Kodak bid up 2.25 points, Placer Dome up 2.5 in gray market action; Finisar, iDine emerge after close

By Ronda Fears

Nashville, Oct. 7 - Trading in large part took place in the shadows, or gray market, as new deals got lots of play before pricing since there hasn't been a fresh batch of paper hit the convertible market since the controversial Bristol-Myers Squibb Co. deal nearly two weeks ago.

Yet traders said there was a decent boost in trading volume as a result of the $860 million of new paper via four deals put on the table for this week so far.

"We got busy today, but most of the action was in the gray market with the new deals," said the head convertible trader at one of the bulge bracket firms.

"Trading picked up in general, you see. There's a lot of new money in convertibles so we don't see nearly as much selling to make room for new deals as we used to."

Lowe's Cos. Inc. was seen 1 point higher, at least the 0% due 2021 convertible, and Juniper Networks Inc.'s 0% due 2008 was seen up 2.25 points at 112.5 bid, 113 offered. Another name seen in active trading was Mercury Interactive Corp., with its 0% convert slipping about 1 point to 114.625 bid, 115.125 offered.

Eastman Kodak Co.'s new issue was last seen 2.25 points over issue price on the bid side with an offer of 2.75 point over, according to buyside traders. The shares ended 25c lower, or 1.17%, to $21.10.

Placer Dome Inc.'s new issue was bid 2.5 points over issue price with an offer of 2.75 points over, according to buyside traders. The stock closed up 15c, or 1.12%, to $13.50.

Both traded actively, as they were being marketed throughout the session, and there was some scuttlebutt about terms getting tweaked, but nothing firmly transpired along those lines.

"I've heard rumors, and just rumors and nothing more, that there might be some repricing because these deals are trading up nicely in the pre-market," said a buyside trader in New York.

Kodak snapped the primary market out of its stand-still, launching a $500 million deal after Monday's close, and price talk emerged on it early Tuesday putting the yield between 3.375% and 3.875% with the initial conversion premium indicated at 40% to 45%.

While the Kodak wasn't viewed as all that cheap, buyside traders said it was getting played on the high-grade rating and popular stock.

At the midpoint of price talk, Merrill Lynch & Co. analysts put the Kodak convert 0.3% cheap, using a credit spread of 290 basis points over Treasuries and a 30% stock volatility, plus accounting for the 2.34% common dividend.

Tatyana Hube, a Merrill convertible analyst, said she modeled the Kodak deal with a more conservative credit spread, equivalent of a Ba1 credit, due to the negative outlook on the company's ratings. The three rating agencies have rated the issue a notch above that mark, barely in investment grade territory. Moody's and Fitch have a negative outlook on the credit, but S&P has the outlook at stable.

"Nevertheless, given the dry spell of the last several weeks in the convertible primary market, we anticipate that the [Kodak] issue will be priced at the mid-to-cheap end of the price talk," Hube said. Deutsche Bank Securities analysts put the Kodak deal 0.13% rich to 3.9% cheap, at the midpoint of guidance, using a credit spread of 275 bps over Libor and a 35% stock volatility, plus accounting for the 2.34% common dividend.

Analysts noted that spreads on other Kodak paper widened by about 20 bps after the convertible was announced.

The Kodak 3.625% senior notes due 2008 were seen trading at a spread of 265-255 bps over Treasuries. Also, it was noted that the five-year credit default swaps on Kodak were trading early Tuesday at 225-235 bps over Libor with seven-year credit default swap at 230-250 bps over Libor.

"A lot of people want to own this [Kodak convert] as a means to own the stock. The yield is cut by the common dividend but the premium looks pretty reasonable on a relative basis," said a buyside trader in New Jersey.

Still, the common dividend of 2.34%, which takes away from the yield on the convertible, turned some buyers away.

"The problem with the Kodak deal is the common dividend. This [convert] just doesn't make sense," said another buyside trader in New Jersey.

"With Placer Dome, the premium is just too high."

Placer Dome is tapping the convert market with a $200 million offering of 20-year convertible notes talked to yield 2.75% to 3.25% with a 50% to 55% initial conversion premium. The deal was pricing after the close Tuesday, following a full day of marketing.

"Given the scarcity of new convertible issues in the last several weeks and accounting for a tight borrow, we anticipate that the [Placer Dome] issue will be priced at the mid [point] of the price talk," one market source said.

Market participants said the Placer Dome issue looked a lot cheaper than Kodak and also will be rated a couple of notches above Kodak. Placer Dome's convert is expected to be rated BBB+/Baa2.

Placer Dome also pays a common dividend, but both it and Kodak offer holders of the convertible dividend protection by way of a conversion ratio adjustment.

Lehman Brothers put the Placer Dome issue 3.83% cheap, at the middle of price talk, using a credit spread of 120 bps over Treasuries and a 32% stock volatility, plus accounting for the 0.75% common dividend.

Venu Krishna, head of U.S. convertible research at Lehman, noted the concurrent $300 million senior note being offered by Placer Dome was talked at 130 bps over Treasuries so a tighter spread was used for the convert due to the shorter term. But, he added, the spread used to model the convert is wider than the five-year credit default swap for Placer Dome, which were quoted at 47-51 bps over Libor.

Merrill Lynch analysts put the Placer Dome convert 1.72% cheap, at the midpoint of guidance, using a credit spread of 145 basis points over Treasuries and a 32% stock volatility, plus accounting for the 0.75% common dividend.

Hube said she used the Placer Dome 6.375% senior notes due March 2033 as the benchmark for the credit spread, based on size and pari passu ranking, which were seen trading at a spread of 120-130 bps over Treasuries.

Deutsche Bank analysts put the Placer Dome convert 2.85% cheap, at the middle of talk, using a credit spread of 60 bps over Libor and a 34% stock volatility, plus accounting for the 0.75% common dividend. Deutsche analysts noted the five-year credit default swap for Placer Dome traded in the 35 bps range Monday and then widened about 20 bps on news of the convertible.

In other primary market activity, Finisar Corp. and iDine Rewards Networks Inc. launched small deals right after the closing bell.

Finisar is returning to the convertible market with a $100 million of seven-year convertible notes and part of the proceeds will be used to take out some of its existing converts. The 5.25s due 2008 were quoted up 3 points to 91 bid, 92 offered. Finisar shares closed up 28c, or 9.72%, to $3.16 but were seen in after-hours trading down by 20c.

The new Finisar convert was talked to yield 2.5% to 3.0% with a 22.5% to 27.5% initial conversion premium, and is scheduled for Wednesday's business.

iDine launched $60 million of 20-year convertible notes talked to yield 3.25% to 3.75% with a 20% to 25% initial conversion premium, for pricing after the close Wednesday.

Also, there was another small issue put into play by Mercer International Inc.

Mercer sold an upsized $82.5 million of seven-year convertible notes at par to yield 8.5% with a 26.5% initial conversion premium. It was upsized from $75 million, which was announced Sept. 12. A convertible issue originally was mentioned by the company in May, then at $65 million.

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