Caesars, Kerzner, Impax Labs on tap with FelCor, Regal-Beloit; ON Semicon, Amylin launched

By Ronda Fears

Nashville, March 30 - Convertible desks were hopping Tuesday as the primary calendar sprang to life, with five deals totaling $725 million at bat and two more for another $410 million on tap Wednesday. In addition, fund managers worked toward wrapping up the routine window dressing of their portfolios.

Pricing new paper ahead of key economic data like the big unemployment number on Friday may suggest issuers are trying to lock in low coupons, one buyside market source said.

Generally, market influences were far-reaching with the end of first quarter approaching, and the broader markets kept convertible investors "alert," traders said.

Treasuries failed to break a week-long losing streak and ended lower Tuesday, pushing yields back up to three-week highs in the face of nothing stellar in the way of economic news. But the continued selloff in Treasuries was a boon for commodities, particularly gold and other precious metals.

The Conference Board reported that consumer confidence sank slightly in March, and the markets seemed to be braced for flat unemployment data on Friday. Manufacturing and factory order figures will be streaming across the tape Wednesday and Thursday, as well.

Stocks also were flattish, spending most of the morning in negative territory before turning north in the afternoon with the Nasdaq settling above the psychologically important 2,000 mark.

With little room to make money in credits and the major stock indexes rather flattish, traders said the trade of the day was in volatility but most declined to mention specifics in that strategy other than the obvious - that it was helping mitigate credit risk.

New deals leap from shadows

A lot of the hot areas in the secondary market were providing steam for capital-raising efforts in the primary arena, most notably in the gaming and drug sectors.

Chiefly, however, syndicate types said it's just a matter of the streaming sand in the hourglass forcing new deals out of the shadows.

"If you're thinking interest rates have a higher likelihood of getting raised in the second half of the year, early on like in August, which is a pretty good consensus, then you have to get out there with these deals over the next couple of months," said a source at one of the busy convertible origination desks.

"Time is running out."

Still, despite considerable excitement among potential buyers for the new paper, there was not a lot of gray market activity going on.

"The gray market has been dead all this year, because the new deal terms are so aggressive," one buyside trader said, parroting comments from peers for weeks past.

Hot stocks help build deal slate

Building on the hoopla in gaming stocks, Caesars Entertainment Inc. and Kerzner International Ltd. launched quick-sale deals early Tuesday totaling $450 million.

Potentially on the horizon is Wynn Resorts Ltd., which may be returning to the convertible market. The Las Vegas casino developer - which is transforming the Desert Sands into Wynn Las Vegas - filed a $1 billion in stock and debt registration statement with the SEC on Tuesday.

On casinos, a fund manager on the West Coast commented, "At least domestic demographics look positive. With terror in the world, we might as well stay home and/or go to Vegas, right? Of course [the United States] is a target as well but" it feels safer than traveling abroad.

Impax Laboratories Inc. also launched a small $75 million deal for pricing after the close amid a recent surge in drug stocks on a spate of positive clinical results. Follow that up with Amylin Pharmaceuticals Inc.'s return to tap convertible funds for $150 million on Wednesday; it also had nice headlines regarding trials for diabetes and obesity drugs.

The chip sector has been a roller coaster ride but finished slightly higher on whole Tuesday, providing a little more pleasant circumstances for ON Semiconductor Corp. to launch a $260 million deal.

Also on tap Tuesday are FelCor Lodging Trust Inc.'s $100 million add-on and automotive components maker Regal-Beloit Corp.'s $100 million deal. Those deals were looking roughly 2% cheap, according to a sellside market source.

It's been very quiet in Europe among convertible issuers, sources there say, but on Tuesday the Australian bank concern, Westpac Banking Corp., said it is assessing the possibility of issuing Tier 1 hybrid securities, which appears to be a mandatory convertible, in U.S. dollars.

Caesars plus 1.75 point offer

Before the open, Caesars launched $300 million of 20-year convertible floating-rate notes talked to yield the three-month Libor minus 50 basis points to flat with a 70% to 75% initial conversion premium.

Right after noon, it was seen offered at 1.75 points over issue price in the gray market, but no bid had surfaced, according to a buyside trader.

Lehman Brothers analysts estimated it 1.5% rich at the midpoint of guidance, using a credit spread of 175 basis points over Libor and a 27% stock volatility.

The Las Vegas casino operator said proceeds would be used to pay down existing debt, which stood at $4.6 billion on Dec. 31.

Standard & Poor's assigned a BB+ rating to the Caesars convertible floater, with a stable outlook, noting strong name recognition.

The gaming environment should continue to improve in 2004, S&P said, and Caesars would benefit from a diversified portfolio of assets. However, S&P said Caesars faces a number of near-term challenges in some markets, specifically Atlantic City and many riverboat jurisdictions.

Moody's rated the Caesars convertible floater at Ba1, with a stable outlook.

