CMS, Fairmont, Concord deals emerge; buying boosts Northrop; Tyco, Inco come in

By Ronda Fears

Nashville, Dec. 1 - Activity in the convertibles market was described by traders as slower than anticipated in the face of the strong showing in the stock market Monday as participants faced turmoil in the bond market and currencies sparked by an unexpected spike in factory activity.

The lag might be short lived, however, as three new deals emerged for a combined $490 million, traders said. Only CMS Energy Corp. was launched early in the day, though, with Fairmont Hotels & Resorts Inc. and Concord Communications Inc. surfacing after the close.

Activity was scarce in the gray market, as well, although the CMS deal was bid 1.25 points over par.

CMS Energy returned to tap convertible investors for the second time in just five months, this time pitching $200 million of perpetual convertible preferreds talked to yield 4.25% to 4.75% with a 22.5% to 27.5% initial conversion premium.

The deal was launched before the open, and bids were seen through noon, running up to 1.625 points over par. Buyside traders, however, said no offers emerged until after noon and by then the bid had dropped. Traders said there wasn't much, if any, of the pending CMS convertible issue that traded, though.

"They [bids on the new CMS convertible] backed off probably because the bond market backed off," said a buyside convertibles trader at a hedge fund in New Jersey.

The Dearborn, Mich.-based energy firm, struggling alongside its peers in the wake of Enron Corp.'s collapse two years ago, said proceeds would be used to reduce debt. In November, CMS outlined a plan to cut debt by some 50% over the next five years through various means, although a convertible offering was not mentioned at that time.

In July, CMS sold $150 million of 20-year convertible notes at 3.375%, up 48% concurrently with $300 million of seven-year straight senior notes with an 8% handle.

Proceeds from the July offerings were earmarked to redeem its $300 million issue of 6.75% senior notes due January 2004 and partially repay debt outstanding on its senior credit agreement.

CMS shares dropped 28 cents, or 3.55%, to $7.61 on hedging activity related to the convertible. The 3.375% convertible fell on the stock decline, quoted down 1.75 dollar points to 104.5 bid, 105.5 offered. A dealer said the issue was "fairly steady" on swap and saw very little activity.

Credit default swaps on CMS for five-year protection were slightly tighter on the news, one market watcher said. Straight debt widened out some, however, so the evaluation of the new deal was tough and varied considerably at the various buyside shops.

A Lehman Brothers analyst put the new CMS convertible just 0.03% cheap, or right at fair value, at the midpoint of guidance, using a credit spread of 775 basis points over Treasuries and a 30% stock volatility.

The credit assumption was based on a discount to the CMS 3.375% convertible due 2023 at an option-adjusted spread of 540 basis points and inline with CMS' 7.75% convertible preferred due 2027 at 788 basis points on an option-adjusted basis.

Another sellside shop put the new CMS convertible 2% cheap, at the middle of guidance, using a credit spread of 700 basis points over Treasuries and a 35% stock volatility.

A buyside convertible trader said the spreads used to model the new CMS convert were "wild, ranging from 500 bps up to 800 bps."

Nothing was heard yet on the Fairmont deal outside of the indicative terms, nor the small Concord Communications deal.

Canadian hotel chain Fairmont Hotels & Resorts launched $225 million of 20-year convertible notes talked to yield 3.75% to 4.25% with a 40% to 45% initial conversion premium. The company planned a full day of marketing with pricing after Tuesday's close.

Fairmont shares closed Monday off 31 cents, or 1.13%, to $27.24 in the United States.

Also, for Wednesday's business, Concord Communications is planning to issue $65 million of convertible notes talked to yield 3.0% to 3.5% with a 25% to 30% initial conversion premium.

Concord shares closed Monday up 46 cents, or 2.08%, to $22.56.

Economic data and the resulting ripple through the credit markets was the biggest hindrance to trading convertibles Monday, dealers said. Lots of hedge fund players, though, were busy covering short stock positions, buyside traders said.

The Institute for Supply Management reported that the U.S. manufacturing index rose to 62.8 in November, the highest level since December 1983. It was ahead of economists' predictions and included the first gain in factory jobs in more than three years.

"The bond market and the dollar being weak put the kibosh on doing some things that people may have been thinking about with stocks up over a hundred points," said a buyside trader.

The Dow Jones Industrial Average advanced 116.59 points, to 1.19%, to 9,899.05. The Nasdaq gained 29.56 points, or 1.51%, to 1,989.82. The S&P 500 rose 11.92 points, or 1.13%, to 1,070.12.

The manufacturing data also gave cause to rein in price levels on convertibles like those of Inco Ltd. and Tyco International Ltd, the buyside trader said.

"Things got marked up at the end of last month, so now, today, some of these things are coming in," he added, specifically noting Inco and Tyco.

Inco shares were stronger on the data, gaining $1.00, or 2.91%, to $35.31, and the converts were better in dollar points by 3 to 3.5 points, he said. On swap, though, he said the bids came in by 2 to 3 points. The Inco 1% convertible was quoted at 124.5 bid, and the 3.5% convert at 151.25 bid.

It was a similar situation with regard to Tyco, the trader said, with the Tyco 2.75% convertible ending the day at 118 bid, and the 3.125% convertible at 124.25 bid. Tyco stock closed up 59 cents, or 2.57%, to $23.54.

There was some buying activity noted in Northrop Grumman Corp. ahead of the U.S. Defense Department announcing a round of contract awards. A dealer quoted the 7.25% mandatory convertible off 0.125 point to 101.25 bid, 101.5 offered and the 7% mandatory convertible up 0.125 point to 119.5 bid, 120 offered.

Northrop shares ended off 21 cents, or down by 0.23%, to $92.42.

Flextronics International Ltd. was weaker, too, but traders said there was some selling responsible for the decline, in addition to some pressure from the drop in the underlying stock. The news was good for Flextronics, though, one trader said.

"The selling in Flextronics was really based on some fundamental concern ahead of their mid-quarter conference call, nothing really to do with the [Beckman Coulter Inc.] settlement, although that was a positive point," the trader said.

On Tuesday, at 4.30 p.m. ET, the Singapore chipmaker, Flextronics, has scheduled its mid-quarter conference call with analysts.

Late Wednesday, Flextronics and Beckman announced that a full settlement has been reached in the lawsuit whereby Flextronics will pay $23 million to Beckman to completely resolve the matter, which stemmed from a contract dispute between the two companies that escalated to a potential liability of nearly $1 billion as the result of a jury verdict in California earlier this year.

"Although the settlement remains larger than we believe the law would have allowed, it relieves the company of the significant burden and distraction that the original verdict imposed," stated Michael E. Marks, chief executive of Flextronics, in the company statement announcing the settlement.

The settlement will result in Flextronics recognizing an unusual charge of 3 cents per diluted share in the December quarter in excess of its previous accrual of $8 million for this matter.

On Monday, Standard & Poor's affirmed its ratings on Flextronics and upgraded the credit outlook to stable from negative, reflecting the settlement.

The original verdict included $3 million in contract and tort damages and $931 million in punitive damages.

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