Sybase issue climbs out of gate; BlackRock ends in gray market with no bid; Allied Waste slips

By Ronda Fears

Nashville, Feb. 16 - Convertible fund managers say that despite the "seemingly heavy redemptions" going on in the market demand for new paper is very healthy, yet capital markets sources argue they are struggling to get deals done despite a heavy shadow calendar.

"There is still capital to deploy in convertibles," said a manager based in New York. "There have been some closures [of funds] but it can't be all that drastic because we haven't seen that much of a decline in prices, not to the extent that the noise [about redemptions] would suggest anyway."

"Mostly it's a matter of warming up the issuer to what the terms are going to have to be to get a deal done, compared to what they were thinking maybe at the first of the year," said a chief convertibles origination official. "We estimate there are probably 20 or 30 deals waiting in the wings."

Yet, deals are just trickling across the tape with February's fare of $1.3 billion thus far running way behind $4.4 billion seen in the first couple of weeks of February 2004. Year-to-date issuance figures are just as dismal, with the tally so far at $3.6 billion versus $8.6 billion in the same period of last year.

"The same reason that the portfolios are hurting right now is why we're having a tough time bringing deals," another capital markets source said.

The back up in Treasury yields Wednesday on the sell-off sparked by Federal Reserve chairman Alan Greenspan's testimony before Congress doesn't help either, a buyside trader added. "It's a chicken-and-egg sort of dilemma almost," he said. "Returns are getting zapped but new issues would help us out there; yet, apparently they can't get the issuers to jump in the market with the dynamics such as they are."

Sybase shoots up to 101.5 bid

Sybase Inc. sold its $400 million convertible, on swap, at par to yield 1.75% with a 35% initial conversion premium - at the tight end of coupon talk of 1.75% to 2.0% and in the middle of premium guidance of 32.5% to 37.5%. That heartened lots of banker types, particularly as it came on the heels of a tough go of it last week with Protein Design Labs Inc.'s issue.

"We were happy to see where Sybase came at," one capital markets source said. "It shows that people are still willing to buy in this area, there's still some money out there sloshing around."

The Sybase convertible gained from par right out of the chute and got better as the day wore on, a buyside trader, who got involved with the deal, said. In the gray market before pricing, it had traded as high as 0.75 point over issue price but eased to end with a bid of 0.5 point over and offer at 0.875 point over.

Joint bookrunner Lehman Brothers Inc. closed out the issue at 101.5 bid, 102 offered. Sybase shares, meanwhile, regained 37 cents on the day, or 1.98%, to end at $19.05.

Dublin, Calif.-based Sybase, a wireless software company for mobile and wi-fi technologies and Linux server software developer, said it would use up to $125 million of proceeds to buy back stock concurrent with the offering of the notes. Remaining proceeds, the company said, would be used for working capital and general corporate purposes, which may include the acquisitions, strategic investments or additional purchases of common stock.

BlackRock wafts lower in gray

Conversely, buyside traders said New York-based investment fund BlackRock Inc.'s quick-sale deal drifted lower in the when-issued market throughout the session. Shortly after the $225 million deal launched early Wednesday, one trader said it showed a bid of 0.375 point over issue price with an offer at 0.875 point over.

By the day's end, traders said there was an offer of 0.5 point over with no bid. BlackRock shares lost $1.92 on the news, or 2.42%, to $77.58.

The 30-year convertible notes were talked to price to yield 2.125% to 2.625% with a 30% to 35% initial conversion premium.

Despite dividend protection for holders, which has become a standard feature of new convertible deals, some potential buyers were leery of the BlackRock issue. On Tuesday, BlackRock - majority owned by The PNC Financial Services Group Inc. and employees with $342 billion of assets under management at year-end 2004 - boosted its quarterly common stock dividend 20%.

BlackRock is using proceeds to repay a $150 million bridge loan used to fund a portion of the acquisition of SSRM Holdings Inc. - an umbrella for money manager State Street Research & Management that BlackRock bought from MetLife Inc. for $375 million.