Key credit concerns for Moody's are new competition in Las Vegas, a slow growth outlook in Tunica and additional competition in Biloxi beginning in 2005, and in the intermediate term the potential that gaming could be expanded in states surrounding the company's properties in New Jersey and Nevada.

Also, Moody's noted risk associated with terrorism or geopolitical tensions.

Caesars stock closed Tuesday down 58 cents, or 4.24%, to $13.11.

Kerzner trade at plus 3/8 points

Kerzner was pitching $150 million of 20-year convertible notes talked to yield 2.125% to 2.625% with a 30% to 35% initial conversion premium.

Lehman analysts put the Kerzner deal about 1.5% cheap at the midrange of price talk, using a credit spread of 250 basis points over Libror and a 28% stock volatility.

Merrill Lynch analysts put the Kerzner deal 1.2% cheap, at the midpoint of guidance, using a credit spread of 370 basis points over Treasuries and a 28.1% stock volatility.

In early afternoon, the Kerzner convertible traded at 0.375 point over issue in the when-issued market, a buyside trader said, and that clipped the gray levels considerably. After that trade, the issue was bid 0.25 point below issue price with the offer at 0.375 point over. Before that trade, it had been seeing a bid of 0.25 point over, with an offer of a whopping 2.25 points over.

Concern about terrorism or geopolitical tensions could be a factor in the market's reaction to Kerzner, because the Bahamas-based casino operator has Middle East exposure, a market source said.

Another buyside trader said that there is concern about upside potential, but noted that the proposed premium on the Kerzner deal is considerably lower than on Caesars.

"Kerzner is a pretty decent deal," the buyside trader at a New Jersey hedge fund said.

"But, the stock has run up so much, there may not be much upside left."

Kerzner shares on Tuesday fell $2.39, or 5.18%, to $43.79. The 52-week range on the stock is $22.25 to $46.75.

Impax bid plus 0.25 points

Impax Labs also tossed a deal out before the open, a $75 million offering of 20-year convertible notes talked to yield 1.25% to 1.75% with a 25% to 30% initial conversion premium.

The Hayward, Calif.-based generic drugmaker said proceeds would be used to fund operations and for general corporate purposes.

A sellside source said the Impax deal looked priced to sell, or very cheap.

Another sellside source put it roughly 4% cheap, at the midpoint of price talk, using a credit spread of 600 basis points over Treasuries and a 60% stock volatility.

Deutsche Bank Securities analysts put the Impax Labs deal 3.16% cheap, using a credit spread of 550 basis points over Libor and a 50% stock volatility.

"It's sick when a credit like this can bring a deal with these terms, it's scary," said a buyside trader.

Yet, another buyside trader noted that in the early afternoon, the Impax Labs issue was bid at 0.25 point over issue price in the gray market.

Amylin seen priced to sell

After the close, Amylin launched after the close Tuesday $150 million of seven-year non-callable convertible notes talked to yield 2.5% to 3.0% with a 40% to 45% initial conversion premium.

Deutsche analysts put the new Amylin convert 3.675% cheap, using a credit spread of 500 basis points over Libor and a 45% stock volatility.

The San Diego biotech firm said proceeds would be used to continue research and development, fund operating expenses, establish manufacturing sources and inventory, pursue regulatory approvals and expand its commercialization capabilities as necessary.

Early on Tuesday, Amylin said it made advances in its clinical pipeline for diabetes and obesity treatments with the initiation of a couple of clinical trials, plus the completion of enrollment for another trial. The company is developing drugs for treatment of diabetes and obesity, some in collaboration with pharma heavyweight Eli Lilly & Co. and Alkermes Inc., another convertible issuer.

Amylin shares closed Tuesday up 53 cents, or 2.25%, to $24.06. In after-hour trading, on the convertible offering news, the stock was down 66 cents, or 2.74%. Amylin also has a 2.25% convertible due 2008 outstanding.

ON Semi also for Wednesday

Also after Tuesday's close, ON Semiconductor began marketing $260 million of 20-year convertible notes talked to yield 0% with a 25% to 35% initial conversion premium. It is going to have a full day of marketing, though, with pricing slated for after the close Wednesday.

The Phoenix-based maker of building-block microchips for power and data management said proceeds from the new deal would be used for general corporate purposes, including the repayment of other debt.

Earlier this year, the company made a stock offering in part to redeem some of its 12% first lien senior secured notes due 2010 and 12% second lien senior secured notes due 2008 through the exercise of the equity clawback provision on the junk bonds, eliminating $175 million of debt. That led S&P to boost the company's outlook to stable from negative.

Also after the close Tuesday, the company raised its first quarter outlook, on strong new orders that the company said should continue into second quarter.

ON Semiconductor shares closed Tuesday up 26 cents, or 3.18%, to $8.43. In after-hours trading, on the convertible offering news, the stock was down 48 cents, or 5.69%.

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