Northwest reoffered at 98, edges up slightly; Elan is a blowout at 6.5%, up 49.9%

By Ronda Fears

Nashville, Oct. 30 - As speculated, Northwest Airlines Corp.'s new issue was reoffered below par, at 98, and at that level saw some nice action, according to dealers. The big home run, though, apparently was the Elan Corp. plc deal, which was boosted to $400 million from $250 million.

The Elan deal was not offered in the U.S.; it was priced at 6.5%, up 49.9%. The beleaguered Dublin-based drugmaker is using proceeds to take out its existing 0% convertible due 2018 when the put comes up in mid-December.

Outside of new deal activity, traders noted several energy names trading on earnings - Duke Energy Corp., Dynegy Inc. - along with McData Corp., which was weaker ahead of earnings, and Inco Ltd., which saw "a nice bounce as some buyers stepped in."

But fresh, new convertibles were on the forefront of most of the market buzz.

New 20-year paper, with three years of hard call protection, from Northwest Airlines was injected into the market as a bought deal off the Citigroup desk, using the cash-to-zero structure. The 7.625%, up 60% issue - for $225 million - was repriced as expected at 98 and it traded up slightly.

Citigroup took the new Northwest convert out at 98.125 bid, 98.375 offered. The stock ended the session down 63c, or by 4.4%, to $13.68.

Several hedge fund sources said they played the new Northwest convert, but one noted, "we're not as confident that the model still works for this one."

At par, a buyside analyst put the issue right at around fair value.

Deutsche Bank Securities' analysts put the issue 0.4% rich, at par, using a credit spread of 1,150 basis points over Libor and a 55% stock volatility.

At 98, Lehman Brothers analysts put the new Northwest convertible 3.17% cheap, using a credit spread of 1,050 bps over Treasuries and a 50% stock volatility.

Venu Krishna, head of U.S. convertible research at Lehman, said the reoffer price made the terms favorable, but he also noted that the $13.50 level where Northwest Airlines stock opened would limit the cheapness to 1.49%.

He said he used a tighter credit spread assumption than the existing Northwest Airlines 6.625% convertible due 2023, given the five-year put on new issue versus a seven-year put on the existing convert, but used a discounted level versus Northwest Airlines' 7.626% and 8.30% senior secured notes due 2010.

Northwest Airlines' 6.625s, a $150 million issue sold in mid-May, was quoted all over the map Thursday but a trader at a lead bank on that deal said it traded up slightly in tandem with the new convert to 121 bid, 121.75 offered.

The airline said it would use $10 million of the proceeds of the new offering to enter into a call spread to limit potential dilution from the offering, which would synthetically bump the conversion price - from its perspective only - to about $27.48.

Few details were available on the Elan deal, but it looked liked a blowout.

Elan said it boosted the deal to $400 million, plus sold the requisite 35 million ordinary shares needed to avoid paying a higher fee to subsidiary bondholders who had granted a waiver for the convertible offering.

The new convert was issued to yield 6.5% with a conversion price of $7.42, according to the company. That conversion level translates to a 49.9% initial conversion premium compared to the $4.95 for the stock offering.

Elan had said late Wednesday when it announced the convertible offering that it had received waivers from holders of a majority of the guaranteed notes issued by subsidiaries, Elan Pharmaceutical Investments II Ltd. and Elan Pharmaceutical Investments III Ltd., in order to make the convertible offering, on condition that it also sold at least 30 million ordinary shares.

Also, the company paid a fee of $16.8 million, which would have increased to $21 million to those bondholders if it failed to sell less than 35 million ordinary shares.

Elan sold 35 million ordinary shares, however, at $4.95 each for total gross proceeds of $573.3 million, adding in the convert proceeds.

Proceeds are going to be used to pay the anticipated put on Elan's 0% convert due 2018 when it comes around on Dec. 14, which is estimated at nearly $500 million.

Meanwhile, other new deals in the U.S. were somewhat better on the day, according to dealer, but buyside players said the market was still "a little stand-offish," as one put it, toward the recently sold United Rentals Inc. and JDS Uniphase Inc. converts.

JDS Uniphase's new 0% was slightly higher, by 0.5 point, at 99.625 bid, 100.125 offered. The stock added 1 penny to $3.51.

United Rentals' new 1.875% gained 0.75 point to 97 bid, 97.25 offered while the stock gained 22c, or 1.29% on the day, to $17.25.

Both United Rentals and JDS Uniphase were reoffered by the lead banks at 98, as well.

PMI Group Inc.'s new convertible was a big hit, however, evidenced in part by it getting upsized. The new mandatory added 0.125 point to 25.625 bid, 25.75 offered.

PMI Group shares were off for the second consecutive session, after gaining sharply on the day of the mandatory offering, which market sources were at a loss to explain. The stock ended Thursday down by a dime, or 0.26%, to $38.14.

The existing PMI Group convertible "have been active recently, suddenly, as well," one convertible fund manager noted.

PMI Group's 2.5% convertible due 2021 was quoted Thursday down 0.75 point to 111.25 bid, 111.625 offered.

Throughout the secondary market, traders used the "mixed bag" phrase.

"Now we have the [gross domestic product] data thrown into the pot, so everyone will be very anxious to see the spending report and the next employment report," said the head convertible dealer at one of the big shops.

On Friday, there are personal income and personal spending reports, along with the help wanted index. Market onlookers, however, are looking forward to the next jobless and unemployment claims reports.

Trading was described as choppy but overall a busy day.

Duke Energy was a great example of "mixed reactions" after it slashed its earnings forecast and said it is axing about 1,900 jobs, on the heels of reporting sharply lower profits blamed on its energy trading unit.

Net income for third quarter fell 79% to $49 million, or 5c per share, from $230 million, or 27c per share, which missed analysts' expectations, and the company warned it will probably not meet expectations for fourth quarter or 2003.

Duke shares closed up 24c, or 1.36%, to $17.94. The older 8.25% mandatory was up slightly on modest volume, ending at 12.25, while the new 8% mandatory was slightly lower on heavier volume, closing at 13.67.

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