Convertible market surges with $2.6 bln of new paper

By Ronda Fears

Nashville, Tenn., Oct.26 - Convertible traders said the market ended the week on a high Friday, after taking in some $2.58 billion of new paper. The week was highlighted by a couple of surprises as LSI Logic trotted out its third convertible in as many years and Fairchild Semiconductor resurrected its deal from last May. Avaya Inc. also advanced the pricing of its deal.

Dealers said the secondary market gained as stocks closed mixed. The Dow Jones Industrial Average closed up 82.27, or 0.87%, to 9545.17 while the Nasdaq declined 6.51, or 0.37%, to 1768.96.

New paper continued to gain ground, dealers said. Demand is still strong and although next week's slate only has two deals totaling $500 million, market sources expect more pop-up deals will surface in the coming week.

"Demand is certainly there for all these deals and more," said a convertible trader at a hedge fund in New York. "Terms may tighten a bit but we don't even expect much of that. The convertible market is the best alternative for companies needing to raise capital, and there is a lot of need on both the supply and demand side of the table."

Indeed, Fairchild took the opportunity that it had been looking for in May, when market conditions caused it to shelve plans to sell a convertible. The company sold $200 million of seven-year convertible notes at par to yield 5.0% with a 25.5% initial conversion premium. The overnight Rule 144A deal sold at the cheap end of price talk that put the yield at 4.5% to 5.0% and the initial conversion premium between 25.5% and 28.5%.

"The convertible market is very strong right now. Our stock had rallied over the last few days, so we just decided to make our move," said Fairchild spokesman Matt Towes. "We were thrilled with the execution."

Motorola sold upsized convertible and straight senior bond deals, and Avaya upsized its deal as it advanced the timing from Monday.

Motorola sold $1 billion of mandatory convertible preferreds at par of 50 to yield 7.0% with a 22% initial conversion premium. The registered deal, upsized form original plans to sell $875 million, sold at the cheap end of revised yield guidance but at the aggressive end of revised premium price talk. Before pricing, the guidance had been tightened to put the yield between 6.75% and 7.0% and initial conversion premium between 18% and 20% versus original guidance of a 7.0% to 7.5% yield and a premium of 20% to 22%.

The wireless phone maker also sold $600 million of 10-year Rule 144A senior notes, upsizing the deal from $400 million. Market sources said the 8.0% senior notes priced at 99.633 to yield 8.054%.

Avaya sold $400 million in proceeds of 20-year zero-coupon convertible notes at 48.748 for a yield-to-maturity of 3.625% and 38.5% initial conversion premium. The registered deal was boosted from original plans to sell $300 million in proceeds, and sold cheaper than yield price talk but more aggressive than premium guidance. Price talk had put the yield-to-maturity at 2.75% to 3.25% and initial conversion premium between 27.5% and 32.5%.

"We're seeing some give and take on the terms," said a syndicate source working on several deals that priced during the week. "There is a lot of demand for the higher premiums due to the defensiveness it provides. Of course, there are a lot of buyers that would like to see the low premiums, deals priced to convert. But the market is really wanting defensive plays and the higher premiums provide that."

All three deals that freed to trade Friday moved up in the immediate aftermarket. Motorola's new convert gained 0.625 point to 50.625 as the stock lost 13c to $17.15. The Fairchild convert added 1.75 points to 101.75 as the stock fell $2.42 to $21.48. Avaya's convert gained 0.25 from issue price to 49 as the stock dropped 20c to $9.20.

Next week, the market looks to deals from King Pharmaceuticals Inc. and Anthem Inc. King Pharmaceuticals is selling $300 million of 20-year convertible senior notes that are talked to price yield 2.75% to 3.25% with a 28% to 32% initial conversion premium alongside a stock offering. Anthem is selling $200 million of mandatory convertibles alongside its initial public offering of stock, which has been boosted from $1 billion to $1.5 billion.

King Pharmaceuticals shares closed higher again Friday, adding 33c to $39.37, as the company continued to gain on its news that it was increasing production of its product Wycillin in preparation for potential demand to treat anthrax.

Beyond next week, the market could see a $1 billion offering from Swiss Re America Holding Co. and a $350 million offering from PartnerRe Ltd. before year's end.

Ivax Pharmaceuticals Corp. also gained Friday as the generic drugmaker announced it had won a U.S. government contract to supply more than 1.2 billion tablets of its brand equivalent doxacycline - one of several antibiotics used to treat anthrax. The company also said it has an application pending with the FDA for its ciprofloxacin, the generic equivalent of Cipro, the antibiotic most commonly used to treat anthrax.

The Ivax 4.5% convertible notes due 2008 added 0.5 point to 88.375 bid, 88.75 offered and the Ivax 5.5% convertible notes due 2007 gained 0.625 point to 106 bid, 106.5 offered as the underlying common shares closed up 13c to $22.58.

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