Vishay reoffered at 98, drops; Fair Isaac, Mentor floater up; Tyco 3.125s drop on big sale

By Ronda Fears

Nashville, Aug. 1 - Lots of traders were happy Friday if for no other reason because it was the last day of a tough week, as most of the market lost ground, including the bulk of new converts put into circulation.

Also noteworthy, Tyco International Ltd.'s 3.125% converts fell 1.25 points on a big block sale, one trader said. The issue went out at 103.5 bid, 104 offered, while the 2.75% converts slipped by 0.25 point to 103 bid, 103.5 offered with the stock closing off 10c, or 0.5%, to $18.50.

Several new issues were reoffered below par this week as investors exerted some pricing muscle, including the new Vishay Intertechnology Inc. convertible, and still they went south. Vishay's new deal, priced at 3.625%, up 60%, was reoffered at 98 and was closed by one of the lead banks at 97.625 bid, 97.875 offered.

Flextronics International Ltd.'s new offering, priced at 1%, up 35%, was reoffered at 98.5 when it priced before the open Thursday and fell another 2.25 points Friday to 95 bid, 97 offered.

Hedge funds - which account for 75% or more of the activity in converts - have complained about "pain" for a couple of months but while they suffer many outright convert funds are nearly ecstatic with recent returns.

"I get the feeling that last month [July] was worse than the month before. Right now I'm just keeping my head above water," said John Siebel, head of trading at Silverado Capital Management.

"If you're hedging off your interest rate risk and equities and vol, you're burning the fuse at both ends. There's nowhere to make money."

Merrill Lynch reported Friday that its hedge fund index for July was down 1.1%, following a 0.44% drop in June, citing increasing yields and dropping volatility as the biggest culprits.

Still, there are optimists.

"Lower prices, higher yields and lower conversion premiums must lead to better performance in the future," said veteran fund manager F. Barry Nelson, of Advent Capital Management.

"Time runs forward, not backwards. Even concerns about low volatility...well, vol is already down, is it going to zero? Is it stabilizing? Might it rise again? Prospects are looking up."

Certainly, outright funds - especially those focused on delta - are happy with their performance of late, if not the new deals that are getting served up.

"We're up 12.5% in July. That's our best month of the year," said Richard Russell, who manages the ACM Convertible Securities Fund.

He's not excited about most of the new deals, except perhaps Fair Isaac Corp. sometime in the future, and he was caught a bit offguard by Veritas Software Corp. calling its 1.856% discount convert, but for the most part Russell is bullish.

Fair Isaac's deal turned out to be the closest to a home run among the slate of new deals this week, mostly due to the small premium. The $350 million deal priced to yield 1.5%, up 22%. The lead banks closed it at 102.25 bid, 102.75 offered.

"We don't have to buy them now," Russell said, adding that he has not been playing many new deals because of the hefty premiums.

"I'm very bullish on the market, though, not in the next month but in the next year or year and a half."

Many convertible investors have invoked some degree of pricing power recently, even the salesmen acknowledge.

Dynegy Inc. sweetened the yield range on its new deal, and priced it at the cheap end of revised guidance for a whopping 100 basis points more than the top end of original price talk. The $175 million issue was printed with a 4.75% handle, up 30%, and dropped 1 point from par in the immediate aftermarket.

Dynegy also had to pony up more yield on its junk bond deal, but it was upsized.

On the heels of Friday morning revisions in the price talk of all three tranches, which added about 25 bps, Dynegy priced an upsized $1.45 billion - up from $1.325 billion - of second priority senior secured notes. (See the high yield review elsewhere in this issue for terms.)

Buyers for the Dynegy convert largely came from the high-yield universe, some traditional convert investors speculated.

"The prospectus on this [Dynegy convertible] deal was 2 inches thick, it reminded me of the Michael Milken days," said a West Coast convertible fund manager, referring to the junk bond giant who ultimately fell from grace in scandal.

Another outright convertible fund manager added: "I figure a lot of the [Dynegy] convert buyers were high yield accounts too."

In addition to Fair Isaac getting interest from delta seekers, Mentor Graphics Corp.'s floater also was a hit among those looking for interest rate cushion but it was a tiny deal.

Mentor Graphics sold the $100 million convertible floater to yield three-month Libor plus 165 bps, up 37.5% - at the middle of yield talk and cheap end of premium guidance. It rose to 101.5 bid, 102 offered.

New deals through Thursday made for a number approaching record levels in terms of the number of deals, but the market also has seen a lot of paper exiting.

Merrill Lynch convertible analyst Tatyana Hube noted in a report Friday that with only $1.2 billion of net new issuance in July and almost flat convertible secondary market performance, the convertible universe grew by just $1.6 billion.

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