Health Management breakfast deal reoffered at 98.75 to whet buyers' palate; four deals pricing after close

By Ronda Fears

Nashville, July 24 - A spate of new deals came to the rescue of a sluggish convertible market, helping to pick up the pace of secondary activity, traders said. Four deals were lopped onto the plates of buyers in addition to one already pending, for a total of $1.35 billion.

"It turned out to not be as dull a week as everyone was expecting," said a convertible trader at one of the big shops.

"We really needed these new deals. Trading picked up a little as a result," he said, but also noted dividend news stirred players in Viacom Inc., Delta Air Lines Inc. and American International Group Inc.

Four deals emerged Thursday, coming from Health Management Associates Inc., Quantum Corp., America West Airlines Inc. and Chiron Corp., in addition to the Constellation Brands Inc. mandatory that had been slated to price after the close.

Chiron was the only overnighter, but Health Management's was a breakfast deal.

Before the open, Health Management launched and priced $500 million of 20-year convertible senior notes sold with a 1.5% coupon and 45% initial conversion premium, with proceeds earmarked to take out its old 0.25% convertibles due 2020.

Although sellside analysts did not show the new Health Management convert to be outrageously aggressive, buyers did not swarm in to take a piece of the new paper.

"We didn't like the terms," said one fund manager in New York.

"There may also be market concerns about weakness in the stock price. We'd have bought it on better terms."

The fund manager said he did not have a position in HMA's existing converts - the 0.25s or zeros due 2022 - but a salesman working on the new deal said there were some holders of the 0.25s - which will go away as a result of the new deal - buying the new Health Management convertible.

Underwriters reoffered it at 98.75. One of the bookrunners closed the new deal up from there at 99.5 bid, 100 offered. Health Management shares lost 38c, or 2%, to $18.51.

Deutsche Bank Securities analysts put the new Health Management issue at 0.87% cheap, based on a price of par, using a credit spread of 135 basis points over Libor and a 25% stock volatility. Deutsche convertible analysts noted the credit markets were in the 75 bps range prior to the deal and subsequently widened to 120 bps/140 bps.

Merrill Lynch analysts put the new Health Management deal at 1% cheap, at the reoffer price of 98.75, using a spread of 155 bps over Treasuries and a 25% stock volatility. Merrill analysts modeled the new deal with a 1% common yield input, noting that holders will not have dividend protection up to 1%, and the current yield on the stock is about 0.44%.

Quantum was pitching a quick-sale $175 million of seven-year convertible notes talked to yield 3.5% to 4.0% with a 37.5% to 42.5% initial conversion premium, with proceeding going to redeem its 7% convertible subordinated notes due August 2004.

At the middle of price talk, Deutsche puts the new Quantum convert 1.63% rich to 2.47% cheap, using a credit spread of 800 bps over Libor and a 55% stock volatility. Another sellside shop, which asked to remain anonymous, put it 2% cheap using a spread of 750 bps over Treasuries and 50% volatility.

Moody's lowered Quantum ratings and assigned a B3 rating to the new issue, with a stable outlook. Standard & Poor's assigned a B rating to Quantum's new convert while confirming its other ratings, also with a stable outlook.

Quantum shares Thursday fell 65c, or 16.8%, to $3.22.

America West's $75 million of 20-year cash-to-zero convertibles were talked to yield 6.75% to 7.25% with a 37.5% to 42.5% initial conversion premium. The issue will pay a cash coupon for five years and payments for the first year will be collateralized by placing $42.9 million of the proceeds in a special account.

Shares of the airline Thursday lost $1.26, or 13.25%, to $8.25.

At the middle of price talk, Deutsche put the America West convert 3.93% cheap, using a credit spread of 1,400 bps over Libor and a 50% stock volatility. Lehman puts it 4.4% cheap, using a spread of 1,350 bps over Treasuries and 45% volatility.

Lehman analysts noted their credit assumption was based on recent airline convert offerings of Continental, Delta and Northwest Air, given their similar challenging credit profiles. However, they also noted that America West's current pace of high cash burn suggests additional funding needs are likely in three to four years.

Chiron's overnight offering of $450 million of 30-year convertibles were talked to yield 1.5% to 1.75% with a 45% to 50% initial conversion premium.

Standard & Poor's assigned an A- rating to the new issue, with a negative outlook. Chiron, which is 43% owned by Swiss pharmaceutical giant Novartis AG, has a very diverse product portfolio, S&P acknowledged, but its $890 million Powderject Pharmaceuticals plc acquisition in May was a major cash outlay and significant addition of debt.

Chiron shares closed Thursday down 65c, or 16.8%, to $3.22.

At the middle of price talk, Deutsche put the new Chiron convert 1.42% rich to 0.71% cheap, using a credit spread of 35 bps over Libor and a 25% stock volatility. Lehman put it 1.94% cheap, using a credit spread of 35 bps over Libor and a 30% volatility.

Also pricing after the close Thursday was Constellation Brands Inc., which has been on the road for almost a week with a $150 million three-year mandatory talked to pay a dividend of 5.75% to 6.25% with a 18% to 22% initial conversion premium.

At the middle of price talk, Deutsche put the Constellation deal 4.15% cheap, using a credit spread of 750 bps over Libor and a volatility skew of 30% to 27%. Merrill Lynch put it 5.66% cheap, using a spread of 500 bps over Treasuries and a 25% volatility. Lehman puts it 4.5% cheap, using a spread of 550 bps over Treasuries and a volatility skew of 28% to 25%.

Constellation Brands stock closed off 36c, or 1.27%, to $28.

Dividend risk was still impacting the market, sources said, but Deutsche convertible analyst Robert Barron said in a report Thursday that people can relax regarding the anxiety over Getty Images Inc. And, on the word of Getty Images management that no common dividend plans are in the lurch, he said its new 0.5% convert looks undervalued.

"During GYI's [fiscal third quarter] earnings conference call we asked management its intentions regarding a common dividend," Barron said in the report.

"The company responded to the question by stating that GYI's board has not met to discuss paying a dividend and that the company believed it could create greater shareholder value by repurchasing stock."

He noted that, like many other convertibles, the new Getty convertible suffered from the market pricing in a dividend risk following Mandalay Resort Group's recent initiation of a common dividend.

If the market had priced in the risk of a 1% common dividend, Barron's report suggests Getty Images' 0.5% convertible could be nearly 3 points cheap.

The issue was marked down Thursday in line with the stock's sharp decline, however. On the heels of its earnings, which showed a gain in profits, the stock fell $2.66, or 6.31%, to $39.50. The convert was marked down about 2.5 points to 94.375 bid, 95.375 offered.

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