Men's Wearhouse bid up 2-3 points in gray market, even on tighter talk; Beverly bid up 1-2

By Ronda Fears

Nashville, Oct. 15 - Convertible players were bidding up the two small deals set to price after the closing bell, even with tightened guidance on the Men's Wearhouse Inc. deal, as demand for new paper raged through the market like baseball fever during the playoffs.

While there was lots of activity in the trading trenches, particularly with regard to the new deals, several traders left early to catch the New York Yankees-Boston Red Sox game.

"You can certainly tell there's not been much in the way of new deals," said a convert trader at a hedge fund in New Jersey.

"These bids are just crazy, if you ask me. I'm cutting out early to go to the game."

A manager in New York, running a new event-driven multi-strategy hedge fund, said he wouldn't look at either of the pending new deals, "although I guess Men's Wearhouse has pretty good financials but a terrible industry, I think."

Men's Wearhouse price talk was revised to a coupon of 3.125% to 3.375% and initial conversion premium of 40% to 42%. Originally, the $110 million deal was talked at 3.375% to 3.875%, up 38% to 42%.

Even after the new price talk, buyside sources said the issue was bid 2.75 points over par with an offer of 3.75 points over in the gray market. Another buyside source said the bids came in about 0.25 point on the revised price talk, but were still "very strong."

Men's Wearhouse shares closed off 38c, or down 1.24%, to $30.20.

While sources among the managers of the Men's Wearhouse deal said there was no shortage of buyers for the paper, the revised talk squeezed a lot of juice from it and some buyers backed out.

"The Men's Wearhouse pricing change sucks," said one hedge fund manager in New York. "We were in, now we're out."

On the original price talk, sellside analysts put the Men's Wearhouse convert 3.15% cheap to 4.19% cheap.

After the revision, analysts put it from 1.2% rich to 1.6% cheap.

At the middle of the new price talk, Merrill Lynch & Co. analysts put the Men's Wearhouse convert 1.6% cheap, using a credit spread of 340 basis points over Treasuries and a 27% stock volatility. At the middle of original guidance, Merrill had put it 3.15% cheap.

Merrill used Gap Inc. as the comparable credit for Men's Wearhouse. Gap's 6.9% senior notes due 2007 were seen trading at 108.25, which implies a spread of 180-200 bps over Treasuries, with credit default swaps in Gap quoted at 130-150 bps over Libor. Taking into account Gap's much bigger size and better credit ratios for Men's Wearhouse, Merrill used a conservative spread of 350 bps.

At the middle of revised guidance, Deutsche Bank Securities analysts put the Men's Wearhouse convert 1.2% rich to 0.42% cheap, using a credit spread of 450 bps over Libor and a 33% stock volatility.

At the middle of original guidance, Lehman Brothers put the Men's Wearhouse issue 4.29% cheap, using a credit spread of 350 bps over Treasuries and a 32% stock volatility.

Beverly Enterprises was getting some action in the gray market, too.

Beverly's $100 million of 30-year convertible subordinated notes were talked to yield 2.5% to 3.0% with a 36% to 40% initial conversion premium.

Buyside sources said the Beverly deal was last seen with a bid of 2.25 points over par and an offer of 3 points over. Another buyside source said the when-issued levels for Beverly gained sharply, about 1 point, after guidance on the Men's Wearhouse deal was tightened.

"Both deals were obviously very strong," said the trader in New Jersey.

"I'm not playing in either issue. Beverly's terms are way too rich and I don't trust them" because of questions arising from Medicare and Medicaid billing practices.

Sellside analysts not involved with the Beverly deal put it from 1% rich to 4.3% cheap.

Beverly Enterprises is being subpoenaed for more information regarding Medicare or Medicaid billing practices at one of its units in California. The Fort Smith, Ark.-based nursing home operator said it is cooperating with authorities and has set aside $18 million to cover the estimated over-payments received.

Some 80% of Beverly's net operating revenues is derived primarily from Medicare and Medicaid, according to its financial reports.

Beverly shares closed Tuesday off 2c, or down 0.37%, to $5.40.

Elsewhere, players were lamenting about the convertible market tracking up the richening path - largely due to there being such a dearth of new paper in recent weeks.

"Everything is getting richer again," said John Siebel, head of trading at Silverado Capital Management.

A hedge fund manager in New York said: "As for the market, because issuance has dropped again and so has volatility, it's getting hard again to find things that are interesting to buy."

Sellside traders said they see buying interest in the higher-yielding issues, but not much else.

"We are still grinding it out every day," one sellside source said.

Merrill Lynch has been showing that the convertible hedge fund strategy has ticked up over the last seven weeks, and that trend was also borne out by the CSFB/Tremont hedge fund data.

CSFB/Tremont's subindex for the convertible arbitrage strategy showed returns of 1.97% in September, bringing year-to-date returns to 8.9%.

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