New Elan issue is a treat, zooming past 110 in heavy U.S. trading activity

By Ronda Fears

Nashville, Oct. 31 - It wasn't really a trick-or-treat deal, but the new Elan Corp. plc convert that freed to trade Friday, including on U.S. desks, was a hot item during an otherwise "dead" Halloween session as buyers grabbed for the new paper with a whopping 6.5% handle.

Elan's deal had its tricks, though. At first, the company's press release put the conversion premium at 7.42%, then corrected it as having a $7.42 conversion price. The premium was nearly 50%.

"It's not the first instance of confusion like that," said Luke Olsen, head of convertible research at Barclays Capital Markets in London.

"With Getronics' recent new issue, they confused the coupon and the conversion price in a press release."

In any event, the new Elan convert turned out to be a treat for U.S. players as it hit the immediate aftermarket, purely on the yield. Initial buyers for the Regulation S deal were limited to outside the U.S.

"Yield is always something that will attract buyers and we've not seen anything like this in a long, long time," said a buyside convert trader in Boston.

"A lot of issues have been resolved [at Elan], although there's still some hair on it. But S&P upgraded the credit, so it looks like there's some consensus that a lot of the trouble is behind them."

There is an ongoing investigation into Elan's accounting practices at the Securities and Exchange Commission, but Standard & Poor's upgraded the senior unsecured ratings of Elan Corp. plc to B- from CCC+ and subordinated debt to CCC from CCC- on the convertible sale. The outlook is stable.

Proceeds of the new convertible, along with funds from a 35 million share stock offering, are earmarked to retire the roughly $500 million in outstanding 0% convertible note in December when the put is expected to be exercised.

Bankers involved with the deal said it was a blockbuster, no matter how you looked at it. The books were far oversubscribed, even after considering it was upsized to $400 million from $250 million - and then the $60 million greenshoe was exercised during Friday's session.

Then, in the secondary market, U.S. traders said it was among the most active converts in an otherwise lackluster trading session with many empty chairs on trading desks. Some people took the day off and many more went home early.

Lead manager Morgan Stanley closed the new Elan 6.5% issue, which was sold at par, at 110.875 bid, 111.875 offered. Elan shares ended the day up 18c, or 3.64%, to $5.13.

Deutsche Bank Securities analysts put the new Elan convert 3.41% cheap, using a credit spread of 1,000 basis points over Libor and a 50% stock volatility.

Another recent addition to the convertible universe, Beverly Enterprises Inc., was active.

The new Beverly 2.75% due 2033 shot up 3 points on the day to 109 bid, 110 offered while the stock closed up 38c, or 6.68%, to $6.07.

"There was no news really [on Beverly]," a dealer said.

A buyside trader noted, in connection with Beverly, however: "People are still wanting, looking at new paper to put on."

After the close Beverly announced it would sell nine skilled nursing homes in southern California for cash, with proceeds to repay debt.

Of note in other new paper, Northwest Airlines Corp.'s new 7.625% convert ended off by 0.375 point to 97.75 bid, 98.25 offered and the old 6.625% convert was flat at 121 bid, 121.75 offered, while the stock closed up 8c, or 0.59%, to $13.70.

No one mentioned the new JDS Uniphase Inc. or United Rentals Inc. deals and there wasn't any interesting buzz about new deals coming up, although the general tone in the market is that there will be a fairly healthy amount of convertibles brought to market before the holiday season gets fully under way.

Issuance in October picked up a little from the lull in September, but was still well below the pace seen earlier this year.

October's issuance of $3.47 billion in 29 deals brings the year-to-date total to $83.36 billion in 348 deals, according to Prospect News data. (For full league table information and criteria, see the full story elsewhere in this edition.)

October was only marginally better than the $3.29 billion of new convertibles sold in September, making it the second slowest month of 2003.

For the most part, the trading session was otherwise described as very, very slow for convertibles, too.

The much stronger-than-expected U.S. gross domestic product figure pushed yields on 10-year Treasuries back up and convertible players were stunned that the VIX set another low, closing Friday at 16.10.

"There were a lot of people who thought it was crazy to think that the VIX would fall below 20," said a hedge fund manager in New York.

"Now the big question is how low can it go?"

Credit spread contraction is no longer the foremost concern among convertible players, although recent trends suggest the reach for yield will require going farther down the credit ladder. Still, a sellside market source said there are a few credit trades that are interesting.

Lucent Technologies Inc., for example, still holds promise, he said.

"A year ago Lucent was 800 over, now it's at 450 and I say in the next six to nine months, Lucent will go to 250 over," he said.

"Lucent has turned the corner," he added.

"It's not that I'm so bullish on the company, but once they handle the 8% trust preferreds, the next debt coming due isn't until 2006, so they're in pretty good shape" from a liquidity standpoint.

Lucent's converts are among the "usual suspects" that are actively traded. The 8s were quoted Friday at 107.5 bid, 108.5 offered. The 2.75% due 2023 was described as flat at 123 bid, 123.125 offered, while the 2.75% due 2025 dropped 1.125 points to 128 bid, 128.625 offered.

Lucent shares on Friday ended off 4c, or 1.23%, to $3.20. The sellside source said he saw fair value for the shares at $3.50 to $4.

© 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.