Broad rise in convertibles but eagerly awaited King Pharmaceuticals delayed

By Peter Heap

New York, Nov. 1 - Convertibles turned in a strong performance Thursday, with rising stock prices helping equity-sensitive issues and a delayed reaction to Wednesday's sharp drop in interest rates boosting the big portion of the market that is behaving more like straight bonds.

But the eagerly awaited King Pharmaceuticals, Inc. offering was delayed from its scheduled late-Wednesday pricing. In other primary activity Chesapeake Energy Corp. announced a $125 million convertible preferred offering that is expected to price next week.

Convertibles got a lift from a strong performance in the stock market Thursday. The Dow Jones Industrial Average added 188.80 to 9263.90 while the Nasdaq composite gained 56.10 to 1746.30. That followed a similar lift Wednesday when the rising Nasdaq outweighed the sinking Dow industrials to help the still heavily technology-oriented convertibles market.

But an extra factor was seen Thursday as far out-of-the-money issues responded to the sharp drop in interest rates Wednesday when the Treasury announced it will no longer be issuing 30-year long bonds. The gains in bond prices continued Thursday, although profit taking reversed some of the steep early rise.

"A lot of the interest-rate sensitive bonds - there are a lot of them - they lag the market," one hedge fund trader in New Jersey said. "Today you started seeing a lot of bonds doing better."

But despite the upward move Thursday, many convertible players continue to avoid the large chunk of the convertible market that is deeply out-of-the-money due to the "rout" of recent times, an analyst at a major investment bank in New York said.

"People want transactions where they can make money," he noted, something that is less easy when securities are only making the small moves typical of the straight bond market.

Not only are these deals trading at the bond floor, but many have put options which are creating concern, since the issuers could be faced with heavy demands for cash.

All that means that many convertible players are waiting for new deals to surface, the analyst said.

"There's a lot of pent-up demand for new deals," he added.

A good illustration of that is the planned $300 million offering for Bristol, Tenn.-based King Pharmaceuticals.

The Rule 144A deal had been scheduled to price after the market close Wednesday but was held over.

"It's just that the company didn't want to price" that night, said one source familiar with the deal. "It's not because of a lack of potential buyers."

Price talk remains the same, with the yield put at 2.75% to 3.25% and the initial conversion premium at 28% to 32%. Underwriters are Banc of America Securities, Credit Suisse First Boston, J.P. Morgan and UBS Warburg.

The securities were "very active" in the gray market Thursday, one source said, adding that they were quoted at a healthy premium to the issue price of 102 5/8.

With that level of enthusiasm, several in the market were speculating that the offering would be upsized.

But one buyside source said he had heard that the deal was delayed because King Pharmaceutical wanted to stick to its planned mix of 16 million shares of common stock (plus 4.5 million from company officers) and $300 million of convertibles.

"The company is insisting on a certain split of equity and converts," the source said. "The market wants more converts."

Also in the primary, Chesapeake Energy announced it will sell $125 million of convertible preferreds. Market sources said the bookrunners will be Bear, Stearns & Co. and Credit Suisse First Boston - with CSFB on the left - and that the offering will price some time next week.

No official price talk was available.

But one trader said he had heard talk at 6¼% to 6¾% for the yield and 21% to 26% for the initial conversion premium. He said it had an unusual structure where the company can force conversion if the stock rises to more than 130% of the conversion price.

The issue "will trade well, there's a lot of demand for paper like that right now," the trader added. Although a relatively small offering, Chesapeake Energy's deal is in a sector that has found favor with investors recently.

Meanwhile, among secondary movers, Providian Financial Corp.'s convertibles shrugged off a decline in the stock. The company's 3¼% convert due 2005 was up ¼ point at a bid of 39 5/8 at mid-afternoon even as the stock closed down 69 cents on the day at $3.20.

Providian announced it has hired Salomon Smith Barney and Goldman, Sachs & Co. to assist in its evaluation of "a broad array" of financial and strategic alternatives.

End

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