Teekay launches mandatory; trading choppy, quiet, mixed

By Ronda Fears

Nashville, Feb. 10 - It remained quiet in the convertible market Monday with sporadic activity on mixed signals regarding the possible outbreak of war.

After the close, Teekay Shipping Corp. launched $125 million of three-year mandatory convertibles talked to price at a yield of 7.25% to 7.75% with an 18% to 22% initial conversion premium.

The deal is set to price Tuesday, and was pegged by sellside analysts at 2.6% to 5.47% cheap. Teekay shares ended off 17c to $38.52.

"It was choppy, especially this morning," said a dealer.

"At the end of the day it was a mixed bag. The war is on and off, and it really has put everyone on edge."

Indeed, the war talk has sidelined lots of players.

"I think market participants are frozen in fear that we will have either war or peace or God-knows-what," said Barry Nelson, portfolio manager at Advent Capital Management.

"Many traders fear being wrong more than they lust for gains, so they tend to do nothing on the eve of market-moving news."

After spending the morning in lower territory, stocks turned north when news around midday broke that Iraq had agreed unconditionally to allow U.S. spy planes to fly over the country.

Still, most activity in the convertibles market centered on security.

"There was decent buy interest in defensive, better credit names," said Venu Krishna, head of U.S. convertible research at Lehman Brothers.

Valuations for mandatory convertibles and technology convertibles are both coming in a bit, Krishna said, after a fairly long run.

Also, Krishna noted the spread on Tyco International Ltd.'s new converts "collapsed a fair bit with the Bs now just a shade better than the As. We expect the As to eventually regain their premium over the Bs."

Initially, the Tyco 2.75% convert, the A tranche, appeared more attractive to investors because of the shorter put and higher bond floor. Then, the pendulum swung to tranche B, the 3.125s, as the credit curve signaled a mispricing in the convert, observers said.

Tyco's 2.75s ended Monday off 0.125 point to 98.75 bid, 99 asked and the 3.125s added 0.125 point to 98.25 bid, 98.5 asked. Tyco shares closed off 3c to $15.29.

Other new paper was mostly lower, with few trades, and most still remain underwater.

Freeport McMoRan Copper & Gold Inc.'s new 7% convert slipped 0.625 point to 99.625 bid, 100.125 asked while the stock ended off 22c to $16.16.72.

Traders said few converts changed hands, but the issue was marked down as the stock moved. The stock fell, traders said, in response to a decline in the price of gold on the easing of war fears on the news that Iraq would allow overflights.

McData Corp.'s 2.25% convert edged up 0.25 points to 101.25 bid, 102.25 asked as the stock gained 1c to $7.21.

United States Steel Corp.'s 7% mandatory added 0.125 point to 48 bid, 48.5 asked while the stock gained 1c to $12.16.

Micron Technology Inc.'s new 2.5% convert dropped 1.875 points to 93.625 bid, 94.125 asked with the stock closing down 26c to $7.35.

Elsewhere, traders mentioned El Paso Corp., Scios Inc. and EchoStar Communications.

El Paso's converts lost ground on credit worries, in the wake of a two-notch downgrade late Friday by Standard & Poor's, although the stock rebounded.

S&P lowered El Paso's senior unsecured debt, including the converts, to B+ from BB.

El Paso's 0% convert dropped 0.625 to 29.875 bid, 30.875 asked. The 9% mandatory lost 0.25 point to 24.5 bid, 24.75 asked.

El Paso shares gained 28c to $5.20.

Scios' convertible was marked down considerably from Friday when it shot up on talk that the drug company would be acquired by Johnson & Johnson.

On Monday, when the talk was confirmed by both companies, the Scios convert was quoted at 120.875 bid, 121.875 asked with the stock up $1.72 to $43.92. While that was 10 to 11 points higher than a week ago, it was down from 126 bid, 127 asked on Friday.

"Their mouths were larger than their stomachs," said one observer, noting the pullback in the Scios converts.

Even though the proposed Johnson & Johnson acquisition of Scios Inc. is a $2.4 billion cash transaction, Merrill Lynch convertible analyst Tatyana Hube said it may not trigger a change of control put, based on the conversion price test. (See story on page one of this issue.)

In any event, she said the Scios convert should be worth more after the merger, about 123.65, largely due to Johnson & Johnson's better credit quality. So holders might not want to put it for par.

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