Interpublic prices, Arris launches $100 million; King Pharma dives on SEC investigation

By Ronda Fears

Nashville, March 11 - The Interpublic Group of Cos. Inc.'s upsized new convert continued its northerly path out of the gate, but most of the buying in its other converts fizzled. After the close, Arris Group Inc. launched a small deal to price Wednesday.

King Pharmaceuticals Inc. was hit by a Securities and Exchange Commission investigation and the stock plunged 23.5%. The 2.75% converts dropped 3.25 points on the day, but traders said there was no volume to speak of in the issue.

Elsewhere, traders said a Moody's report on the U.S. life insurance industry's exposure to junk bonds weighed on the entire insurance sector. Ace Ltd., Anthem, Hartford and Prudential were mentioned.

"I didn't see a lot going on today. The market really dried up in the last hour or so," said John Siebel, head of trading at Silverado Capital Management.

"IPG just kept going, but we did not play this one. They just blew out the premium to where we lost interest."

Interpublic did not want for buyers, however. The books were tenfold oversubscribed, according to a capital markets source working on the deal.

The new issue priced at 4.5%, up 55% and was upsized by $100 million. Terms were at the aggressive end of guidance that had been tightened twice during the one-day marketing effort. Sellside analysts said the deal ended up roughly 5% cheap.

It was closed at 107.375 bid, 107.625 asked while the common stock ended unchanged at $8.01 on extremely heavy volume.

"It was a show of confidence for the company after all they've been through," the accounting issues, the impact of the recession, and a downgrade to junk, the capital markets source said.

Orders were heavy on the deal from the outset, he said, and a narrowing of Interpublic's credit spreads allowed the more aggressive terms.

"I think people realize that [restoring IPG's investment-grade rating with S&P] will take some time," he said.

"That said, I think people realize that these issue are mostly behind them and the company can get back to business as usual."

Flow in the other three Interpublic converts trailed off sharply Tuesday, traders said, after strong interest and volume following the S&P downgrade.

Of particular note, however, traders said there was a bit more interest in Interpublic's 1.87% convertibles, the longer dated of the three, as the 0% will likely be taken out with the tender using proceeds from the new deal or at the put date in December.

Interpublic's 1.87% due 2006 added 1 point on the day to 80 bid, 81 asked.

The 1.8% due 2004 and zeros were both unchanged.

After the close, Arris Group Inc. launched a small $100 million deal to price after Wednesday's close. The five-year issue is expected to price with a 4.25% to 4.75% coupon and 25% to 30% initial conversion premium.

Deutsche Bank Securities convertible analysts put the deal about 10% cheap at the midpoint of guidance, using a credit spread of 850 basis points over Libor and a 60% stock volatility.

A level on the company's 4.5% convertible due 2003 was not available. There is only about $11.5 million outstanding on the issue, according to an SEC filing by the company on Monday.

Arris has been repurchasing the 4.5% converts and said it plans to buy back the rest either ahead of or on the upcoming maturity date.

Proceeds from the new deal are to be used to redeem the outstanding balance of the membership interest currently owed to Nortel Networks Corp., which stood at $114.5 million at Dec. 31, and to repurchase as much Arris stock as possible owned by Nortel.

At year-end, Arris showed $98.4 million. The company generated $109 million of free cash flow in 2002.

Elsewhere in convertibles, King Pharmaceuticals was in the spotlight as it revealed that it had been notified Monday of an SEC investigation into asset sales and pricing practices. The agency subpoenaed documents for 1999 and 2000, to be provided by March 21.

King executives said they were not sure what the investigation was about but were taking it seriously. The company held a conference call to discuss the matter with the investment community, but its securities still took it on the chin.

King's 2.75% convertibles due 2021 (Ba1/BB) were marked down 3.25 points on the day to 86.5 bid, 87 asked while the stock fell $3.73 to $12.17.

"But to tell you the truth I didn't see a lot of the King Pharma's trade," said a convert trader.

"Not a lot of people are willing to step in at these levels, thinking there could be a lot more downside coming."

Investors were seen exiting several insurance names after a Moody's report expressing concern about the U.S. life insurance industry's growing exposure to below-investment-grade bonds.

"Combined with declining capital and other financial pressures, these exposures represent a mounting challenge to the industry," Moody's said in the report.

Ace Ltd. was one of the hardest hit names, although mostly due to its asbestos exposure. Also lower were Prudential, Anthem and Hartford, among other insurance converts.

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