Convertible market higher, thankful to get new deals early

By Ronda Fears

Nashville, Tenn., Nov. 19 - It was a positive day, in every corner, convertible traders said, as the market gained with stocks and primary market activity continued at a non-stop pace. Indeed, issuance has been so heavy that convertible market players were happy to see the week's new deals advance to price a day early, after the close Monday. Interest continued to flourish at least for the two big deals, from Agilent Technologies Inc. and Xerox Corp., which were both higher in the gray market. Quest Diagnostics Inc. also surprised players with a pop-up deal.

"Everything is pricing early and we are very happy about that," said a trader at a convertible hedge fund in Connecticut. "It will be a lot easier to get away from here Wednesday, and we are looking forward to a break."

Moreover, it was a positive session, traders said, outside of a few isolated events like the Nvidia Corp. insider trading charges, although that did not crush the stock or converts severely. On reports that the Securities and Exchange Commission had charged 15 people, 11 of whom were Nvidia employees, with insider trading regarding Nvidia the stock closed down $1.15 to $51.34. The Nvidia 4.75% convertible due 2007 (B-) lost 2.125 points on the day to 135 bid, 136 offered.

Stocks were higher and converts trailed the gains, traders said, as bullish stock investors drove the Nasdaq up 35.84, or 1.89%, to 1934.42 and the Dow Jones Industrial Average up 109.47, or 1.11%, to 9976.46.

"There is a lot more optimism about the state of affairs on several fronts, the economy and the upcoming shopping season, the war in Afghanistan, corporate profits making a turnaround," said a convertible trader at one of the major investment banks. "We saw a lot more activity from buyers. People want to get in on the front end of the rise. Energy and oil and gas, and nearly all the tech and telecom sectors were very active. Cyclicals and the conglomerates were very active, too."

Technology certainly is the flavor du jour when it came to new issues.

Quest Diagnostics launched a deal early Monday and priced it intraday off Friday's closing stock price. The $225 million 20-year paper was somewhat richer than the market has been accustomed to lately, but sources said it was well subscribed and gained a bit out of the gate. The 1.75% convertible senior notes price at par with a 40% initial conversion premium, with multiple puts, which buy-side sources said helped investors swallow the terms. The issue also included contingent conversion and contingent payments features, which had been showing up less on new deals.

"It looked to work out about 2% cheap and that's okay, but there's a lot of cheaper paper out there," said a convertible hedge fund source in New Jersey. "It was hard to digest. Still, there were plenty of buyers. We did buy it, a little, just to be a supporter of the market. Obviously, it was brought in a bullish market and it priced intraday and that's still pretty amazing."

In the aftermarket, the Quest Diagnostics deal edged up 0.25 point to 100.25 bid, 100.5 offered as the common lost $1.07 to $61.43.

Xerox's new deal was upsized to $750 million from $500 million, tweaked with more aggressive premium guidance and was pricing after the closing bell as the underlying stock gained on strong comments from Xerox chief executive Anne Mulcahy at an investor conference. The 20-year convertible trust preferreds are expected to price to yield 7.5%, at the aggressive end of price talk that put the yield between 7.5% and 8.0% yield, according to a source close to the deal. But the initial conversion premium range was revised to 20% to 24% from 15% to 20%, the source said. The new Xerox traded Monday 3.625 points to 2.875 points above par in the gray market. Xerox common shares closed up 72c, or 11%, to $7.30.

Agilent's deal also was higher again in the gray market, last seen at 2.375 points over issue price. None of the terms on the deal were said to be revised, but the pricing was also advanced to Monday after the close. The $1 billion 20-year notes are expected to price to yield 3.0% to 3.5% with a 26% to 30% initial conversion premium, via joint book-running lead managers Credit Suisse First Boston, J.P. Morgan and Salomon Smith Barney. Agilent shares closed up 28c to $24.41.

"You would almost expect the Agilent deal to be trading higher and be more active than the Xerox" in the gray market, said a convertible trader at a hedge fund in New Jersey. "But that wasn't the case. Agilent just got too expensive. What's making it attractive, mostly, is that it's investment grade. The Quest deal went okay, but you see how it just sat there at par. Most of the new deals lately have been gaining big."

Riverstone Networks' new 3.75% converts, which sold intraday last week at par with an initial conversion premium of 27%, added 2.25 points on the day to 105.25 bid, 106.25 offered as the common stock rose 51c to $14.71. Northrop Grumman Corp.'s 7.25% mandatory convertible preferred, which priced at par of 100 last week, climbed 7 points on the day to 107 as the underlying stock added $4.45 to $95.95.

In addition to the big Agilent and Xerox deals, Anadigics Inc. and Profit Recovery Group International Inc. each have $75 million deals in the market that sources said were also believe to have been advanced to price after Monday's close, although that could not be confirmed. Profit Recovery Group is pitching five-year convertible subordinated notes with guidance for 4.5% to 5.0% yield and a 17.5% to 22.5% initial conversion premium. Profit Recovery Group shares closed down 31.9c to $6.451. Anadigics is selling of five-year convertible senior notes with price talk of a 5.0% to 5.5% yield and a 21% to 25% initial conversion premium. Anadigics shares closed down 24.1c to $18.559.

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