New deals active; Solectron loses 0.5 point; AMR reoffered at 98.5; CuraGen, InterMune ahead

By Ronda Fears

Nashville, Feb. 10 - Trading flow subsided a bit Tuesday, but the new deal slate remained fairly active although there was considerable moaning and groaning from buyside sources about terms on the new paper. Indeed, nearly all the new paper afloat - in the immediate aftermarket or still in the gray market - was south of par.

AMR Corp. and Solectron Corp. priced, and both declined right out of the gate, even with AMR getting reoffered at 98.5. Together, those deals totaled $750 million.

Before the open, Fluor Corp. tossed another $300 million quick-sale deal out for the market to chew on, and it was "fractionally higher" in the gray market, a buyside trader said. It priced at 1.5, up 40% - at the aggressive end of yield talk but at the cheap end of premium guidance.

At bat after the close, too, were small deals from CuraGen Corp. and InterMune Inc. CuraGen was last seen in the gray market bid 0.75 point over issue price, while InterMune was bid 0.5 point below issue price.

Also after the close, Dick's Sporting Goods Inc. launched $125 million in proceeds of 20-year discount cash-to-zero convertibles for Wednesday's business talked with a cash coupon of 2.25% to 2.75% with a 37.5% to 42.5% initial conversion premium. After five years, it will accrete at the coupon plus 25 basis points.

Citadel Broadcasting Corp. is on tap to price $300 million of convertible notes after Wednesday's close, too. Traders said there hasn't yet been a gray market open up for the deal, which is talked to yield 1.5% to 2.0%, up 30% to 35%.

In the secondary market, merger and acquisition activity plus the rampant speculation along those lines were keeping traders busy. Mentioned specifically were ChipPAC Inc. and ST Assembly Test Services Ltd. - two convertible names that announced a $1.6 billion merger agreement. And in the wireless sector, the market buzz of the potential sale of AT&T Wireless Services Inc. continued to stir those issues.

Of note, as well, oil and gas producers like Amerada Hess Corp. were higher on the prospect of oil prices remaining high due to OPEC's decision to cut crude production. Oilfield services companies like Schlumberger Ltd. and refiners like Valero Energy Corp. were higher, too.

But price sensitive sectors like airlines, which were already reeling on higher fuel costs, were hurt by the news.

Bittersweet reaction to deals

The new deal pace has picked up this week to answer the clamoring of buyers itching to put money to work, but it hasn't gotten any great applause from the ranks of investors.

Issuance still trails year-ago levels, but that's not really the complaint.

"It's just so ugly right now, treacherous," said a source from the hedge fund community.

"It's been a very difficult period and new issues usually take up the slack. This week's calendar looked pretty good, but then hardly any of these new issues are trading up. The easy money has dried up."

Deal terms are seemingly designed to appeal to a variety of convertible investors - hedged or not - but the fundamentals, the coupon and conversion premium, just seem to be too expensive, an outright convertible manager said.

A convertible origination source defended new deal terms, however, saying: "The terms are commensurate with the overall convertible market, which, granted, is priced right now right at about fair value, or even a little rich." He pegged the broad convertible market's terms at about 3.5%, up 40%.

"It's a give-and-take seat from our perspective. We're trying to balance having a satisfied issuer and an investor who is pleased. Sometimes a deal is designed to appeal to a specific segment of the market, because of what you're trying to achieve for the company involved."

According to a Lehman Brothers report earlier this week, at Jan. 31, the firm's tally of U.S. convertibles consisted of 768 securities with average terms of 4.1%, up 46.1%, a credit quality of Ba1/Ba2 and the market reflected an average weighted richness of 0.35%.

AMR flies southerly route

The latest AMR pitch to the convertible market flew, but it was in a direct southerly path. The issue was reoffered by bookrunner Credit Suisse First Boston at 98.5, and buyside sources said the first trade was at 97.5. CSFB closed the issue at 98.5 bid, 98.75 offered.

AMR sold the $300 million 20-year convertibles with a 4.5% coupon and a 40% initial conversion premium - at the cheap end of price talk for a yield of 4.0% to 4.5%, up 40% to 45%.

"If you were in that first trade, it was a good buy," one trader said, referring to the 97.5 level.

AMR's existing 4.25% convertible, sold just a few months ago, lost 5 points outright and came in "a little bit" on swap, traders said. It was pressured by the drop in the underlying stock, which weakened on the prospect of fuel prices remaining high.

The AMR 4.25s were quoted late afternoon at 113 bid, 114 offered versus $15.15 for the stock. AMR shares ended off 70 cents, or 4.44%, to $15.05.

Sellside analysts had put the new AMR convertible anywhere from 2.5% rich to 1.17% cheap, at the midpoint of price talk.

The Mesa Air Group Inc. and Delta Air Lines Inc. deals last week were also tough sales, both losing ground out of the gate, and Delta's was reoffered at 97.

Airline paper across the board was weaker Tuesday on the OPEC implications.

After the close, traders also speculated that there could be a mixed reaction to Delta's late-day release that it plans to sell two Boeing 777-200 aircraft scheduled for delivery in 2005 in order to cut capital expenditures. In addition, the company said it also plans to either buy other Boeing aircraft in lieu of three Boeing 777-200 aircraft scheduled for delivery in 2006 or sell those aircraft.

"Delta must continue to create a path to rebuild its balance sheet and maintain effective cash flow management," said M. Michele Burns, Delta's executive vice president and chief financial officer. "Reducing major capital spending, such as purchasing aircraft, is an essential way to contribute to this goal."

But one trader said the market's reaction to the Delta news is "probably going to be negative."

Solectron deal shafts outrights

Solectron's fifth trip to the convertible market was a conundrum in and of itself, market participants said.

"The book looked healthy, but the gray was weak. It was weak in the gray market by 0.5 point Tuesday before the market open, but the book was running around $3 billion [for a $450 million offering]," a buyside trader at a huge convertible fund in New York said.

"Then it traded down to 99.5. The outrights got shafted."

Solectron sold $450 million of convertibles to yield 0.5% with a 43% initial conversion premium - at the aggressive end of price talk for a yield of 0.5% to 1.0%, up 38% to 43%.

Sellside analysts put the new Solectron convertible about 2.17% cheap, at the middle of guidance.

Goldman Sachs & Co., one of the joint bookrunners on the deal, closed the new Solectron convertible at 99.5 bid, 100.25 offered. In the gray market before pricing, the issue was seen with a bid at issue price with an offer of 0.25 points over.

Solectron shares ended Tuesday up a nickel, or 0.74%, to $6.81.

A source working closely with the new Solectron deal said participation was fairly broad across the convertible market in terms of outright and hedged buyers.

Fluor bid plus 0.125 point

Early in the day, Fluor launched $300 million of 20-year quick-sale convertible notes talked to yield 1.5% to 2.0%, up 40% to 45%.

It was last seen in the gray market with a bid of 0.125 point over issue price and an offer at 0.5 point over. Fluor shares closed down 75 cents, or 1.84%, to $39.96.

Deutsche Bank Securities analysts put the Fluor convertible 2.7% rich to 0.52% cheap, at the middle of price talk, using a credit spread of 60 basis points over Libor and 26% volatility.

Moody's assigned an A3 rating to the Fluor convertible, with a stable outlook. Fitch Ratings assigned an A rating, with a negative outlook. Standard & Poor's assigned a BBB+ rating, with a stable outlook.

A buyside market source said the final terms on Fluor were 1.5%, up 40%, which would be the aggressive end of yield talk but cheap end of premium guidance, suggesting more delta players than coupon clippers.

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