Demand squeeze forces new deals to wide end of ranges; Nektar sweetens

By Ronda Fears

Nashville, June 24 - Traders said the convertible market continued to soften Tuesday amidst levels still considered expensive, although activity was described as light to moderate for the most part. There was a huge sell-off in the existing General Motors Corp. converts, however, in the face of its upcoming $3.5 billion new deal.

In the primary arena, buyers were again flexing some muscle with regard to new deal terms and sellside contacts were beginning to talk about demand for convertible paper tightening.

Nektar Therapeutics sweetened the yield on its deal by a whopping 75 basis points and still sources said final terms would likely come at the wide end of the new guidance for a 2.5% to 3.0% coupon. The $100 million notes were launched at 1.75% to 2.25%, up 25% to 30%.

Halliburton Co.'s jumbo $1 billion came at the wide end of price talk. The oilfield services giant sold the deal to yield 3.125% with a 65% initial conversion premium; price talk put it at 2.625% to 3.125%, up 65% to 70%.

A capital markets source at one of the busier shops said demand is getting tighter but he indicated little to no concern about sweetened terms or new deal terms coming at the wide end of guidance, noting that "you could drive a truck through" the typical 50 bps range in price talk for convertibles.

"For a few weeks everything came at the tight end [of price talk], when converts were high-profile, getting a lot of ink, and investors from the four corners of the market were wanting to play the new deals," said a salesman at another busy shop.

"It is getting a little tighter now. I don't think really there's been a lot of money taken off the table, but there are a lot of threats to take money off the table. That can give our guys [bankers] the oomph to convince issuers to pony up some more yield, as well as having the argument that in general interest rates are on the rise."

In any event, as one buyside trader put it, there no longer is "a carefree bidding war for converts, new or otherwise."

The Halliburton convert ended the day in the gray market at a mere 0.0625 point over issue price on the bid side with the offer at 0.25 point over. The stock closed up 25c, or 1.11%, to $22.82.

And, sellside analysts had put the Halliburton deal, at the midpoint of guidance, anywhere from around 1.5% cheap to over 3% cheap. Buyside sources, however, said they looked at the Halliburton 2.22% common dividend yield as a bigger threat than sellside analysts, even though there is some degree of dividend protection in the deal by way of an adjustment to the conversion ratio.

Merrill Lynch put the Halliburton deal 1.6% cheap, using a credit spread of 215 bps over Treasuries and a 33% stock volatility.

Lehman Brothers put it 3.21% cheap, using a credit spread of 130 bps over Libor and a 33% stock volatility. Deutsche Bank Securities puts it 1.91% cheap, using a credit spread of 160 bps over Libor and a 32% stock volatility.

A sellside source working closely on the Halliburton deal said there was not an undue amount of concern among potential buyers for the convert about the company's asbestos situation, although the rating agencies have expressed some degree of alarm about it.

"This [asbestos claims issue] is almost entirely behind them," the source said.

"What people were looking for in this deal was a coupon and exposure to a stock with some upside potential."

Moody's assigned a Baa2 rating to the new Halliburton convertible but also put it under review for possible downgrade, in line with the existing review on the other ratings, largely due to Halliburton's pending $2.8 billion asbestos settlement.

Standard & Poor's rated the new Halliburton convert at BBB and also put it on negative watch with its other ratings, again in part due to the pending asbestos settlement.

GM's jumbo deal was weak in the gray market as well, dropping sharply from Monday.

The GM deal opened Tuesday with a bid of 0.125 point below issue price with an offer of 0.125 over and didn't improve much throughout the session. Buyside traders pegged it right at par at the close. It traded Monday at 1 point over and ended around 0.25 point over on the bid side with the offer at 0.5 point over.

GM shares dropped 48c, or 1.28%, to $36.90.

Dealers also noted huge selling volume in the GM 4.5% and 5.25% converts, but prices didn't slide much. The 4.5s slipped 0.1875 point to 24.5 bid, 24.625 offered and the 5.25s lost 0.5625 point to 22.625 bid, 22.875 offered.

Again, sellside analysts put the deal rather cheap, versus many new deal terms of late, even considering GM's huge 5.25% yield on the common stock. At the midpoint of guidance, Lehman put it 3.24% cheap using a credit spread of 400 bps over Libor and a 29% stock volatility and Deutsche puts it 3.48% cheap using a credit spread of 355 bps over Libor and a 27.5% stock volatility.

Nektar Therapeutics, formerly Inhale Therapeutics, also appeared to be having some difficulty with its $100 million of seven-year converts, buyside sources said.

The biotech firm sweetened the yield on its new deal, bumping the coupon to 2.5% to 3.0% from original talk of 1.75% to 2.25%. The premium is still expected at 25% to 30%. It was set to price after the close Tuesday.

"We're not talking about a little bit, but a whole lot of a change," said one buyside trader, referring to the Nektar guidance revision.

"Any they may still be having trouble with this one."

At the other end of the spectrum, IMC Global Inc. sold $125 million of three-year mandatory convertibles at par of 50 to yield 7.5% with a 22% initial conversion premium - at the aggressive end of guidance that put the dividend at 7.5% to 8.0% and initial conversion premium at 18% to 22%.

Factoring in IMC Global's 1.23% common stock dividend yield, at the midpoint of guidance, Lehman put the IMC Global deal 5% cheap, using a credit spread of 350 bps over Treasuries and a stock volatility skew of 44% to 47%. Deutsche put it deal 2.7% cheap, using a credit spread of 600 bps over Libor and a stock volatility skew of 44% to 47%.

Also Tuesday, Moody's cut IMC Global's senior debt to B1 and assigned a Caa1 rating to the mandatory, citing high leverage, weak interest coverage and substantial intermediate term debt obligations even after the financing.

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