points on speculation that proceeds would be used to redeem those issues as rumors of a new deal spread through the market around noontime.

The rally in stocks and mild exodus from Treasuries, which observers speculated was mostly profit taking ahead of the Federal Reserve meeting Tuesday also helped flow in the secondary market, traders said.

It is a widely expected that the Fed will leave interest rates at record lows.

Convertible issues in play that were specifically mentioned by traders on Monday were Crown Castle International Inc., Mirant Corp., Apria Healthcare Group Inc., Redback Networks Inc., AtheroGenics Inc. and Artesyn Technologies Inc., among others.

In new-deal action, Sepracor was marketing the biggest deal, a two-part overnight offering of $600 million convertible subordinated notes, on swap and on a call spread, with proceeds earmarked to redeem its 5.75% convertible notes due 2006.

Tranche A, for $200 million with a $50 million greenshoe, is talked to yield 0% with a 24% to 32% initial conversion premium. The five-year notes are non-callable.

Tranche B, for $400 million with a $100 million greenshoe, is talked to yield 0% with a 16% to 24% initial conversion premium. The seven-year notes are non-callable.

The notes will be subordinated to all of existing and future senior debt, but ranked senior to Sepracor's 5.75% convertible subordinated notes due 2006 and its 5% convertible subordinated debentures due 2007.

The 5.75% converts were quoted up 2.375 points to 99.875 bid, 100.375 offered and the 5% converts gained 1.125 points to 96 bid, 96.5 offered. Sepracor shares rose 71c, or 2.84%, to close at $25.72, but were down in after-hours trading by $1.47, or 5.72%.

Lehman Brothers analysts put tranche A 2.22% cheap, at the middle of price talk, using a credit spread of 475 basis points over Treasuries and a 50% stock volatility. Lehman put tranche B 1.84% cheap, at the middle of price talk, using a credit spread of 525 bps over Treasuries and a 50% stock volatility.

Venu Krishna, head of U.S. convertible research at Lehman, tightened the spread assumption on tranche A due to the longer maturity of issue versus the existing Sepracor 5% convert. He said tranche A looks "incrementally more attractive" than tranche B convert on both implied volatility and a valuation basis.

Deutsche Bank Securities analysts put tranche A 1.26% rich to 2.33% cheap, at the middle of guidance, using a credit spread of 425 bps over Libor and a 45% stock volatility. Deutsche put tranche B 1.09% rich to 3.44% cheap, at the middle of guidance, using the same credit spread and stock volatility inputs.

Emulex was pitching $450 million of 20-year convertible senior notes, on swap, with proceeds aimed in part to repurchase its 1.75% convertible notes due 2007 as market conditions permit. The overnight issue was talked to yield of 0.0% to 0.25% with a 60% to 65% initial conversion premium.

Emulex said it plans to use proceeds to repurchase all or a portion of its outstanding 1.75% convertible notes due 2007, depending on market conditions.

The 1.75% converts were quoted off 0.125 point to 93.875 bid, 04.875 offered.

Emulex shares ended off 37c, or 1.35%, to $27. In after-hours trading, the stock was down another 27c, or 1%.

Akamai was at bat with $175 million of 30-year convertible senior notes talked to yield 1% with a 45% initial conversion premium, after earlier on Monday raising its guidance for fourth quarter and 2003 revenues.

At a par price, Deutsche analysts put the new Akamai convert 3.19% rich, using a credit spread of 700 bps over Libor and a 60% stock volatility.

Akamai's existing 5.5% convertible due 2007, a $300 million issue sold in June 2000, were quoted flat at 95.5 bid, 97.5 offered at one sellside shop and at 90.75 bid, 96.75 offered at another. The stock ended down 52c, or 4.52%, to $10.98 and in after-hours trading lost another 52c, or 4.74%.

Affymetrix announced late Monday plans to sell $100 million of 30-year convertible senior notes with proceeds, along with cash, to redeem its other two convertible issues that together there is $267.5 million outstanding.

No other information was available.

On Tuesday, the Santa Clara, Calif.-based biotech firms said it plans to announce the redemption of its 5% convertible subordinated notes due 2006 with $102 million outstanding and, subject to the completion of the new deal, also to redeem its 4.75% convertible subordinated notes due 2007 $165.5 million outstanding with the proceeds and available cash.

The Affymetrix 5% convertibles were quoted flat at 100.5 bid. The Affymetrix 4.75% convertibles were quoted down 1 point to 96 bid, 97 offered. Affymetrix shares closed Monday up 48c, or 1.93% to $25.31.

Hanover Compressor Co. launched $100 million of 10-year convertible senior notes talked to yield of 4.75% to 5.25% with a 43% to 48% initial conversion premium, for pricing after the close Tuesday.

Lehman analysts put the Hanover deal 5.58% cheap, at the middle of price talk, using a credit spread of 525 basis points over Treasuries and a 35% stock volatility. But Lehman's Krishna said the cheapness was "warranted, given challenging fundamentals."

Deutsche put the Hanover convert 3.04% cheap, at the midpoint of guidance, using a credit spread of 600 bps over Libor and a 35% stock volatility.

Moody's rated Hanover's new convert B3, and affirmed its existing ratings dating from Nov. 21 when it downgraded the senior implied rating to B1, with a stable outlook.

Standard & Poor's assigned a B rating to Hanover's proposed convertible, two notches below the corporate credit rating to "reflect the significant level of secured debt that subordinates unsecured debt holders." The outlook remains negative.

Serena Software's deal is for Wednesday's business - $150 million of 20-year convertible senior notes talked to yield of 1.25% to 1.75% with a 27.5% to 32.5% initial conversion premium. Interest payments for three years will be collateralized with U.S. Treasuries.

Deutsche analysts put the Serena convert 1.91% rich to 2.26% cheap, at the midpoint of price talk, using a credit spread of 500 basis points and a 40% stock volatility.

Serena Software shares closed Monday up 21,or 1.14%, to $18.60.

For next week, Roper finally launched its deal that has been sitting on the forward calendar for nearly two months now. Roper is selling $150 million in proceeds of 30-year discount cash-to-zero convertible notes talked to yield of 4.0% to 4.5% with a 27.5% to 32.5% initial conversion premium. Roper shares closed Monday up 2c, or 0.04%, to $49.80.

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