Market focuses on absorbing aggressively priced new issuance

By Sara Rosenberg

New York, May 2 - A lot of focus was spent on new issues Friday, as the convertibles market tried to digest the six deals that priced overnight at what many consider to be aggressive levels.

"We didn't play any of them. They were absolutely absurd," said John Seibel, director of trading at Silverado. "Basically, there's nothing here worth mentioning of note. They'll sop up extra liquidity and then hopefully you'll start to get decently priced issues. Until supply/demand comes back into balance, we're just staying on the sidelines. [These deals] are attractive for the issuer but not attractive for convertible buyers.

"AirTran was the most attractive," Seibel continued. "But it's the airline sector and we don't play in that."

Most of the deals ended Friday around their issue price but two deals moved significantly higher, one of them AirTran Holdings Inc. a lot higher.

Since market close on Thursday, Comverse Technology Inc.'s $350 million zero-coupon convertible notes due 2023 priced to yield 0%, with an initial conversion premium of 37%. The new convertible finished quoted at 100.25 bid, 100.75 offered Friday, according to a trader. The stock closed at $12.4368, down $0.6832 or 5.21%.

Duke Energy Corp.'s $700 million convertible senior notes due 2023 priced to yield 1.75%, with an initial conversion premium of 40%. The new convertible was quoted at 99.75 bid, 100.125 offered at Friday's close, according to a trader. The stock closed at $16.79, down $0.06 or 0.36%.

AirTran priced $100 million convertible notes due 2023 to yield 7% with a conversion premium of 60%. The new convertible was quoted at 111.125 bid, 112.125 offered at the close Friday, according to a trader. The stock closed at $7.55, up $0.60 or 8.63%.

UnumProvident Corp. priced $500 million of mandatory units to yield 8.25% at an initial conversion premium of 22%. The new convertible was quoted at 100.5 bid, 100.75 offered on Friday, according to a trader. The stock closed at $11.13, down $0.15 or 1.33%.

Grey Wolf Inc.'s $150 million contingent convertible senior notes due 2023 priced to yield 3.75% with an initial conversion premium of 65%. The new convertible was quoted at 98 bid, 98 offered, according to a trader. The stock closed at $3.90, down $0.01 or 0.26%.

And, Maxtor Corp.'s $200 million convertible senior notes due 2010 priced to yield 6.8% with an initial conversion premium of 125%. The new convertible was quoted at 104 bid, according to a trader.

Maxtor's premium is a record high, beating the previous record holder Wells Fargo & Co., which priced $3 billion of 30-year convertible floaters in April at par to yield 3-month Libor minus 25 basis points with a 110.75% conversion premium. The stock closed at $5.55, up $0.10 or 1.83%.

"Maxtor is not a convertible. It's a straight piece of corporate debt," Seibel said in reaction to the convertible's pricing level.

However, according to an analyst: "A company with a low dollar share price, if you don't issue a high premium, it's tremendously dilutive.

"There have been a number of high premium deals lately, but I don't think premiums will get much higher. I think a lot of these are sitting at investment banks now. They're not flying out the door.

"We don't see huge blocks of this stuff trading so it's got to be sitting somewhere. It's a question of how much the market will absorb at these levels.

"Maxtor is different," the analyst continued. "It depends on your credit view. If you think it's an improving credit that can make a huge difference. Even at 100% premium, that only brings you to like $8. The stock can easily get to the conversion price."

In the secondary Tyco International Ltd. continued to actively trade on Friday, maintaining its upward momentum since Wednesday morning's drop as investors continue to show a positive attitude towards the company's financial results, according to an analyst. Furthermore, the rating upgrade to the LYONs by Moody's Investors Service on Thursday helped the convertibles' performance as well, the analyst added.

Tyco's 2.75% series A convertible due 2018 was quoted at 104.57 bid, 104.82 offered, up 1.69, according to a trader. Tyco's 3.125% series B convertible due 2023 was quoted at 106.56 bid, 106.81 offered, up 2.41. The stock closed at $16.78, up $0.70 or 4.35%.

On Wednesday, the company's convertibles swung down to around 97 in response to a Wall Street Journal news report that the company may face a $1.1 billion charge due to some additional accounting problems and then headed back up to around 102 with the common stock to close higher on the day.

However, diffusing the situation was Tyco's announcement on Wednesday morning that it would report a loss from continuing operations of 23 cents per share for the quarter, compared to a loss from continuing operations of $1.03 for the same period last year, and revenues of $9 billion, up 4% from $8.6 billion in the second quarter of 2002.

After hours on Wednesday, the company announced its detailed financial results, which included earnings per share from continuing operations for the six months ended March 31 of 8c per share, including 55c related to after-tax net charges, and revenues for the six month time period of $17.9 billion, a 4% increase over the same period last year.

The charges arising out of the ongoing program of intensified internal audits and detailed controls and operating reviews were $997.4 million pre-tax.

"Subsequently, the financials looked pretty good. Moody's upgraded the debt as well. So there's more good news than bad news," the analyst said in explanation of the recent rally in Tyco's paper.

Moody's upgraded Tyco's Liquid Yield Option Notes to Ba2 from Ba3 in recognition of a newly issued guarantee from Tyco International Group SA and confirmed Tyco International Group's senior unsecured debt at Ba2.

Moody's said the action follows Tyco's announcement of second quarter results that included approximately $1.3 billion (pretax) of further accounting charges. While the need to take further charges is disappointing, the rating confirmation reflects the steady financial performance by Tyco, Moody's said. Revenues and earnings for the second quarter before the various accounting charges were within guidance, albeit at the lower end of the range. On the other hand, free cash flow was $1.1 billion and well exceeded the guidance of $450 million to $750 million that was confirmed in March.

While the magnitude of charges is higher than Moody's expectation, current management's resolve to deal with legacy issues is constructive, the rating agency said. Also, the charges are predominately non-cash in nature and represent a fraction of Tyco's $37 billion revenue generation capability and net worth that is approximately $25 billion.

Tyco is a Pembroke, Bermuda diversified manufacturing and service company.

Also active on Friday was Titan Corp.'s 5¾% High Tides convertible preferred securities due to the expectation that the debt will be retired.

The convertible was quoted at 50.125 bid, 50.375 offered, according to a trader. The stock closed at $8.38, up $0.21 or 2.57%.

The company announced Wednesday that it plans to sell $200 million of senior subordinated notes. Proceeds from the note offering, combined with $50 million in borrowings under its existing senior credit facility plus additional cash on hand, will be used to redeem the High Tides convertibles.

Titan is a San Diego technology developer and systems integrator for the Department of Defense, the Department of Homeland Security and intelligence and other government agencies.

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