ExpressJet prices aggressively after Continental scraps stock sale; Dynegy sweetens yield

By Ronda Fears

Nashville, July 31 - It was a tough, if not outright confusing, market in convertibles Thursday with salesmen and traders alike reporting a difficult day. As Treasuries got "slammed" and stocks marked slight gains, converts were widely mixed.

"It was a very tough day," said the head convertibles trader at one of the big shops, with more than a hint of exasperation in his tone.

A buyside convertibles trader at a hedge fund in New York said: "It was crazy today, a mess. The bond market got slammed. Volatility still sucks. There's a lot of pain and our tolerance for these [new deal] terms is wearing very thin."

Descriptions of the market from origination desks were no different than in the secondary market - tough, difficult.

"Investors are pushing back right now," as one salesman put it.

ExpressJet Holdings Inc.'s popular - albeit delayed - deal priced aggressively, then failed to gain much ground out of the gate, while Flextronics International Ltd. sold at the cheap end of guidance and was reoffered below par by underwriters.

Dynegy Inc. sweetened the yield on its new deal, by a whopping 75 to 100 basis points, and buyside sources said it still was having trouble as the stock, with very limited borrow capacity, continued to sink.

"It's amazing how far they had to walk back the coupon," said a convert salesman, who was not working on the Dynegy deal.

New price talk on Dynegy's $175 million of 20-year convertible put the coupon at 4.5% to 4.75%, versus original guidance for a 3.25% to 3.75% handle. The initial conversion premium is still seen at 30% to 35%.

Still, in addition to the Dynegy and Vishay Intertechnology Inc. deals, Fair Isaac Corp. and Mentor Graphics Corp. joined the pricing party on the final day of July.

In another sign of tough times in the primary market, the only gray market activity even seen on any of the pending deals was in Mentor Graphics and it didn't really count, as the bid was at issue.

Mentor Graphics is pitching $100 million of 20-year convertible floating-rate notes talked to yield three-month Libor plus 140 to 190 basis points with a 37.5% to 42.5% initial conversion premium. The existing Mentor Graphics 6.875% convert due 2007 fell 2.75 points to 109 bid, 111 offered, while the stock closed off 79c, or 4.44%, to $17.02.

Several buyside sources speculated that the Fair Isaac deal might find potential buyers balking at the terms. The $350 million of 20-year convertible notes are talked to yield 1.0% to 1.5% with a 22% to 27% initial conversion premium.

"We're just not going to leap out there just to stay busy," said one fund manager.

"Not only is it [Fair Isaac] in a weird space, it designs scoring systems for credit card companies, the terms are just too expensive."

At the midpoint, Deutsche Bank Securities Inc. analysts put it 4.2% rich, using a credit spread of 350 bps over Libor and a 25% stock volatility. Merrill Lynch & Co. analysts put it 1.45% cheap, using a credit spread of 330 bps over Treasuries and a 30% stock volatility.

Some also think the new Vishay deal will be a difficult sell.

Vishay's $450 million of 20-year convertible notes are talked to yield 3.125 to 3.625% with a 60% to 65% initial conversion premium.

At the midpoint, Merrill puts it 0.9% cheap, using credit spread of 630 bps over Treasuries and a 45% stock volatility. Deutsche puts it 1.84% rich to 1.68% cheap, using a credit spread of 500 bps over Libor and a 40% stock volatility. Lehman puts it 1.09% cheap, using a credit spread of 500 bps over Treasuries and a 40% stock volatility.

In part, Vishay will use proceeds to take out the old General Semiconductor 5.75% convertible. That issue is callable in August at 103.29, and closed Thursday down 1 point to 101.5 bid, 102.5 offered.

As Vishay also may use some proceeds for buybacks on its 0% due 2021, which is putable in June 2004 at 60.277, that issue pulled back by 0.5 point to 55.75 bid, 57.75 offered.

Vishay shares lost $1.16, or 8%, to $13.30.

ExpressJet made its take-off after Continental Airlines Inc. scrapped its sale of 5 million shares in the airline, but is spending most of the proceeds to buyback stock from Continental. Thus, Continental's converts got a lift.

ExpressJet sold $125 million of 20-year convertible notes at par to yield 4.25% with a 30.5% initial conversion premium - at the tight end of yield talk and slightly more aggressive than premium guidance by 0.5%.

The ExpressJet deal was delayed a day because Continental didn't want to sell its ExpressJet stock at the lower levels resulting from hedge funds shorting the common. The convert had traded Tuesday 1.5 to 2.5 points over issue price, but Citigroup - one of the lead managers - closed it Thursday at 100.125 bid, 100.625 offered. ExpressJet shares closed down 51c, or 3.66%, to $13.44.

Flextronics sold $500 million of seven-year convertible notes at par to yield 1.0% with a 35% initial conversion premium - at the cheap end of price talk - and then underwriters reoffered it at 98.5, according to sellside sources.

Credit Suisse First Boston, one of the lead banks on the Flextronics deal, closed the new convert at 97.25 bid, 98.25 offered. Flextronics stock lost 52c, or 4.5%, to $11.00. Proceeds were earmarked to repurchase senior notes and high-yield trading desks reported that the Flextronics 9.875% due 2010 gained 4 points to 113 while the 6.5% due 2013 lost 2 points to 92.

Other new deals put into circulation this week were widely mixed.

Nextel Partners Inc.'s new 1.5%, up 31% convert, was pegged by lead manager Wachovia at 97 bid, 98 offered. The old Nextel Partners 1.5s were quoted up 2.25 points to 134.5 bid, 135 offered, after plunging around 12 points immediately after the new deal. The stock added 21c, or 2.42%, to $8.88.

Priceline.com Inc.'s new 1% added back 1.125 points while WCI Communities Inc.'s new 4%, which was reoffered by lead bank Deutsche at 98, was seen flat at 98 bid, 98.5 offered.

Elsewhere in secondary dealings, distressed traders were busy, and noted that Charter Communications Inc. converts were lower while the junk bonds gained ground.

Convertible dealers also noted a big drop in coal concern Massey Energy Co.'s convert and metals name Inco Ltd. Pep Boy's converts, however, were marked higher by around 2 points on its restructuring news.

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