Convertible market higher as $1 bln in new deals emerge

By Ronda Fears

Nashville, Tenn., Oct.24 - Convertible traders said the market was higher Tuesday on increased trading as three new deals totaling $1 billion emerged. CSX Corp. was bringing $400 million of zero-coupon converts to the table after the closing bell, while Avaya Inc. and King Pharmaceuticals Inc. each added $300 million deals to next week's slate of business.

"The quality of new deals is lifting the market and the interest is still very high in defensive plays with high credit quality," said a convertible trader at a hedge fund in New York.

Dealers said the secondary market gained somewhat on optimism in stocks that the worst of the earnings news is over and from the tax cuts outlined by President Bush during the session. The Dow Jones Industrial Average closed up 5.54, or 0.06%, to 9345.62 and the Nasdaq gained 27.10, or 1.59%, to 1731.54.

But most of the gains in converts, dealers said, stemmed from primary market activity that remains steady and strong. Pricing guidance also remains cheap to fair value, which analysts said is helping prop up demand.

At bat right after the close is CSX, bringing an overnight deal in the Rule 144A market on the heels of nice gains in railroad stocks on Tuesday. The Richmond, Va.-based rail company is pitching $400 million of 20-year zero-coupon convertible notes with pricing guidance of a 0.75% to 1.25% initial yield-to-maturity and a 35% to 40% initial conversion premium. Credit Suisse First Boston is lead manager of the deal.

The variable yield-to-maturity will be reset in years six, 10 and 15, market sources said. The 20-year issue will be non-callable for seven years, with puts in years two, five, seven, 10 and 15. There is a contingent conversion feature with a 120% threshold that declines to 110%.

CSX stock closed down $1.62 to $33.57.

Avaya and King Pharmaceuticals join Anthem Inc. and Motorola Inc. on next week's schedule.

Price talk on Avaya's $300 million in proceeds of 20-year zero-coupon convertible notes puts the yield-to-maturity at 2.75% to 3.25% and initial conversion premium at 27.5% to 32.5%. Merrill Lynch is lead manager of the registered deal, which is set to price after the market close Monday. The Basking Ridge, N.J.-based Lucent spinoff, a communications networks solutions and services provider, said it would use proceeds to refinance a portion of its commercial paper debt.

Avaya shares ended down $1.30 to $10.60.

King is pitching $300 million of 20-year convertible senior notes in the Rule 144A market with pricing guidance that puts the yield in a range of 2.75% to 3.25% with a 28% to 32% initial conversion premium. The company also is selling 16 million shares of common stock and certain company officers are selling 4.5 million shares. Credit Suisse First Boston, J.P. Morgan, Banc of America Securities and UBS Warburg are joint book-runners of the deal, which is scheduled to price after market close next Wednesday.

King stock closed down $3.80 to $38.20.

Traders said activity in the secondary market Wednesday showed renewed interest in some technology sectors like semiconductors, but also a continuing search for shelter from the economic downturn. Financials and money managers gained, traders said, as did chips and networking names although most telecoms were lower. New paper also remained on higher ground.

The new Cubist Pharmaceutical convert's gain was muted by some sharp gains for other more technology related names with new issues in play, traders said.

"The Cubist was interesting because the premium was so low, but the hot market spots right now is in security, companies that have security software, network security and the like," said a convertible trader at one of the major investment banks in New York.

Cubist's 5½% convertible subordinated notes due 2008 edged up 0.5 point on the day to 104 bid, 104.75 offered as the underlying common shares added 51c to $39.69.

Symantec Corp.'s new 3% convertibles due 2006 gained 5.5 points on the day to 111.5625 bid, 111.8125 offered with the network security solutions maker's common up $1.27 to $57.71. Teradyne Inc.'s new 3¾% convertible senior notes due 2006 added 5.625 points on the day to 108.8125 bid, 109.0625 offered as the automated test equipment maker's stock closed up $1.98 to $21.80.

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