Markets go green on war visibility; spate of deals hold promise for busy week

By Ronda Fears

Nashville, March 17 - It was a modestly busy Monday, as the U.S.-led war against Iraq came clearly into sight, and then when the closing bell rang the convertible market got down to business with new deals.

Zenith National Insurance Corp. launched a small $105 million deal early, but after the close indicative terms were circulating for a $350 million deal from Mandalay Resort Group and a $1.35 billion deal from News Corp., convertible into British Sky Broadcasting Group plc stock.

There also was buzz about an Alaska Air Group Inc. deal - and late in the evening the company announced an offering of $125 million of floating-rate convertibles.

In secondary activity, traders noted Fleming Cos. Inc. firmed considerably from last week, as the troubled food distributor was said to be making the interest payment due on the 5.25% converts.

Also noted in trading action were Brinker International Corp., Manpower Inc., Harris Corp., Inco Ltd., The Interpublic Group of Cos. Inc. and Omnicom Inc.

It was widely believed that in an address to the U.S. at 8 p.m. ET on Monday, President Bush will announce the formal launch of a military action against Iraq, without the blessing of a United Nations resolution - in the event Bush gave Saddam Hussein a 48 hour deadline to leave Iraq or face military action "at a time of our choosing."

"The market hates uncertainty. There's a little more clarity today," said Stuart Novick, convertible analyst at Salomon Smith Barney.

"It's fitting to have a green screen on St. Patrick's Day."

Stocks began the day heading lower, but staged a roaring comeback in a short-covering rally rooted the Iraq conflict is at hand.

"At least it's the beginning of an end to it," said a dealer.

"We can't get this ordeal behind us, apparently, until there's a volley of gunfire. So now it looks like at least that's going to start.

Some convertible market participants were saying the rally appeared to be overdone, while others thought the same argument could be made for the market's downturn overall.

"After 31 years on the Street, nothing surprises me. The stock market has lately held up remarkably well in the face of much negative news," said Barry Nelson of Advent Capital Management.

"Moreover, there are a lot of reasons to be bullish. A huge federal budge deficit and aggressive money printing by the Fed are likely to engender economic recovery. Once we have a denouement to the Iraq conflict, the uncertainties should fade and companies are likely to resume capital expenditures.

"My only concern is stocks are not cheap," Nelson continued.

"My enthusiasms are convertibles and high-yield bonds. Convertibles provide a low risk way to be positioned for a new bull market. And wide credit spreads in the face of economic recovery present an imperative for lower-grade corporates, including higher yield convertibles."

New issues also are promising in the convertible market, he said.

"We're optimistic that the convertible market will continue to grow, and growth should mean variety, and variety should present plenty of opportunities in both new issues and in the aftermarket," Nelson said.

"We find it reassuring that new issuance of convertibles has tended to continue through thick and thin, while equity IPOs and new high-yield issuance occasionally have long dry spells."

Indeed, three new deals popped up Monday.

Early Monday, Zenith National Insurance Corp. launched $105 million of 20-year convertible notes talked to yield 5.5% to 6.0% with a 25% to 30% initial conversion premium to price after the close Tuesday.

Analysts put it 2.8% to 5.8% cheap, at the midpoint of guidance, noting a "terrible" borrow on the stock.

The issue was last seen in the gray market with a bid of 2 points over issue price, with no offers.

Zenith shares closed down $1.42, or 6.8%, to $19.33.

After the close, guidance on the Mandalay and News/BSkyB deals emerged.

Mandalay launched an overnight $350 million of 30-year convertible notes talked to price to yield three-month Libor plus 0.375% to 0.875%, with a 100% to 110% initial conversion premium.

Mandalay shares ended up 86c, or 3%, to $28.65.

News Corp. Finance Trust II was pitching a quick-sale offering of $1.35 billion of 20-year exchangeables that convert into shares of BSkyB, expected to yield 0.75% plus a pass-through of 75% of dividends on BSkyB shares, with a 36% to 38% initial conversion premium.

The deal is slated to price at 11:30 a.m. ET, or after the London market close, on Tuesday.

BSkyB shares closed in London up 8p, or 1.3%, to 634p. In the U.S., BSkyB shares ended off 5c, or 0.12%, to $40.05.

In the secondary market, traders said activity in convertibles was overshadowed by stocks as many hedged convertible players were short-covering their stock positions.

There were a few bright spots, however.

Fleming was one, as word spread through the financial markets that the company was going to make the March 15 interest payment on the convertibles, as it was pushed to Monday because the 15th fell on a Saturday.

The Fleming converts were quoted at 18 bid, 20 offered - a marked improvement from 10 bid, 12 offered last week.

Salomon's Novick noted a nice bounce in the Brinker converts as the stock moved higher on an upgrade by the firm's equity analysts.

Inco's new converts also remained active, although prices were flattish, but the new Interpublic 4.5% convert gained 2.375 points as it continued to draw yield seekers.

Activity in the Omnicom converts trailed off, however, even though there was a sharp uptick in the stock. Traders said convertible holders were "standing pat" as the market widely anticipates a refinancing deal soon.

Omnicom shares ended up $3.49, or 6.8%, to $54.60. The 0% convertible due 2031 added 0.5 point to 98.75 bid, 99 offered and the 0% due 2032 gained 0.25 point to 100.25 bid, 100.5 offered.

"It's the serial put issue," said Novick, pointing out that Omnicom faces a potential put on the two convertibles every six months henceforth.

"At some point, it's going to get cost prohibitive to do a sweetener every six months. The market is looking see a refinancing."

There also were some odd lots of ISIS Pharmaceuticals Inc. and King Pharmaceuticals Inc. trading on news.

The ISIS 5.5% convertible due 2009 lost 3.375 points to 95.375 bid, 96.375 offered as the stock dropped $1.33, or 32, to $2.83 as ISIS and Eli Lilly announced disappointing results of a Phase III trial for a cancer drug.

King gained as investors appear to perceive troubles with its asset purchase from Elan Corp. plc as a good thing. King agreed in January to buy the U.S. and Puerto Rican rights to Elan's Skelaxin and Sonata drugs for $850 million.

On Friday, King said it was reviewing the deal after the U.S. Federal Trade Commission disclosed it was investigating whether Elan unfairly blocked generic competition for the muscle relaxant Skelaxin. On Monday, Elan filed suit to stop King from backing out of the arrangement.

King shares closed up 50c, or 4.5%, to $11.61. The bonds were pegged in the neighborhood of 85.5 bid, 86.5 asked.

"As far as King's credit goes, I don't think this deal falling through will be a negative," Novick said.

"For one thing, I don't think the market liked it to begin with. On the day it was announced the stock was down 15% and today it's higher. For another thing, they were paying a top price for these drug rights. So, if it doesn't happen, it won't be a bad thing."

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