Tyco dominates trading day, power issues surge on manipulation suit dismissal

By Ronda Fears

Nashville, Jan. 8 - Tyco International's new paper soared, dominating the convertible market Wednesday. But power issues also were very active and higher.

"It was pretty busy today, dominated by the Tyco new issue," said a dealer.

Both tranches were trading at over 105 during the session, traders said, and Tranche A shot up to about 106.75 at one point.

The issue size climbed to $4 billion with the greenshoes exercised within 24 hours of the pricing, making it one of the largest issues in the market.

Tranche A, the new 2.75% convertible debentures due 2018, closed at 104.375 bid, 104.625 asked. That was up from 3.75/4.0 points over par in the gray market.

Tranche B, the new 3.125% convertible debentures due 2023, closed at 104.25 bid, 104.5 asked. That was up from 3.0/3.25 points over par in the gray.

Tyco shares ended off 36c to $16.90.

Buyers were pleased with the move.

"We did participate. On a statistical basis we thought it was a little cheap. Nothing is as cheap as I would like. Deals are being priced at the wide end, or expensive end, because of the excess demand at the hedge funds," said Kevin Hunter, portfolio manager for The Trust Co. of the West's convertible fund.

"But we thought the stock, as a turnaround/value play, holds some potential. This addresses their funding needs and it really seems they have scrubbed the books," which he said alleviates most of the accounting concerns.

Spreads on Tyco's five-year credit default swap paper also continued to tighten, sources said.

In general, spreads were tighter, which helped convertibles overall against the retreat in stocks.

Stocks suffered a setback amid negative earnings and profit warnings, along with war jitters and the dollar's mid-afternoon slump against the yen and euro.

But, power issues surged on a lawsuit against Mirant Corp. and Williams Cos. Inc. getting dismissed, traders said.

"There was a lawsuit in Washington State dismissed against Mirant, Williams and others that rallied all the power producers," a dealer said.

A judge dismissed a lawsuit by the Snohomish County Public Utility District in Washington State against nine electricity suppliers that sought monetary damages for excess power prices caused by alleged market manipulation.

The news contributed to some gains in power issues late Tuesday that continued into Wednesday's session and gained steam, traders said.

Directly impacted by the dismissal were convertible issuers Reliant Resources Inc., Duke Energy Corp., Williams, Xcel Energy Inc., Sempra and Mirant.

Mirant, Calpine and AES got the biggest reaction from convertible investors.

Mirant's 5.75% due 2007 added 5 points to 52.75 bid, 53.75 asked. The stock gained 37c to $2.48. Mirant has an analyst call scheduled for 10 a.m. ET on Friday.

Calpine's 4% due 2006 soared 5.25 points to 61 bid, 62 asked. The stock rose 24c to $4.22.

AES' 4.5% due 2005 climbed 4.5 points to 54.5 bid, 55 asked. The stock ended off 2c to $3.35.

In general, convertible traders were very busy Tuesday but not just because the Tyco deal pricing was advanced.

In the wake of InterMune Inc.'s news, biotechs continued to decline with the Amex biotech index off by another 2.75%.

Alkermes Inc.'s recently exchanged 6.52% due 2009 slipped by 0.25 points to 114.25 bid, 114.5 asked with the stock off 8c to $6.90 but holders of the issue appear to be very pleased with how it has done since it settled out around the end of the year.

"The response we've heard is that the exchange offer was good for holders," said Brendan Dyson, co-head of convertible securities at U.S. Bancorp Piper Jaffray, which managed the exchange for Alkermes.

"Since we filed the deal, the value of the bond is up by around 30%."

In addition to now holding a convertible that is in the money, holders who participated in the exchange also have a convert with higher equity participation and that is more liquid.

"It's been very good for the company, and the stock is moving up. During the roadshow [for the exchange], most equity investors perceived it as a positive. People are more comfortable with the company and its capital structure," Dyson said.

"Issuer feedback has been very positive, as well."

The market is anticipating a surge of exchanges or tenders for some of the converts that are out of the money or busted in 2003, as many of them approach calls or maturity.

Although stocks stumbled Wednesday, spreads were tighter on whole and the tone continues to be upbeat in the market.

"I'm a believer that this year will be a positive year," said TCW's Hunter.

"I look for equity returns of 8-12%, that's a good range. We could be surprised to the upside slightly, but there's a lot of risk on the horizon."

Converts should participate in more than half that, he said, because of the additional boost from contracting credit spreads.

The biggest issue, he said, is confidence. As the U.S. economy gets on better footing, corporate spending should improve modestly and consumers will be able to hold their own so long as unemployment rates don't spike and there's no shock.

A war would be a shock, but Hunter believes the odds are against that event.

"The biggest issue right now is confidence. The real question is, 'Do CEOs increase spending?' That probably doesn't happen until the Iraq situation is off the table," Hunter said.

"I think the odds are 1-to-5 against it. I don't think there's any appetite for this on the part of our allies."

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