United Rentals, JDS Uniphase both repriced at 98; United Rentals drops to 95, JDS edges higher

By Ronda Fears

Nashville, Oct. 28 - Static interest rates may bring issuers out of the shadows, but the convertible market's reaction to that prospect was mixed based on the two overnighters Tuesday from United Rentals Inc. and JDS Uniphase Inc.

The Federal Reserve left rates intact, which is fueling hopes of an uptick in issuance, and that also worked with other factors to boost convertible volumes on trading desks.

"Suddenly we're hearing that some flood of deals that have been waiting in the wings are ready to go," said a convert trader at a huge hedge fund in New York.

"Rates aren't going up, earnings are wrapping up, the year is winding up and now we're ready for some deal action."

At Tuesday's open there were two new pieces of paper to trade, United Rentals and JDS Uniphase, but they were greeted with a mixed reaction.

"There is still plenty of demand, but I'm not sure the market would be open to much more no-no paper," the buyside trader said, referring to 0% coupon/0% yield deals priced at par like the JDS Uniphase offering.

JDS Uniphase sold $400 million of seven-year convertibles, non-callable for five years, at par to yield 0% with a 38% initial conversion premium, and it was repriced at 98 by bookrunner Morgan Stanley.

"It wasn't all that pretty, but with a fairly aggressive hedge, this [JDS Uniphase] works out okay," said a hedge fund manager in New York, who declined to specify the hedge he set up on the deal.

"You aren't buying it for income, certainly that's obvious. You have to like the stock story. It seems that fiber optics is coming around the curve toward a turnaround, so if you believe that, this is where you'd like to get in at."

Morgan Stanley closed out the new JDS Uniphase convert at 99.125 bid, 99.625 offered. The stock ended off 11c, or 3.18%, to $3.47.

Roughly 185 million shares of JDS Uniphase stock were handled Tuesday on the Nasdaq, compared to the three-month running average of 28.35 million shares. Onlookers concluded hedge funds were big participants in the new deal.

The market was far less moved by the United Rentals deal, however.

United Rentals sold $125 million of 20-year convertibles, non-callable for seven years, with a 1.875% handle and 49% initial conversion premium, but bookrunner Goldman Sachs & Co. also reoffered it at 98 and it still flagged out of the gate.

"It [United Rentals] opened at 95 and it never moved from there," said a buyside source.

"It was just priced too aggressive, even at the reoffer price."

A sellside source not associated with the United Rentals deal put a value of 96.5 on the new issue, modeling it using a credit spread of 475 basis points over Treasuries and a 42% stock volatility.

Goldman closed the new United Rentals convert at 95 bid, 97 offered. The underlying stock closed off 18c, or 1.04%, to $17.05.

At bat after Tuesday's close were two more deals, both mandatories, from PMI Group Inc. and Valero Energy Corp. for another injection of nearly $500 million to the market.

"We think there may be a window of opportunity over the next two to four weeks for issuers," said a top capital markets source at one of the big banks.

"The year still looks good, and anything more would be great but I wouldn't go out there saying there's going to be a flood of new deals. I think there will be a respectable amount of issuance before the holiday seasons begin."

Elsewhere, players were more cheerful in general, taking a cue from the broader markets, after the Fed left rates unchanged.

With rates remaining flat, traders said there was an obvious "grab for yield" but also plenty of convert players looking for delta exposure as stocks resume an upward track.

Stock valuations, however, are beginning to raise eyebrows, one dealer said, so there could be a pause in the market's gain.

"The market is too difficult to gauge on a day-by-day basis. The Kozlowski trial is way more sexy; that's like watching soap operas all day, the streaming footage of that trial. It's crazy," the dealer said.

Tyco International Ltd., where federal prosecutors alleged former chief executive Dennis Kozlowski raided company coffers along with former top Tyco financial officer Mark Swartz, saw its convertibles stronger while the stock was weaker Tuesday but traders said it had nothing to do with the "party tapes" from Kozlowski's trial that were splashed across television screens throughout the day.

"The [Kozlowski] tapes are sensational and that sells news, I guess, but it doesn't really motivate convertible buyers or sellers," the dealer said.

"Tyco converts are always active. They are sort of selling off steadily, but it's nothing to make much out of I don't think. There's not some big liquidation going on. There's always a willing buyer for this paper."

Both Tyco converts were quoted up 0.375 point while the stock ended off 11c, or 0.52%, to $20.92. The 2.75s were at 111.25 bid and the 3.125s at 114.375 bid with the stock at $20.92.

Moreover, dealers said convertible trading volumes were very strong Tuesday.

In addition to the surge in stocks and the Fed's standstill on interest rates, merger activity continues for fuel activity and many traders noted considerable action in high-yielding convert names as well as the entire range of tech issues.

Lucent Technologies Inc. surged on positive headlines, traders said. Lucent announced a new contract and headlines showed spun-out unit Avaya Inc.'s chief was looking for demand in telephone equipment to pick up, traders said. Also, there have been generally pleasing earnings figures from the telecom and telecom equipment groups.

Lucent's 2.75% convertibles both gained sharply, with the 2023 issue adding 4 points to 114.5 bid, and the 2025 issue up 4.5 points to 119 bid versus the stock at $2.85. Lucent shares closed up 14c, or 5%, to $2.89.

Xcel Energy Inc.'s convert moved up with the underlying stock, although unit NRG Energy Inc. ran into some trouble with its bankruptcy reorganization plan. An informal committee of NRG secured bondholders are opposing the plan but a dealer said, "people figure that will eventually go away, the entire NRG overhang," and noted NRG is in discussions with the unsecured creditors.

Xcel's 7.5% convertible due 2007 gained 1 point to 156.25 bid, 158.25 offered. Xcel shares closed up 18c, or 1.14%, to $16.

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