Dominion, Genzyme emerge; Concord soars to 111, slides to 105.25; Fairmont hits 104.5

By Ronda Fears

Nashville, Dec. 3 - The deal of "substantial size" which was abuzz in the market earlier this week, emerged after the close Wednesday as Genzyme Corp. joined the refinancing frenzy with a $600 million deal. Dominion Resources Inc. also returned to tap convertible investors with a $200 million overnighter.

Price talk on those deals and the three new issues put into play this week by CMS Energy Corp., Fairmont Hotels & Resorts Inc. and Concord Communications Inc. suggest that pricing power has swung back to issuers after a short-lived period of a few weeks in September.

"We've been reluctant to be aggressive in this pricing environment," said a convertible trader at a huge buyside shop in New York.

If the secondary market was cheaper, instead of richening as it has been in recent weeks, he said a buyer might be able to justify adding on a new issue even if it was expensive. But you can't count on the secondary market giving you much if you wanted to flip a new issue soon, as the market is most likely to cheapen rather than continue richening.

"We are right back where we were; the terms on these new deals are absurd," said John Siebel, head of trading at Silverado Capital Management.

"What is happening is you're getting a lot of reallocations from different strategies because it's year-end, a lot of hedge funds have a bunch of new money. But, take the Dominion deal, there's three years of call protection but the yield is half of what you get on the common and even with the premium where they are talking it the deal is absurd.

"If you start getting a spike in interest rates and it catches people flat-footed, they are going to get slaughtered with these deals."

Another buyside source said demand also is getting a big boost from new funds trying to build a portfolio, and new issues are the best way to do that when the secondary market is so rich.

Dominion's $200 million of 20-year convertible notes were talked to yield 2.125% to 2.625% with an 18% to 22% initial conversion premium.

The Richmond, Va.-based utility holding company is an established name in the convertible market, like many issuers in 2003.

Dominion itself sold a $300 million mandatory convertible in March. The 8.75% due 2006 mandatory convertible lost 0.625 point on Wednesday, according to a dealer, ending the day at 52.25 bid, 52.35 offered. On the New York Stock Exchange, the mandatory closed off 0.56 point, or 1.01%, to 55.12.

Dominion's 9.5% mandatory convertible due 2004 was quoted by a dealer down 0.5 point to 54.5 bid, 64.625 offered.

Dominion shares closed Wednesday down $1.02, or 1.66%, to $60.33.

Sources working close to the new Dominion deal said it was going well already, just an hour or so after it was launched, but buyside sources said the reaction was mixed, like the views on the credit.

Lehman Brothers analysts put the new Dominion convertible 0.63% rich at the midpoint of guidance, using a credit spread of 40 basis points over Libor and a 15% stock volatility.

Last week, Standard & Poor's affirmed the BBB+ ratings on Dominion but cut the outlook to negative from stable, reflecting weak financial performance for the rating given regulatory insulation at Virginia Power.

Virginia statutes do not allow the utility to subsidize holding company expansion into non-regulated activities or to pay dividends if it would impair the utility and its bondholders, S&P explained. Regulatory insulation does not weaken the business risk profile on whole but it does increase risk at parent Dominion and its subsidiary Consolidated Natural Gas because Dominion does not have unrestricted access to Virginia Power's cash flow.

But on Wednesday, Carol Levenson, director of research at the independent firm Gimme Credit put out a very positive report on Dominion and more specifically its Virginia Electric & Power unit.

"It's not often we get the chance to pat an electric utility on the back for - if not reducing its business risk - improving its financial structure to address both its increased business risk and the post-Enron world of uncertain capital markets access. Such is the case with Dominion Resources," Levenson said in the report.

Positive measures taken by Dominion, she said, included management which has "persisted in issuing a significant amount of equity despite a recalcitrant stock market. This paved the way for painless bank negotiations and improved financial flexibility.

"This year too, Dominion has tapped the stock market to strengthen its balance sheet, using both internal sources such as its employee stock purchase and dividend reinvestment programs as well as another substantial equity deal to raise over $900 million year to date," the analyst added.

"Our greatest concern is that Dominion might be tempted to buy some of the generation capacity its financially struggling peers have put up for sale."

Use of proceeds for the convertible was not specified by Dominion, however.

Genzyme, on the other hand, hopped on the refinancing train.

The biotech concern plans to use most of the proceeds from its deal to redeem its $575 million of 3% convertibles due 2021 when the issue becomes callable May 20, 2004 - and to do so at an annual interest rate of less than half that, to boot.

But the development will almost assuredly put pressure on the existing 3% convertible.

"You would think that with all the scare about call risk this year that there wouldn't be anything out there trading above the call price, at least if the call is within six months," said a dealer.

"But the old Genzyme's are showing up in the 101.5 to 102 area, and the call price is 100.75. So, you can expect that to come in tomorrow."

The Genzyme 3% converts were quoted at 101.5 bid, 102 offered at one big sellside shop and at 102 bid, 102.5 offered at another.

Genzyme's new $600 million 20-year convertible notes are talked to yield 1.0% to 1.25% with a 47.5% to 52.5% initial conversion premium. The old 3% convert was issued with a 30% conversion premium in May 2001.

The Cambridge, Mass.-based biotech firm said proceeds also would be used to pay off amounts outstanding under its credit facility and for general corporate purposes.

Lehman Brothers analysts put the new Genzyme convertible 0.12% cheap, at the middle of price talk, using a credit spread of 100 basis points over Treasuries and a 35% stock volatility.

Elsewhere, new issues were climbing in the immediate aftermarket, for the most part.

The new CMS Energy convertible was the only laggard, sitting at 51.75 bid, 52 offered, where it closed Tuesday as well. CMS shares closed up 1 cent to $7.72.

Fairmont's new 3.75%, up 45% convert continued upward from the 102 area seen in the gray market before pricing. Joint bookrunner Citigroup closed it Wednesday at 104.5 bid, 105 offered while the stock recouped 74 cents, or 2.84%, to $26.76.

Concord Communications upsized its deal to $75 million from $65 million; CMS Energy and Fairmont both boosted their offerings as well.

Concord Communications sold the 20-year convertible notes at par to yield 3.0% with a 30% initial conversion premium - at the tight end of price talk of 3.0% to 3.5%, up 25% to 30%.

Sellside analysts not associated with the deal put it anywhere from 5.36% cheap to 7.655% cheap.

The new Concord convertible went to 108 right out of the gate and soared to 111 by noon but slipped back during the afternoon when the stock began to slip with the Nasdaq, one market source said.

Bear Stearns & Co., the sole lead on the Concord deal, closed it at 105.25 bid, 106 offered. Concord shares on Wednesday ended down $1.06, or 5.13%, to $19.61.

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