Broader market softer but new paper from Sina, Fisher higher; Level 3 seen getting upsized

By Ronda Fears

Nashville, July 1 - Amidst widespread softening in the convert market, traders reported a slow session focused on new deals afloat. Level 3 Communications Inc. stole the spotlight, and sources close to its deal speculated it would get upsized to $300 million from $250 million with a strong book of orders.

New paper from Sina Corp. and Fisher Scientific International Inc. stood out as gainers, though, and AirTran Holdings Inc. took flight on an order it placed for 100 new planes and reported record traffic in June.

Although AirTran was soaring, most of the airline paper was landing in lower territory on some profit taking, traders said. Virtually the entire slate of tech and telecom paper took a dive as well.

Distressed traders also noted a pull back in names like Charter Communications Inc. and Mirant Corp.

Buyside traders used words like "disgusted" to describe their take on the market Tuesday as most of the convertible universe ended in lower territory although stocks staged a comeback and closed higher.

"It was sloppy, choppy, and most of the convert market didn't bounce back," said a dealer.

"Most people seemed to be looking at the new deals, and that was plenty to stay busy with. We traded bits and pieces, here and there, but no big blocks or chunks."

With eight new deals launched Monday, certainly there was enough to preoccupy players' time.

Five priced by the open Tuesday and the remaining three were at bat after the closing bell.

Level 3's deal was at center stage, getting the most attention, and with orders running strong it was expected to be upsized at least to $300 million from $250 million.

Terms were not revised as some had expected, though. The seven-year convertibles are still seen pricing to yield 2.875% to 3.375% with an 18% to 22% initial conversion premium.

The new Level 3 convert was seen in the gray market trading 1 to 1.25 points over issue price.

Level 3 has two other convertibles outstanding -- a 6% due 2009 and 6% due 2010. The 2009 issue was quoted down 2.625 points to 73 bid, 75 offered and the 2010 issue down 0.375 point to 73 bid, 75 offered.

Level 3 shares closed down 63c, or 9.46%, to $6.03.

Sources working on the Level 3 deal said fund managers were especially pleased with a "more reasonable" conversion premium than has been seen on lots of new deals so far this year.

"Terms [on the new Level 3 convert] look good relative to the equity," said F. Barry Nelson, a portfolio manager with Advent Capital Management. There is "tons of call protection on a $6 stock that has traded as high as $130 and as low as $2."

The deluge of new deals "is motivating us to become more organized," Nelson said, but added, "Let me assure you, though, that our attention to price talk implies no obligation to buy all of these deals."

Indeed, buyers appear to be exerting some pricing power. Most of the deals priced this week and last have come at the cheapest end of price talk, and a couple even cheaper than guidance.

At the least, buyers have become pickier about the terms they are willing to accept, said Merrill Lynch convertible analyst Tatyana Hube

The average theoretical discount at-issue increased significantly to 1.98% in June from 0.35% in May, Hube said in a report Tuesday.

In addition to the demand squeeze, she said the risk of common dividend increases or initiation of common dividends put downward pressure on the convertible market - primary and secondary alike. The market reaction was most pronounced after Mandalay Resort announced its first dividend in mid-June.

Just Monday, Cendant Corp. announced it also would begin paying a common dividend.

As a result of call scares and dividend risk, Merrill Lynch research shows that despite relatively solid performance by underlying stocks in June, convertibles experienced several counteracting effects that left it in a marginally positive territory for the month.

New issues also continued to underperform the broader convertible market.

Merrill's new issue index returned only 0.38% in June, while the underlying stocks pushed forward with a 3.35% return for the month. At the same time, Merrill's convertible master index edged up 0.64% on a back of a 2.36% rise in the underlying stocks.

Still, Merrill puts year-to-date issuance at $54.3 billion through the end of June, just $1.1 billion shy of the full year total of $55.4 billion for 2002.

But terms are getting more reasonable from a buyer's perspective.

Citigroup convertible analyst Stuart Novick noted that the average conversion premium dropped to 40.6% in June from 52.5% in May and the whopping 81.6% in April. At the same time, yields moved up to average 3.79% in June from 2.9% in May and 1.58% in April.

"Terms are moderating," Novick said.

"But we still have a ways to go in terms of historical levels."

Through June 30, he said average terms on new deals in 2003 has been 2.98%, up 49.3%. That compares to the 2002 average of 5%, up 27.18%.

There doesn't seem to be a sudden end in sight of the new deal stream, but after Tuesday there are no expectations for the remaining portion of the holiday-shortened week.

Cable Design Technologies Inc. and New Century Financial Corp. were at bat along with Level 3 after the close.

Cable Design is selling $110 million of 20-year convertibles talked to yield 3.5% to 4.0% with a 42.5% to 47.5% initial conversion premium. New Century was pitching $175 million of five-year noncallable convertibles talked to yield 3.0% to 3.5% with a 28% to 32% initial conversion premium.

Fisher Scientific International Corp. priced a deal before the open, on the heels of deals from Wynn Resorts Ltd., Anixter International Inc., Sina Corp. and ProAssurance Corp. after Monday's close.

Most of them priced at the cheap end of guidance.

Fisher Scientific sold $250 million of 20.25-year convertibles at par to yield 2.5% with a 36% initial conversion premium - at the cheap end of guidance.

Anixter sold $125 million in proceed of 30-year convertibles at 38.015 to yield 3.25% with a 26% initial conversion premium - at the middle of yield talk and the cheap end of premium guidance.

Sina sold $80 million of 20-year convertibles at par to yield 0% with a 27% initial conversion premium - at the cheap end of guidance.

ProAssurance Corp., however, sold an upsized $100 million of 20-year convertibles at par to yield 3.9% with a 55% initial conversion premium - at the middle area of yield talk and the aggressive end of remium guidance.

Wynn Resorts' 6%, up 30% offering was the only deal reoffered below par, though. It was remarketed at 98 by Deutsche Bank Securities, and the shop closed it at 103.25 bid, 103.75 offered Tuesday.

Wynn shares closed off 17c, or 0.96%, to $17.57.

Sina and Fisher also were strong out of the gate.

Lead manager Credit Suisse First Boston closed the new Sina convert at 101.5 bid, 102.5 offered. The stock ended up $1.35, or 6.66%, to $21.60.

Fisher's new convert was closed at 101.5 bid, 102 offered by Goldman Sachs, the deal underwriter. The stock closed up $1.47, or 4.21%, to $36.37.

Anixter's new convert was quoted at issue on the bid side with an offer at 0.25 over by lead manager Merrill Lynch. The stock plunged $1.47, or 6.27%, to $21.96.

Most of the convert market was "taking a beating," as one buyside trader put it.

AirTran was the big exception, however.

The Orlando-based low-fare airline reported June revenue passenger miles were up 21.1% from a year ago on a 17.7% gain in capacity measured by available seat miles. The resulting load factor of 74.4% was up from 72.3% for June 2002.

For second quarter of 2003, traffic grew by 20.1% on a 17% increase in capacity, pushing the load factor to 73.2%. Year-to-date traffic was up 25.1% on a capacity increase of 22.3%, for a load factor of 70.6%.

After reporting those results, AirTran then announced it had placed an order for 100 new planes from Boeing, with deliveries to begin in June 2004.

AirTran's new 7% convertible notes due 2023 flew up 6 points on the day to 142.75 bid, 143.25 offered, while the stock closed up 73c, or 6.97%, to $11.20.

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