Convertibles mostly quiet; On Semi adds a half; PHH gains in the gray; Entertainment Properties to price

By Rebecca Melvin

New York, March 27 - Action in the convertibles market Thursday was curtailed amid muted activity in stocks, and as market players turned their attention to a grim situation developing with Lehman Brothers that looked eerily like one that surrounded Bear Stearns before its demise less than two weeks ago.

Lehman shares dropped sharply in heavy volume, and options traders bought up puts as rumors continued to swirl about the Wall Street investment bank's solvency, even though they were vigorously denied by the firm.

"Any time you have an emerging story like this one affecting Lehman - with all the noise and nonsense around it, and all that's going on - it's going to be difficult for people to do anything," Mark Henriquez, head convertibles trader at J Giordano Securities Group in Connecticut, said.

Indeed, traders seemed to have little color to offer on the day, but there were pockets of positive activity, according to some players.

One positive note was the 2.625% convertibles of ON Semiconductor Corp., which were better by about ½ point, according to a West Coast-based sellside trader.

He said anything non-financial with solid credit was decent, and he attributed curtailed activity for the whole week to the fact that a lot of families had kids on vacation from school following Easter.

Another notable feature of the trading day was a positive gray market in the PHH Corp. convertibles that were unveiled ahead of the markets' open and expected to price after the close.

The PHH convertibles traded at 101.125, with the market at 101 bid, 102 offered, according to one trader. Another trader put the issue at 100.75 at the close, which was especially significant given a 10% slump in PHH stock Thursday.

Also expected to price after the close were the $75 million of cumulative convertible preferred stock of Entertainment Properties Trust. They modeled cheap, according to one source.

ON Semi up slightly

The ON Semi 2.625s traded and got better, one trader said. He put a trade on those notes due 2026 at 83 versus a stock price of $5.70. Share trading (Nasdaq: ONNN) picked up after an initial drop, but ended decidedly lower. At the close, the 2.625s were seen at 81.075, versus a stock price of $5.55, compared to a close of 81.78, versus $5.69 on Wednesday.

ON Semi's sister convertible issues were flat to lower also. The 1.875s due 2025 closed at 100.3, compared to 100.4 on Wednesday; and the On Semi 0% convertible due 2024 were seen at 90.1 compared to 90.5 on Wednesday.

Direct competitors of Phoenix-based On Semi, which has seen its shares generally trend down so far this year, are Fairfield Semiconductor International Inc., STMicroelectronics NV, and Texas Instruments Inc.

PHH looks positive

PHH planned to price $150 million of four-year convertible senior notes, talked at $3.75 to 4.25% with an initial conversion premium of 17.5% to 22.5%.

The senior unsecured notes are non-callable for life, and they have contingent conversion subject to a 130% price trigger and 98% parity.

"The fact that PHH was plus 3/4, while the stock was down almost $2, and trading up - that's a very positive sign," a trader said.

"Its servicing so maybe people feel a little more comfortable," he said by way of explanation about the Mt Laurel, N.J.-based company's business in the mortgage lending and servicing sector. "People won't want to be on the hook for lending money, but there's always going to be servicing."

No sources queried had actually modeled the paper. It was seen as illiquid with no options that trade.

"It's tough to say what the credit is and go out with any valuation," a New York-based sellside analyst said. "Technically it's a triple B credit as a mortgage service company. But there are no listed options, and historical vols have been high. I'm guessing 35 for vol."

The fact that it's four-year paper as opposed to the more typical five-year brand was viewed as a little odd, but not a bad thing, given that many players are looking to keep their maturities short in the current uncertain market.

"I've been struggling to get my head around this one, and I'm waiting to see what the underwriters say," he added.

J.P Morgan, Citigroup and Wachovia were joint bookrunners.

PHH shares (NYSE: PHH) closed down $1.96, or $10.3%, at $17.

Entertainment Properties seen 'pretty cheap'

The same source viewed Entertainment Trust's planned $75 million of cumulative convertible preferred stock as cheap, giving it a credit spread of 700 basis points to 750 basis points over Libor with a volatility of 25%. With those inputs, it was about 26.25, he said.

The series E cumulative convertible preferred shares were talked with a dividend of 8.5% to 9% and an initial conversion premium of 15% to 20%.

They were to be sold as 3 million shares with a $25 liquidation preference.

Concurrently, the real-estate investment trust plans to price 1.5 million common shares, with an over-allotment option for an additional 225,000 common shares.

Meanwhile, shares of the Kansas City-based REIT (NYSE: EPR) closed down $3.84, or 17.4%, at $48.18 on Thursday.

No gray market was reported on the issue and many market players complained about another REIT new issue.

"We don't even have the manpower to look at these financials," one Connecticut-based sellsider said.

Another source said, "We're getting these little garbage deals."

The only good deals of late, he asserted, were Suntech Power Holdings Co. Ltd.'s $500 million of five-year 3% convertibles priced on March 12 and Coeur d'Alene Mines Corp., which priced $200 million of 20-year convertibles on March 14.

This one from Entertainment ranks with the likes of Alexandria Real Estate Equities Inc.'s $250 million of convertible preferred stock that priced last week, and Razer Technologies Inc. which priced $50 million of five year convertibles March 20, that offered no stock borrow, he said.

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