New deals provide stimulus, along with tech stock rally

By Ronda Fears

Nashville, Jan. 23 - It was another lackluster trading day in convertibles Thursday until the afternoon when an overnighter emerged from International Game Technology.

"This whole week has been kind of dead," said Jeff Seidel, head of convertible research at Credit Suisse First Boston.

Earnings, war fears and a lot of different things have stalled convertible activity. The market is rich and spreads have widened out a bit recently.

Thus, players want new deals. Buyside sources had been anticipating a quicker pace for new deals this month but without much accommodation so far in terms of number of deals.

While IGT was priced rather aggressively, buyside sources said the paper-starved market was eagerly chasing it.

IGT sold $400 million in proceeds of 30-year 0% convertible senior notes at 63.87 to yield 1.5% with a 47.5% initial conversion premium. The Rule 144A overnight deal priced at the middle of guidance but analysts put it right at about theoretical fair value.

The overnighter came on the heels of Oneok Inc. pricing an upsized $350 million of three-year mandatories at to yield 8.5% with a 20% initial conversion premium, also at the middle of price talk. It was upped from $275 million.

Also after the closing bell, Arch Coal Inc. launched a deal for Monday's business that was piquing considerable interest although it is a rather small deal and it is viewed as somewhat expensive.

Arch Coal is pitching $150 million of perpetual cumulative convertible preferreds with guidance for a dividend of 5.25% to 5.75% and initial conversion premium between 22.5% and 27.5%. (See full story elsewhere in this issue.)

The issue will be non-callable for five years, with a provisional call at 110% thereafter and a contingent conversion trigger of 110% for life.

Sources noted that the convertible market has not seen a perpetual preferred in several years and never one with a contingent conversion feature, as that is a relatively new development in the market.

The perpetual preferred structure probably has cropped up again, sources said, due to the line of thinking that perpetual preferreds should benefit from the elimination of double taxation on dividends that is currently under consideration in Washington.

Outside of the new deals, there were not many movers in the convertible market.

Lucent Technologies Inc. continued to find buyers as did Nortel Networks Corp.

Nortel had gained "a couple of points in sympathy with Lucent" on Wednesday, then more on Thursday when it reported its own numbers that pleased The Street.

Nortel's 4.25% convertible due 2008 added 1.5 points to 64.5 bid, 66.5 asked. The 7% mandatory rose 841 points to 46,109.149 bid, 46,609.149 asked. The stock closed up 5c to $2.40.

Lucent continued to see action, and one trader noted that Merrill Lynch & Co. changing its rating on the stock to buy helped a great deal.

"We have increased confidence in Lucent's financials and solvency, we look beyond the near term and see reasons for increased optimism: reduced solvency concerns, restructuring progress, and the right customer base," said Merrill equity analyst Tal Liani in a report.

"We believe Lucent offers value for investors and hence we upgrade our rating to a buy from neutral."

Investors will have to be patient, however, Liani believes.

"We note though that in the near term, Lucent might disappoint investors hoping for the company to achieve its top-line targets. We estimate FY03 sales at $9.2 billion, which represent a 25% decline from FY02 and versus management's forecast of $9.8 billion," Liani said.

"We simply do not see the company generating $2.5 billion in quarterly sales in each of the remaining quarters of FY03."

The Lucent 7.75s (Caa2) added 2.5 points to 64 bid, 65 asked and the 8s (Caa2/CCC+) rose 2.25 points to 77.6258 bid, 783625 asked.

Lucent shares ended up 11c to $1.92.

With the market so picked over, First Boston's Seidel said one idea for outright players is to continue to buy issues where the fundamental story is good, but the stock is being driven down by arbs that are set up on a heavy hedge. He did not have any specific names along those lines, though.

"There's still some low-hanging fruit," Seidel said.

"In the under-followed credits there are some opportunities but you have to do a lot of due diligence. I like some that are in the 10% yield area, but you can't just pick anything that is yielding 10%."

© 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.