New issues bid up in gray; Tyco's new converts gain sharply, power names dive

By Ronda Fears

Nashville, Feb. 26 - Spurred into action by the small new deals afloat in the gray market - which were bid up very strongly Wednesday - convertible players extended the playing field to quite a few secondary issues.

"Bids have really firmed up in the secondary market the last couple of days," said a convertible trader at a large hedge fund in New York.

In addition to activity in the new deals, Tyco International was very active and its new converts gained 1.5 to 2 points on a JPMorgan equity report referring to it as one of the best stocks in the firm's universe.

Several drug names also were higher, like Cell Therapeutics, along with a few semiconductors, like Semtech.

There were some sharp declines in the energy and power group, but traders said flow was light in those names.

Mirant Corp. was identified as the culprit in the group's woes, as it delayed its earnings report and said it had hired Blackstone Group to explore debt restructuring options, which sparked bankruptcy buzz.

Sierra Pacific Resources Inc.'s new 7.25% convertible due 2010 was one of the hardest hit in the group, losing about 6 points to 96.75 bid, 97.75 asked as the stock dropped 26c to $2.97.

Chesapeake Energy Corp.'s new deal wasn't fazed, though.

The Chesapeake convertible preferred was quoted 2 to 2.5 points over par, and the stock ended up 6c to $8.15.

"There's nothing else to do, so these deals are getting played heavily," said a convertible trader at a boutique in Connecticut.

"We expect a lot of people will flip these, but most of it will be played out by the end of next week."

Also, Axcan Pharma Inc.'s convertible bond was seen at 3 to 4 points over par in the gray market. The shares closed up 25c to $10.80.

That led many to suspect terms would get tightened, but it didn't happen.

"Both [Chesapeake and Axcan new deals] are extremely well bid and in danger of repricing," said a buyside source.

"Chesapeake is about plus 2, which is like plus 4 in a par bond."

Sources at the banks underwriting the deals said there officially are no plans to tighten the guidance on either deal.

A couple of buyside sources said the most likely to get more aggressive would be Chesapeake, depending on how its junk bond deal is going.

Chesapeake Energy is marketing $200 million convertible perpetual preferreds alongside a $300 million junk bond deal and 8 million common shares.

The convert is talked expected to yield 6.25% to 6.75% with a 23% to 27% initial conversion premium.

There was no new buzz about the terms on the straight bond, other than the unofficial 7% to 7½% yield mentioned by convertible sources Tuesday.

"It's a good time to look at exposure to raw commodities like oil and gas, versus the power names that are getting whacked all to pieces," said a convertible manager.

"As for it [the Chesapeake convert] getting tightened, there's still time for that, all of tomorrow."

Meanwhile, Sierra Health Services Inc. priced its convertible bond at the middle of guidance at 2.25%, up 47.5% and it was quoted closing at par bid, 100.5 asked. The common stock closed down 65c to $11.75.

Most convertible traders were focused on names where there was strong buying, like Tyco.

Tyco got a huge boost from a JPMorgan equity note that plugged the stock as one of the best the firm covers, now that so many ill-boding issues are behind it.

The Tyco 2.75% due 2018 added 1.5 points to 96.625 bid, 97 asked and the 3.125% due 2023 gained 2 points to 96 bid, 96.25 asked.

Tyco shares closed up 48c to $14.75.

Although there were a few nice gains amid a mostly negative market tone, there were far more southerly moves that in several cases traders said created opportunities for buyers to step in or switch into peer issues.

Omnicom Inc. took a dive on a Moody's downgrade, with the stock falling $3.39 to $53.96,which one dealer said caused some holders of those converts to swap into the Lamar Advertising convert.

Lamar's 5.25% convertible due 2006 gained 1.625 points to 101.25 bid, 101.75 asked. The stock closed down 5c to $30.

In other cases, there just wasn't a positive spin.

Rite Aid Corp. saw a big sell-off as one of its senior vice presidents resigned after he was indicted Wednesday for fraud along with another former Kmart Corp. in connection with accounting practices at the now-bankrupt discount retailer.

The Rite Aid 4.75% convertible due 2006 lost 1.375 points to 83 bid, 84 asked as the stock closed down 13c to $2.32.

In another retail area, Performance Food Group came under selling pressure in sympathy with the troubles at other food distribution and retail chains, Fleming Cos. Inc. and Ahold.

The Performance Food 5.5% due 2008 dropped 3 points to 122.5 bid, 123.5 asked while the stock lost $1.22 to close at $31.62.

Fleming, however, regained a little ground in the wake of the news that the SEC investigation on it has become a formal probe and plans to cut 15% of its workforce.

Fleming's 5.25% convertible due 2009 added 0.25 point to 26.125 bid, 26.625 asked. The stock ended lost up36c to $2.21.

There continued to be quite a bid of activity in several mandatory convertibles, traders said.

Anthem Inc.'s 6% mandatory due 2004 added 1.5 points to 72.625 bid, 72.75 asked while several insurance issues were on the decline.

American Electric Power announced a new $1.5 billion bank facility and a 50 million share stock offering, which sparked a lot of two-way activity in the convert, traders said.

The AEP 9.25% mandatory closed off 0.87 point to 32.38 on the New York Stock Exchange. A dealer quoted it down 1.25 points at 31.875 bid, 32.375 asked. The stock ended down 93c to $20.33.

© 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.