Buyers propel new AMR convert; Bristol-Myers up on Erbitux news; Incyte trades at par in gray market

By Ronda Fears

Nashville, Feb. 12 - Convertible players were very busy Thursday with considerable activity in new issues although the bulk of that group continues to straddle par because the fresh paper is pricing at or near fair value. Traders said the cheapening trend in late January sparked by widening spreads has reversed and the market is richening with buyers out in full force, even though spreads haven't really come in much.

"There is just too much money sloshing around" in the convertible market for cheapening to continue, said a senior trader on one of the biggest convertible desks.

Bids subsided for a couple of weeks but are back "with a vengeance," the dealer said.

Some of the new paper that priced fully valued, or around the theoretical fair value, are even beginning to edge higher, another sellside convertible trader said, because the secondary market on whole looks rich.

"A lot of the new issues are looking flattish in their first few days, but they've got nowhere to go but higher," she said.

"This is what's in demand, fresh paper. They may not look that good setting them up, but if they just move with the market you'll eventually make money on them."

Buyside traders say it is frustrating, but also acknowledge that it is part of the evolution of the convertible market.

"The convertible market has gotten very efficient, a lot more sophisticated," said a strategist at a huge hedge fund in New York.

"It is becoming a more mature bond market in and of itself. There are some growing pains that go along with that, but it's a positive step long term."

Shhh, the gray market's asleep

At bat after Thursday's close were Alliant Techsystems Inc., Incyte Corp. and Invitrogen Corp., and buyside traders said the gray market was very quiet, as it has been for several weeks ahead of new issues.

"New deals are coming fully priced so there's really just not a lot of excitement about any of them," said a fund manager in New York who is in the process of establishing a new hedge fund focused on convertibles.

"Allocations are slim right now, no matter where the terms are [because of raging demand], but it's not like these deals are 5% cheap at issue and everyone is breaking their necks to buy in the gray because they know they're only going to get a quarter of their order."

Alliant Techsystems' $250 million deal, talked at 2.5% to 3.0%, up 37.5% to 42.5%, was not seen in the when-issued market at all. The deal, which was being sold on swap with $75 million earmarked to buy back stock, was a bit expensive compared with recent new deal terms, at least by accounts of sellside analysts.

Deutsche Bank Securities analysts put the Alliant Techsystems convertible 2.51% rich to 1.17% cheap, at the midpoint of guidance, using a credit spread of 190 basis points over Libor and 22% volatility.

Merrill Lynch & Co. analysts put the Alliant Techsystems issue 0.35% cheap, at the middle of price talk, using a credit spread of 280 basis points over Treasuries and 24% volatility.

Lehman Brothers analysts said in a report Thursday that new issues in January averaged 0.75% cheap, compared to the average new deal cheapness of 1.35% in December.

Alliant Techsystems priced smack in the middle of talk, 2.75%, up 40%, and with a 120% contingent payment trigger to bump the yield by 30 basis points a year, which boosted its value to holders.

Invitrogen's $450 million deal, talked at 1.25% to 1.75%, up 30% to 35%, got no bids, buyside traders said, but there was an offer at 1.5 points over issue price. It, too, looked rich to analysts. Deutsche analysts put it 3.29% rich to 1.92% cheap, at the middle of guidance, using a credit spread of 200 basis points over Libor and 30% volatility.

Incyte's new deal found more interest in when-issued activity, perhaps because it modeled up more buyer-friendly. The $150 million issue, talked at 3.25% to 3.75%, up 32.5% to 37.5%, traded at issue price and was offered at 0.25 point over, a buyside trader said.

Lehman analysts put the new Incyte convertible 2.9% cheap at the middle of price talk, using a credit spread of 650 basis points over Treasuries and 55% volatility.

Deutsche analysts, though, put the new Incyte issue right at about fair value - 1.93% rich to 1.96% cheap - at the midpoint of indicative terms, using a credit spread of 750 basis points over Libor and 55% volatility.

AMR, Fluor new issues higher

Ahead of spring break and higher summer traffic patterns throughout the summer, the flock of convertible airline paper was gaining altitude en masse. JetBlue Airways Corp. was one of the biggest gainers, but AMR Corp.'s new convert, and fresh converts from Mesa Air Group Inc. and Delta Air Lines Inc. last week, were all at elevated levels.

Traders particularly mentioned buyers for AMR's new 4.5% convertible, propelling it 1 point higher on swap to 101 bid, 101.5 offered. AMR shares edged up 27 cents, or 1.67% higher on the day, to close at $15.62.

