Buyer-friendly market climate results in DST sweetening talk, Church & Dwight downsized

By Ronda Fears

Nashville, Aug. 6 - A more buyer-friendly climate in the convertible market resulted in DST Systems Inc. sweetening price talk on its pending deal while Church & Dwight Co. Inc. cut its new offering to $80 million from $110 million - both on the heels of AMR Corp. canceling a deal earlier this week.

"It's beginning to feel like a buyer's market, what with the massive run issuers have made on the convertible market over the past three months, really all of this year," said a senior capital markets source at one of the busier shops.

"We get the sense that there still is fairly good demand for new paper, but I can't really quantify that. There's just been a huge rush for capital and eventually someone puts the brakes on. With terms widening for issuers it probably will be a lot slower during the second half."

Still, two more deals emerged after the close - an $850 million cash-to-zero floater from Lockheed Martin Corp. and a tiny $75 million transaction from Ptek Holdings Inc. The latter is a refinancing deal, with proceeds going to take out the 5.75% Ptek converts that come due in July 2004.

In the secondary trenches, dealers said buyers stepped in, moving the market up slightly, but most were shopping for bargains. Buyside traders said they were looking for issues to add value to their portfolios, preferably at bargain prices.

"The market is cheapening but I wouldn't call it cheap yet," said a convertible trader at a hedge fund in New Jersey.

"As always, we're looking for value. And it seems to be getting easier."

Several energy names were mentioned moving up on buying interest, such as Chesapeake Energy Corp. and Reliant Resources Inc. But convert traders noted that the junk bonds of several power names, like Calpine Corp. and CMS Energy Corp., were down sharply.

Tech issues, however, continued to weaken, although several telecom names or telecom equipment makers such as RF Micro Devices Inc. gained.

Costco also extended losses, but several peer retailers rebounded, such as Gap Inc.

Even with elevated buying interest in the secondary, dealers said the focus was on new issues.

In further evidence of buyers flexing pricing muscle, DST widened the yield on its deal by 25 basis points but that was much milder than the 100 bps Dynegy Inc. bumped its deal by last week. DST also added some delta to the two-part $700 million of 20-year cash-to-zero convertible notes.

DST's Series A is now expected to yield 3.625% to 4.125% versus original guidance for 3.375% to 3.875%. The Series B is now talked to yield 3.125% to 3.625%, compared to the initial range of 2.875% to 3.375%. The premium on both tranches was revised to 40% to 45%, versus original talk of 43% to 48%.

It boosted cheapness by as much as a full percentage point.

At the midpoint of revised guidance, Lehman Brothers analysts put the DST series A at 4.28% cheap using a credit spread of 350 bps over Treasuries and a 28% stock volatility. At the middle of original talk, Lehman put it 3.3% cheap. Deutsche Bank Securities analysts put it 2.67% rich to 1.61% cheap at the midpoint of initial talk, using a credit spread of 325 bps over Libor and a 27% stock volatility.

At the midpoint of revised talk, Lehman put the DST series B at 2.23% cheap using a credit spread of 325 bps over Treasuries and a 28% stock volatility. At the middle of original talk, Lehman put it 1.9% cheap. Deutsche put it 3.15% rich to 0.24% cheap at the midpoint of initial talk, using a credit spread of 300 bps over Libor and a 27% stock volatility.

Lehman analysts said in a new issue report, "Overall, we prefer the As given better valuation, higher coupon and lower implied vol, despite its two-year longer put. Risk/reward of As, while not as defensive as the Bs, still offers an adequate 2:1 profile."

Church & Dwight cut its deal to $80 million from $110 million, pricing the 30-year convertible notes at the cheap end of talk to yield 5.25% with a 42.5% initial conversion premium.

After the close Wednesday, Lockheed and Ptek trotted out deals that will price along with Artesyn Technologies Inc. after the close Thursday. Artesyn is selling $75 million of seven-year convertible notes talked to yield 4.75% to 5.25% with a 28% to 32% initial conversion premium.

Ptek launched $75 million of five-year convertible notes talked to yield 4.5% to 5.0% with a 32.5% to 37.5% initial conversion premium, with proceeds earmarked to repurchase or redeem its existing 5.75% convertible notes due July 2004.

The 5.75s were indicated at 98.5 bid, 99.5 offered with Ptek shares at $6.02. Ptek shares closed Wednesday down 34c, or 5.39%, to $5.97.

Lockheed is pitching $850 million of 30-year cash-to-zero convertible floating rate notes talked to yield three-month Libor minus 45 to 90 basis points with a 52.5% to 57.5% initial conversion premium. It will pay a cash coupon for five years.

Deutsche puts the Lockheed convert 2.14% rich to 0.76% cheap, at the midpoint of guidance, using a credit spread of 40 bps over Libor and a 20% stock volatility.

Lockheed also announced Wednesday that it intends to purchase for cash up to $1.15 billion of its outstanding 7.25% notes due 2006 and the 8.375% debentures due 2024 originally issued by Loral Corp. The tender offers will commence on Thursday and expire Aug. 14, unless extended or terminated.

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