Duke Energy off highs in gray market on revised terms; new issuance flooding in overnight

By Sara Rosenberg

New York, May 1 - Duke Energy Corp.'s $700 million convertible offering received a lot of market attention on Thursday as the syndicate changed the terms, pricing the deal more aggressively, leading the convertibles to trade off from their highs in the gray market although still above par.

Furthermore, on Thursday the convertible market saw an influx of expected new issuance with Duke, AirTran Holdings Inc., Maxtor Corp., Comverse Technology Inc. and Grey Wolf Inc. all expected to price before the weekend, with some pricing almost immediately after the close on Thursday, bringing a total of $1.5 billion convertibles to the primary.

"Initially there was a lot of enthusiasm for a convertible with a more traditional structure," an analyst said in regards to Duke. "But they just changed the terms. The premium is now 40% to 42% and they indicated that the coupon will come at the low end of the range so the bonds have collapsed.

"It was trading as high as 101 to 101¼ [in the gray market]. And then it dropped to 100 1/8 bid, 100 3/8 offered," the analyst said at mid-afternoon.

"I think it's going to trade at a significant premium tomorrow," he added.

Duke Energy's $700 million convertible senior notes due 2023, scheduled to price after market hours Thursday, is talked to yield 1.75% to 2.25%, with indications that the coupon will come at the low end of the range. Talk on the initial conversion premium is 40% to 42%.

Initial talk had the deal pricing to yield 1.75% to 2.25%, with an initial conversion premium of 36% to 40%.

Citigroup Global Markets Inc., J.P. Morgan Securities Inc., Morgan Stanley & Co. Inc. and Wachovia Securities, Inc. are the bookrunners for the offering, which is being made under the company's existing shelf registration statement.

There is a $70 million greenshoe.

The Charlotte, N.C. energy company will use proceeds for general corporate purposes, which may include the reduction of outstanding commercial paper.

"We're doing some work on Duke," another analyst said. "It's a big deal. High profile name. There are two outstanding mandatories so the convert guys know them too. Based on the fact that they made terms more aggressive you have to assume they had enough interest to get it done."

AirTran emerged rapidly after the bell was rung on Thursday, pricing $100 million of convertible notes due 2023. The deal was priced at the rich end of talk to yield 7% with a conversion premium of 60%.

Morgan Stanley is the bookrunner on the Rule 144A deal.

Price talk had the convertibles yielding 7% to 7.5% at an initial conversion premium of 52.5% to 57.5%, sources said.

Based on talk, the deal was valued 3.97% cheap to theoretical value, using a $7.85 stock price, a volatility assumption of 45% and a credit spread assumption of 1200 basis points, according to Kimberlee Brody, a Wachovia Securities, Inc. analyst.

Based on talk, the deal was valued at 0.87% rich to theoretical value, using a $7.85 stock price, a volatility assumption of 50% and a credit spread assumption of 1500 basis points, according to Venu Krishna, a Lehman Brothers analyst.

There is a $25 million greenshoe.

The Orlando, Fla. low-fare scheduled airline plans to use net proceeds from the offering for working capital and general corporate purposes.

Also emerging almost right after market close Thursday, Grey Wolf Inc. priced $150 million of 20-year contingent convertible senior notes to yield 3.75% with an initial conversion premium of 65%.

Deutsche Bank is the lead bank on the Rule 144A deal.

There is a $37.5 million greenshoe.

The Houston provider of contract oil and gas land drilling services will use proceeds plus $15 million of available cash to partially redeem its 8 7/8% senior notes due 2007 on or after July 1. If the greenshoe option is exercised, the extra will be used for general corporate purposes.

Coming up before market hours on Friday, Maxtor is scheduled to price $200 million convertible senior notes due 2010 before market open Friday. The convertible is talked to yield 6.45% to 6.95%, with an initial conversion premium of 125% to 130%.

Bank of America is the bookrunner and Merrill Lynch is the co-manager on the Rule 144A deal.

There is a $30 million greenshoe.

The Milpitas, Calif. provider hard disk drive storage products will use between $38 million and $62 million of the net proceeds to purchase shares of its common stock from one of the initial purchasers or an affiliate thereof at the closing price of the company's common stock on Thursday, which was $5.45. The company will use the remaining net proceeds for the repayment of indebtedness, investments, acquisitions, general corporate purposes and working capital.

Comverse Technology is expected to price $350 million zero-coupon convertible notes due 2023 overnight. The convertible is talked to yield 0%, with an initial conversion premium of 36% to 40%.

Lehman is the lead bank on the deal.

Based on talk, the deal was valued 1.84% cheap to theoretical value, using a $13.04 stock price, a volatility assumption of 40% and a credit spread assumption of 315 basis points, according to Wachovia's Brody.

Comverse is a Woodbury, N.Y. provider of computer and telecommunications systems and software.

As for the secondary, "USAI has seen a lot of momentum today," an analyst said. "They reported good numbers. They fully consolidated Hotels.com and Expedia so they clarified their capital structure. The bonds are moving up quite a bit."

USA Interactive's 1.54% convertible A due 2012 was quoted at 165.5 bid, 166 offered, up 8 points on the day, according to a trader. The 1.54% convertible B due 2012 was quoted at 150.25 bid, 150.75 offered, up 6.125 points. The stock closed at $32.1348, up $2.1848 or 7.29%.

For the first quarter of 2003, USA Interactive reported EBITDA growth by 120% to $173 million, operating income growth by 236% to $93 million, free cash flow and net cash provided by operating activities exceeded $400 million, and adjusted net income of $110.1 million or adjusted earnings per share of 16 cents, compared with $43.1 million or 6c a share for the sale period last year.

"USA has simplified its corporate structure, with its completed buy-in of Ticketmaster and the announced buy-ins of Expedia and Hotels.com. These transactions further enhance USA's ability to operate its subsidiaries to the fullest extent. This is the first quarter that USA is reporting pro forma the results of all three companies as 100%-owned subsidiaries of USA," according to a news release.

USA Interactive is a New York operator of a diversified media and electronic commerce business.

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