Fluor Corp.'s new issue also was finding buyers, gaining 1 point outright and 0.375 point on swap to 101 bid, 101.25 offered.

"That [Fluor] bond has done very well," said a sellside convertible trader at one of the busiest convertible shops.

"The outrights like it because they'll take the yield on an investment-grade issue, and the arbs like it because there's a little volatility in that name."

New issues overall traded pretty actively Thursday, traders said, and all did pretty well.

Dick's Sporting Goods Inc., Safeguard Scientifics Inc. and Citadel Broadcasting Corp. also priced deals.

In the immediate aftermarket, Dick's Sporting Goods was the only shining star, though, climbing more than 3 points from where it priced.

Dick's Sporting Goods sold an upsized $155 million proceeds of cash-to-zero convertibles at 67.625 for a yield to maturity of 2.375% with a 40% initial conversion premium. It was upsized from $125 million proceeds and priced at the more aggressive end of yield talk for a cash coupon of 2.25% to 2.75% and at the middle of premium guidance of 37.5% to 42.5%.

The bond will pay a cash coupon for five years and then accrete at the cash coupon rate plus 25 basis points.

Bookrunner Merrill Lynch & Co. took the Dick's Sporting Goods convertible home at 70.625 bid, 71.125 offered - roughly up 3 to 3.5 points. The stock rebounded sharply, gaining $2.62, or 4.67%, to $58.78.

Bristol-Myers bucks stock dip

Bristol-Myers Squibb Co., the heavyweight pharmaceutical firm involved with controversial Imclone Systems Inc. in the marketing of the new cancer drug Erbitux, bucked the downward trend in its stock as lots of buyers stepped in for its convertibles.

"We traded a bunch of Bristol-Myers," a dealer said.

Bristol-Myers' 0% convertible due 2023 added 0.375 point on swap and was up 0.75 point on an outright basis, the trader said. It closed at 106.5 bid, 107 offered.

Bristol-Myers stock ended the day off 14 cents, or 0.47%, to $28.89. In after-hours trading, it was up 1.2%.

Imclone, however, was again at the heart of controversy.

Nasdaq halted Imclone stock at 1:35 p.m. ET, just prior to the Food and Drug Administration's announcement that Erbitux was approved, because during a five-minute span before the halt, the stock plunged more than $9 on volume of 684,420 shares, which was over a quarter of all the Imclone shares that traded Thursday.

Once trading resumed, Imclone stock closed at $34, still down $9.11, or 21.11%, on the day. In after-hours trading, though, the shares shot up $2.66, or 6.6%.

Imclone's 5.5% convertible due 2005 was pegged at 102, but no trades in the issue were reported at any of the big shops.

Imclone's infamy goes back to New Year's Eve 2002 when the company revealed a regulatory setback for Erbitux. Activity in the stock before that disclosure sparked an insider trading scandal that landed ImClone founder, Sam Waksal, in prison. Waksal's friend, Martha Stewart, the celebrity homemaker, is currently on trial for her involvement in the matter.

Act 2 of Disney drama unfolds

Walt Disney Co. convertibles were basically unchanged Thursday, but traders said volume in the issue continued to be very heavy.

Disney's 2.125% convertible due 2023, a $1.325 billion issue, closed at 115.625 bid, 115.875 offered. The stock gained another 40 cents, or 1.45%, to $28.

Although the Comcast Corp. bid for Disney is likely to be amended, and there may be others surface, analysts were still looking at how such a merger would affect bondholders.

Tatyana Hube, a convertible analyst at Merrill Lynch, said a merger under the all-stock terms of the Comcast bid for Disney as it stands right now should not trigger the change-of-control put or the contingent conversion feature, but it would result in a lower conversion ratio.

Per the issue's prospectus, if the Comcast merger offer is accepted, the Disney issue would become linked to the Comcast Class A common shares at a new conversion ratio of 26.4766, compared to the current 33.9443 conversion ratio.

For the change-of-control put trigger to be activated, she said, the stock consideration in a merger would have to be less than 90% of the total consideration. For the contingent conversion trigger to be activated, none of the merger consideration can be in stock.

From a credit perspective in general, analysts were not so enthused by the union of Disney with Comcast. Credit rating agencies have put Disney on watch for potential downgrade and Comcast on review for possible upgrade as a result of the event.

"Given the integration risk of left brain and right brain corporate cultures and the modest projected cost savings, we would view the combined company in a friendly all-stock merger as a mid triple-B credit at best," said Carol Levenson, director of research at Gimme Credit in a research report on Thursday.

"We would argue Comcast is already trading at this level and we see nothing but downside from the next plays in this game for both names."

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