Convertibles market averts steep slide with Nasdaq due to new issues

By Ronda Fears

Nashville, Tenn., Oct.9 - Convertible traders said that the market largely avoided a deep slide seen in Nasdaq stocks Tuesday, although a good portion of the market was marked lower. Still, traders described the market as flat to slightly higher, attributing gains to the heavy new-issue calendar that has emerged over the past week. Some $1.625 billion of new paper is slated to price this week, and another $1 billion in the coming weeks.

"We have definitely opened up, which I had wondered about since it began to feel like we're in a war now with the strikes in Afghanistan," said a convertible trader at one of the major investment banks based in New York.

"New deals have stirred everyone up and we're excited about that. Outside of some maneuvering related to new deals, and the new paper changing hands, we are still seeing defensive strategies in motion. People are looking for insulation."

Stocks were lower but the Dow Jones Industrial Average had a softer fall Tuesday, closing off 15.50, or 0.17%, to 9052.44 while the tech-laden Nasdaq dropped 35.75, or 2.23%, to 1570.19 as investors anxiously awaited an earnings release from Motorola Inc. and watched more warnings cross the tape.

Meanwhile, nothing was stopping the predicted stream of new deals in convertibles.

J.C. Penney Co. Inc. revived its deal from before the Sept. 11 tragedy to price it after the close, with no change to the original price talk. The $500 million of seven-year convertible senior notes are expected to price to yield 5.0% to 5.5% with a 23% to 27% initial conversion premium. J.C. Penney stock closed down 58c to $22.41.

Also at bat after the bell is Community Health Systems Inc.'s $250 million of seven-year convertible subordinated notes and 12 million shares of common stock. The registered notes are expected to price to yield 4.5% to 5.0% with a 21% to 25% initial conversion premium. Community Health stock closed up 68c to $26.80.

TXU Corp. also marched out a new deal, $750 million of mandatory convertibles with guidance for 8.75% to 9.25% yield and an 18% to 22% initial conversion premium. TXU shares closed down $2.43 to $46.69. The TXU deal is set to price after the close Thursday along with Performance Food Group Co.'s deal that has been on the road for almost a week now. Performance Food is pitching $125 million of seven-year convertible subordinated notes with price talk of 5.5% to 6.0% yield and a 20.5% to 24.5% initial conversion premium. Performance Food stock ended up $1.04 to $26.40.

Some market sources anticipated the Performance Food deal might get priced after the close Tuesday, but sources working on the deal said that was unlikely. It might price as early as Wednesday, but probably not until Thursday as originally planned. There is a conference scheduled in New York with potential investors on Thursday, prior to pricing the deal, another source working the deal pointed out.

Price talk also emerged on two deals coming later in the month.

AT&T Corp.'s $750 million of mandatory exchangeables that convert into Cablevision Systems Corp. common stock are talked to price to yield 6.5% to 7.0% with an 18% to 20% initial conversion premium. The issue, together with a secondary offering of Cablevision stock by AT&T and the respective greenshoes, will essentially liquidate AT&T's stake in Cablevision. The deal is set to price after the market close Wednesday, Oct. 10 via lead manager Bear Stearns. Cablevision stock closed up 4c to $39.

Anthem Inc., best known by its Blue Cross & Blue Shield trade name, will be selling $200 million of five-year mandatory convertibles at the end of the month. The issue, to be sold along with the company's initial public offering of common stock, will demutualize the Indianapolis company into a public firm. The convertibles are expected to price to yield 6.0% to 6.5% with an 18% to 22% initial conversion premium. Goldman Sachs is lead manager of the offerings, which are expected to price Oct. 29.

Outside of the primary, traders said there was some cause for gains seen as a result of investors looking for safety, but good news was hard to come by.

First Data Corp. got a good response to its favorable third quarter results - a 19% gain in earnings per share to 69c, which beat the Wall Street consensus of 66c. There were several upgrades on the common stock, and Merrill Lynch convertible analysts also recommend the First Data 2% convertible senior note due 2008.

The First Data 2% converts gained 3 points on the day to 105.625 bid, 106.625 offered as the common stock soared $5.43 to $62.44.

"FDC is a solid investment in these uncertain times," said the Merrill convertible research report.

At 102.75 versus $57 in the common, Merrill analysts said the First Data convertible is trading at a slightly above theoretical value and while the convertible's upside is modest by absolute standards, equity weakness has made return profiles like this more the norm than the exception.

LAM Research convertibles gained, while the underlying common declined, as the company beat analysts' expectations for the quarter, traders said. The LAM Research 4% convertibles added 1.25 points on the day to 81 bid, 82 offered and the 5% converts rose 0.5 point to 101.5 bid, 102.5 offered with the common falling $2.06 to $16.64. End

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.