New issues dominate market as funding window narrows

By Ronda Fears

Nashville, Feb. 27 - New issues - those in play, afloat or yet to emerge - dominated the convertible market as the window to tap the market before war breaks out closes in on potential issuers.

Even though the U.S. government on Thursday lowered the terrorism threat level to yellow from orange, citing the end of the Muslim hajj, a war is still viewed as inevitable by many onlookers.

Thus, market sources say issuers planning to tap convertible investors will be wanting to make their move within the next couple of weeks or so because it is widely perceived that warfare will put a halt to investment activity, or at least dampen it severely.

"Who knows how long this window is going to last, to early March, when?" said an investment banker at one of the top convertible underwriting firms.

"These companies will want to do something right now because who knows what's going to happen when the war breaks out. There are a couple of deals that could break quickly."

Indeed, there was a lot of buzz late Thursday that an overnighter was in the works. That also had been the case Wednesday, but nothing materialized.

Early Thursday there was talk in the U.S. convertible market that the big German bank HVB was looking at a €4 billion mandatory convertible but it fizzled out as HVB denied the reports.

After Thursday's close, however, LNR Property Corp. announced a $175 million convertible deal, but no other offerings were known.

As many market participants expected, more aggressive guidance emerged for the Chesapeake Energy Corp. and Axcan Pharma Inc. deals, both at bat after the close.

Axcan's deal then priced even outside the revised talk and at a bigger size.

As the new price talk on the deals squeezed quite a bit of juice from the new deals, Axcan lost some ground in the gray market but was still well over par.

Chesapeake's deal continued to climb in the gray, despite the tighter guidance, but the bid/ask spread narrowed.

Price talk on Axcan's $100 million five-year convertible notes was revised to put the premium between 30% and 35% from original guidance for 25% to 30%. The yield talk was not tightened, and remained at 4.25% to 4.75%.

The revised price talk took about 1% of cheapness out of the deal, by Wachovia Securities' calculations.

Wachovia convertible analyst Kimberlee Brody put the deal, at the middle of the revised talk, as 4.19% cheap, versus 5.12% cheap at the middle of original guidance.

She was using a spread of 750 basis points over Treasuries and 37.5% volatility in both calculations. In the revised modeling, Axcan shares were at $10.94 versus $11.78 in the original calculation.

Axcan priced an upsized $110 million of the convertibles with a 4.25% coupon and 38% initial conversion premium

A capital markets source familiar with the deal said it was oversubscribed by around 10 times.

"I think a lot of it is that people just need product," the source said.

"But the fundamental story here was also a good one. The stock had been in a bullish pattern, and that's expected to resume once the convertible deal is done."

Axcan shares ended Thursday down 65c to $10.15, having dropped from around $11.75 when the deal was launched Monday.

The Axcan convert was quoted 2.5 points over par on the bid side, 3.5 points over on the offer side - about 0.5 point lower than on Wednesday.

The Canadian drug firm plans to use proceeds for general corporate purposes, and future product and company acquisitions.

Guidance on Chesapeake's $200 million convertible perpetual preferred was tightened to yield 6.0% to 6.25% with a 25% to 27% initial conversion premium on Thursday before pricing.

Original talk put the yield at 6.25% to 6.75% and initial conversion premium between 23% and 27%.

The revised price talk took about 2.5% of cheapness out of the deal.

Indicative terms also emerged Thursday on Chesapeake's $300 million of junk bonds, putting the handle in the 7.625% area, which was a bit wider than the buzz in the convertible market earlier this week that put it at about 7%-7.5%.

Also, Chesapeake planned to sell 8 million shares of common stock.

Chesapeake shares ended up 5c to $8.20.

The Chesapeake convert was quoted 2.125 points over par on the bid side, 2.625 points over on the offer side. The bid moved up 0.375 point while the offer moved up just 0.125 point from Wednesday.

"There were better sellers [for the new Chesapeake convert] at the close, but they were less optimistic," said a buyside convertible trader.

Sierra Health Systems Inc.'s new issue lost ground, but traders said several new issues gained nicely.

The Sierra Health 2.25% convert dropped 1.5 points to 98.5 bid, 99.5 asked while the stock closed up 26c to $12.01.

New paper from McData Corp. and Freeport McMoRan Copper & Gold was quoted sharply higher.

Elsewhere in the secondary there was good two-way activity in converts for the most part, due largely to the new deal action, dealers said.

Reports about a potential shakeup at the top level of Interpublic Group were expected to create some interesting play in the converts, which have been active recently on a barrage of news about the ad agency.

An industry magazine reported the Interpublic board was meeting Thursday in New York to consider changes to the company's leadership at the highest levels and that was also reported in the Wall Street Journal.

"Get ready for some volatility, again, on the IPG convertibles," said Wachovia Securities, Inc. convertible analyst Sri Nadesan in a report Thursday.

"Interpublic has struggled operationally over the past two years. We were hoping for some improvements, even if modest, over the next two quarters. We wonder what any leadership change, should it happen, would mean for the timing of an operational recovery and for the potential sale of NFO WorldGroup."

Interpublic's 1.8% convert was quoted up 0.25 point to 89.25 bid, 90.25 asked while the 1.87% convert was quoted off 0.125 point to 76.125 bid, 77.125 asked.

Interpublic shares closed up 46c to $9.70.

Lucent Technologies Inc. gained a little after it reported Thursday said it had settled the SEC investigation into its accounting practices and would not be required to pay any penalties or make any financial restatements.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.