"Some people looking at this like the sophistication of the issuer and feel terms are reasonable relative to recent deals," said a sellside source.

Celanese, Huntsman rising yet

Another capital markets source said that, from the primary side of the fence, an "interesting point of the market recently has been how well the mandatories are doing."

Celanese Corp. and Huntsman Corp. have both recently brought to market convertible preferreds - a mandatory in the case of Huntsman - alongside initial public offerings. Both have done well in the aftermarket, too, plus both gained ground Wednesday with heavy action.

The Celanese 4.25% perpetual convertible preferred added 0.25 point to 25.25 bid, 25.75 offered while the underlying stock gained 16 cents, or 1%, to $16.10.

Huntsman's 5% mandatory gained 0.5 point to 54.25 bid, 54.75 offered with the stock up 37 cents, or 1.45%, at $25.97.

Buyside sources are not too surprised, though. Amid lackluster expectations for issuance in 2005, following a depressed level of new deals in 2004, some managers were forecasting an area to see increased issuance would be preferreds and mandatory issuance as equity-like structures come back into vogue.

Allied Waste mostly steady

Allied Waste Industries Inc.'s convertibles were a bit softer but essentially resisted any reaction to the Moody's downgrade to the credit Wednesday, traders said.

"This [Allied Waste situation] is exactly why we are left scratching our heads," a buyside trader said.

At times, he said, it seems "one has to use a weird lens to look at the market." For instance, Allied Waste's downgrade typically might suggest the credit would widen, but it didn't. The convertibles, at roughly 88.25, have an implied spread of roughly 350 basis points over Libor, on a 25% volatility, but historically a single-B should be trading in the neighborhood of 435 basis points, which he said might be conservative.

"So, you could argue that the [4.25% Allied Waste convertible] bonds are rich even at 99.25," he said.

Yet, a sellside trader pointed out that the Allied Waste credit default swaps are indicated at 440 basis points over Libor. And, Banc of America's broad index of junk bonds puts the yield-to-worse spread for single-B credits roughly at 300 basis points and 400 basis points for industrials, so it could also be argued that the Allied Waste convertibles are fairly priced.

The sellside trader said the rating event, though, might present an opportunity to look at the Allied Waste convertibles. And, there are interested parties.

"There's a lot to be said for AW. Wouldn't you prefer to own garbage dumps and garbage collection routes than, say, own a discount airline?" one fund manager said. "It's difficult to make money in airlines. It's difficult to lose money in garbage collection, particularly if you own the garbage dumps."

FLYi independence in doubt

FLYi Inc., formerly Atlantic Coast Airlines, is not yet in default but the holding company for Independence Air said early Wednesday it would skip the coupon payment for its 6% convertible. The Dulles, Va.-based FLYi said it expects to make the payment within the 30-day grace period, but there are skeptics.

Still, the convertible was quoted at the close Wednesday at 45.875 bid, 47.875 offered versus 44 bid, 46 offered at the open. FLYi shares also ticked up, adding 12 cents on the day, or 8.45%, to settle at $1.54.

"There's just too much bad news to offset any good news," said a buyside trader. "The airline, even with lease negotiations, may still be under water on the revenue side. Their fixed costs are too high to make money."

FLYi, which has $1.3 billion in debt including leases, was able to restructure its aircraft leases with General Electric Co. in January, and the company is amid efforts for further restructuring, which onlookers expects will include airplane leases. And, analysts said negotiations may be easier now because demand for small jets that FLYi uses has softened, so lessors might be more willing to renegotiate terms since they wouldn't have a market if they repossessed them.

"I think the key in these negotiations is that there is little option for the lessors to re-lease the planes, a sellside trader said. "FLYi has conserved about $5 million cash. If they can successfully restructure even just the lease obligations, everyone gets paid. If not, FLYi has $5 million more than it would have to help get it through bankruptcy."

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