Volatility players emerge with a vengence, picking up mostly new deals with lower premiums

By Ronda Fears

Nashville, July 2 - As stocks surged, convertibles followed suit and traders noted a vast amount of activity came from volatility players - many picking up new paper with lower premiums like Level 3 Communications Inc., which was upsized as expected on heavy demand.

Level 3's new deal wsa boosted more than even some had anticiapted, to $325 million from $250 million instead of the $300 million seen late Tuesday.

The deal priced to yield 2.875% with a 19.07% initial conversion premium - at the aggressive end of yield talk, which bucked recent trends, and the cheaper end of premium guidance -catering to volatility players.

"Vol players liked the Level 3 deal," said a buyside convertible trader with a hedge fund in New Jersey.

"Notwithstanding the company, the premium makes it pretty attractive."

The 19% premium on the Level 3 deal compares to the year-to-date average premium on new deals of about 50%, which has fallen from the 80% area around March due to an onslaught of several deals with whopping premiums of 100% or more.

In general, though, premiums are coming in as stocks moving up, and that is luring some players back into action.

"Premiums are starting to come in so some of this paper is starting to meet the threshold as far as where some people can play," said a convert trader at one of the bulge bracket firms.

"Lot's of volatility players today, it was extremely busy. Obviously tomorrow will be slower, though, with the stock market closing early. There will be skeleton crews all over The Street."

New paper was a primary focus, however, and Level 3 was at center stage.

Level 3 was heavily traded and Citigroup, the book-runner on the new deal, closed it at 101.25 bid, 101.75 offered. A buyside trader said it opened at 101.5 bid, 102.25 offered. The underlying shares also saw heavy volume with 26.2 million shares changing hands, following 25 million on Tuesday, compared to the running average of 4 million shares. The stock closed off 14c, or 2.32%, to $5.89.

New Century Financial Corp.'s deal also moved north out of the gate. The mortgage finance company sold $175 million of five-year noncallable convertibles at par to yield 3.5% with a 28% initial conversion premium, on a call spread, at the cheap end of guidance.

Bear Stearns, the lead manager, closed the New Century convert at 100.25 bid, 101 offered while the stock closed up $1.09, or 2.67%, to 41.87.

Sina Corp.'s new issue made perhaps the biggest run amid the frenzy of vol players jumping into the market, though. The new 20-year issue sold at par earlier this week as a 0%, up 27% convert. Credit Suisse First Boston closed it Wednesday up 4.75 points to 106.25 bid, 107 offered but another shop pegged it closing at 107.25 bid, 108.25 offered.

Sina shares closed in $1.50, or 7%, to $23.10, on heavy volume.

Fisher Scientific International Corp.'s new 2.5%, up 36% convert gained 1 point to 102.5 bid, 103 offered.

Wynn Resorts' 6%, up 30% offering was a bit softer, closing off 0.25 point to 103 bid, 103.5 offered. The stock ended up 13c, or 0.74%, to $17.70.

Wynn was the only deal reoffered below par this week but, while the bulk of remarketing bought deals may be over for now, some analysts think it is a phenomenon that may continue.

"There were still some issues that were repriced below par last month. [The number is down] ... possibly signaling an end to the ultra-aggressive investment banking and pricing in the new issue market," said Citigroup convertible analyst Adrian Miller in a report Wednesday.

"Given the friendly trend in new issue pricing, we think it's probable that we've seen the peak of the over-aggressively priced deal flow for the time being. [But] we think that repricings are likely to remain part of the new issue mix for the time being, although it is ultimately a losing game for underwriters, limiting the tactic's long term viability."

Citigroup sees the surge of convertible new issues pushing 2003 into record-breaking territory. (See full related story elsewhere in this edition.)

With eight deals totaling over $1 billion in a holiday week, during the summer, plus massive inflows into the convertible market, there certainly doesn't appear to be much of a slowdown ahead.

There was $9.7 billion in net inflows in June, according to Citigroup, bringing the net inflow figure for the first half of 2003 to $28.3 billion.

"Even with the anticipated barrage of calls from issuers refinancing existing debt through new lower coupon bonds ($2.4 billion in calls last month) plus an additional $2.6 billion in conversions and buybacks, June wound up generating one of the biggest net inflows to the convert market ever," Miller said.

Indeed, the $9.7 billion inflow figure represented the largest net inflow to the market since October of 2001 when $10.2 billion in new issuance was netted.

"As it relates to calls, much of the total is simply a swap of old paper for new ultimately not affecting the overall size of the market," Miller said.

"Right now, by the way, the U.S. convertible market is weighing in at $270.7 billion."

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